AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1998.
REGISTRATION NO. 333-65417
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PINNACLE GLOBAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 6211 76-0583569
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
<TABLE>
<CAPTION>
<S> <C>
5599 SAN FELIPE, SUITE 1212 DONALD R. CAMPBELL
HOUSTON, TEXAS 77056 PRESIDENT
(713) 629-5771 5599 SAN FELIPE, SUITE 1212
(ADDRESS INCLUDING ZIP CODE, AND HOUSTON, TEXAS 77056
TELEPHONE NUMBER, (713) 629-5771
INCLUDING AREA CODE, OF REGISTRANT'S (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
PRINCIPAL NUMBER,
EXECUTIVE OFFICES) INCLUDING AREA CODE OF AGENT FOR SERVICE)
</TABLE>
WITH COPIES TO:
<TABLE>
<CAPTION>
<S> <C> <C>
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. [ ] __________________
-----------------------------
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>
TEI, INC.
5599 SAN FELIPE, SUITE 1212
HOUSTON, TEXAS 77056
Dear TEI Shareholders: December __, 1998
You are invited to attend a Special Meeting of Shareholders of TEI, Inc.
("TEI") at The Houstonian Hotel, The Elm Room, 111 North Post Oak Lane,
Houston, Texas 77024, on Thursday, December 31, 1998, at 9:00 a.m., local time.
The Special Meeting is important because we are asking you to approve two
proposals under which your company will combine with three other companies under
a newly created public holding company -- Pinnacle Global Group, Inc., or PGG.
The three other companies are financial services firms. They are:
HWG.................................. Harris Webb & Garrison, Inc., a
regional investment banking firm
PMT.................................. Pinnacle Management & Trust
Company, a private trust company
Spires............................... Spires Financial, L.P., a fixed-
income securities broker/dealer
THE COMBINATION CALLS FOR EACH OF YOUR TEI COMMON SHARES TO CONVERT INTO
.25 OF A SHARE OF PGG COMMON STOCK. After the combination, TEI's shareholders
would own 50.02% of the combined enterprise. The former owners of the other
three combining companies would own 49.98%.
The features of the combination requiring your vote are:
Proposal 1 -- The merger of TEI with a new, wholly owned PGG subsidiary
Proposal 2 -- PGG's issuance of 3,562,500 of its common shares to the
direct and indirect owners of HWG, PMT and Spires.
The combination is intended to be tax-free to you under federal income tax
laws, and TEI has received an opinion of counsel that it will be.
PGG has applied to have PGG's common stock approved for quotation on the
Nasdaq National Market under the symbol "PING." Approval must precede the
combination.
Since January 1997, we have been evaluating strategies and financial
alternatives for maximizing shareholder value. We believe combining HWG, PMT and
Spires with TEI is an attractive opportunity to restructure your company as a
financial services firm. We believe the long-term trends in the financial
services industry are positive. The combination will bring TEI regional name
recognition in the industry -- along with a proven management team we think can
compete in the financial services market.
Your Board of Directors has unanimously approved the proposed transactions,
after deciding they are in your best interests. The Board 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 IMPORTANT.
Even if you do not attend the Special Meeting, it is important that your
shares be voted. So please vote by promptly completing and mailing the enclosed
proxy card so that your shares will be represented at the Special Meeting and
voted as you wish.
The accompanying Proxy Statement/Prospectus provides you with detailed
information about the proposed transactions. We encourage you to read this
document carefully, INCLUDING ITS "RISK FACTORS" ON PAGES 14 THROUGH 23.
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
regulator has approved these transactions or the securities to be issued in the
transactions, or determined if this Proxy Statement/Prospectus is accurate or
adequate. The Securities and Exchange Commission has not determined the fairness
or merits of these 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 given that a special meeting of the shareholders of TEI, Inc.
will be held at The Houstonian Hotel, The Elm Room, 111 North Post Oak Lane,
Houston, Texas 77024, at 9:00 a.m., local time, on Thursday, December 31, 1998,
for the following purposes:
1. To vote on a proposal to approve a merger agreement whereby TEI would
merge with a newly formed wholly owned subsidiary of Pinnacle Global
Group, Inc., the proposed newly formed public holding company
("PGG"). TEI will survive 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: six 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 include 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 vote on 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 and the share issuance relating to
the combination with HWG, PMT and Spires, former TEI shareholders would
own 50.02% of the outstanding PGG common stock, and the former direct
and indirect owners of HWG, PMT and Spires would own 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
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.
It may be inspected during normal business hours before the Special Meeting at
the offices of TEI, 5599 San Felipe, Suite 1212, Houston, Texas 77056.
By Order of the Board of Directors,
______________________________________
SECRETARY
THE ENCLOSED PROXY CARD SHOULD BE SIGNED, DATED AND PROMPTLY RETURNED IN
THE ENCLOSED ENVELOPE, SO THAT YOUR SHARES WILL BE REPRESENTED EVEN IF YOU DO
NOT ATTEND THE SPECIAL MEETING.
YOU SHOULD NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 7, 1998
PINNACLE GLOBAL GROUP, INC.
TEI, INC.
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to the proposed combination of TEI,
Inc. with three financial services firms under a newly created public holding
company -- Pinnacle Global Group, Inc., or PGG. The three financial services
companies are:
HWG..................... Harris Webb & Garrison, Inc., a regional investment
banking firm
PMT..................... Pinnacle Management & Trust Company, a private trust
company
Spires.................. Spires Financial, L.P., a fixed-income securities
broker/dealer
The combination calls for:
o Each TEI common share to convert into .25 of a PGG common share.
o Each HWG common share to convert into about 41.674 PGG common shares,
or a total of 1,187,500 PGG common shares for all outstanding HWG
common shares.
o Each PMT common share to convert into about 5.871 PGG common shares,
or a total of 1,187,500 PGG common shares for all outstanding PMT
common shares.
o Spires' direct and indirect ownership interests to convert into a
total of 1,187,500 PGG common shares. The PGG shares will be allocated
pro rata among the Spires owners based on their ownership interest in
Spires.
After the combination, TEI shareholders would own 50.02% of the combined
enterprise. The former owners of the other combining companies would own 49.98%.
The combination is intended to be tax free to each of the TEI shareholders
and the owners of the combining companies. A tax opinion has been issued to each
of the combining companies for the benefit of its owners.
PGG has applied to have PGG's common stock approved for quotation on the
Nasdaq National Market under the symbol "PING." Approval must precede the
combination.
This Proxy Statement/Prospectus is being furnished to the TEI shareholders
by the TEI board of directors to solicit proxies for use at the TEI special
meeting to be held on December 31, 1998. This Proxy Statement/Prospectus also
constitutes a prospectus of PGG to register the 7,125,293 PGG shares to be
issued in the combination.
The combination cannot be completed unless (1) the shareholders or partners
of HWG, PMT and Spires approve their transactions and (2) the TEI shareholders
approve the TEI transaction and the PGG share issuances to the owners of HWG,
PMT and Spires.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS YOU SHOULD CONSIDER IN EVALUATING THE TRANSACTION INVOLVING YOUR
COMPANY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THESE TRANSACTIONS OR THE SECURITIES TO BE ISSUED IN THE
TRANSACTIONS, OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THE FAIRNESS
OR MERITS OF THESE TRANSACTIONS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED DECEMBER , 1998
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT TEI THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
PROXY STATEMENT/PROSPECTUS. YOU MAY OBTAIN DOCUMENTS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION AND INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROXY WITHOUT CHARGE BY REQUESTING THEM IN WRITING OR BY TELEPHONE
FROM TEI AT THE FOLLOWING ADDRESS:
TEI, INC.
5599 SAN FELIPE, SUITE 1212
HOUSTON, TEXAS 77056
ATTENTION:__DONALD R. CAMPBELL
TELEPHONE: (713) 629-5771
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM TEI, PLEASE DO SO BY DECEMBER
24, 1998, IN ORDER TO RECEIVE THEM BEFORE THE TEI SPECIAL MEETING. FOR MORE
INFORMATION ON TEI SEE "WHERE YOU CAN FIND MORE INFORMATION" (PAGE 134).
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY.............................. 1
The Companies................... 1
The Transactions................ 2
The TEI Special Meeting and the
Approval Process Generally.... 5
No Appraisal Rights............. 5
Risk Factors.................... 5
SUMMARY UNAUDITED PRO FORMA COMBINED
FINANCIAL DATA..................... 6
SUMMARY HISTORICAL COMBINING
COMPANIES FINANCIAL DATA........... 7
TEI................................ 7
HWG................................ 8
PMT................................ 9
Spires............................. 10
UNAUDITED COMPARATIVE PER SHARE
DATA............................... 11
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
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........................ 18
Fluctuations in Operating
Results......................... 18
Constraints Imposed by Net Capital
Requirements.................... 18
Business Subject to Extensive
Regulation...................... 19
Insufficiency of Insurance......... 21
Losses Due to Fraud or Mistakes of
Customers or Employees.......... 21
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...................... 22
Year 2000 Impact................... 22
No Prior Market; Possible
Volatility of Stock Price....... 22
Preferred Stock; Potential Anti-
Takeover Effects................ 23
Forward Looking Statements......... 23
THE TRANSACTIONS..................... 24
General............................ 24
Ownership Structure of PGG After
the
Transactions.................... 25
Background......................... 26
Reasons for the Transactions....... 28
Business Combination Costs --
Anticipated Consolidation
Benefits........................ 31
Information Provided by Financial
Services Companies.............. 31
Opinion of J.P. Morgan............. 32
Federal Income Tax Consequences.... 36
Accounting Treatment............... 38
Quotation on the Nasdaq National
Market.......................... 38
Federal Securities Law
Consequences.................... 38
No Appraisal Rights................ 39
Conflicts of Interests............. 39
THE TEI SPECIAL MEETING.............. 41
Matters to be Considered at the TEI
Special Meeting................. 41
Recommendations of the TEI Board of
Directors....................... 41
Voting at the TEI Special Meeting;
Record Date..................... 41
Proxies............................ 41
Solicitation of Proxies............ 42
THE AGREEMENT........................ 43
Closing of the Transactions........ 43
Manner and Basis of Converting
Securities...................... 43
Terms of the Agreement............. 44
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA............ 48
BUSINESS OF TEI...................... 54
General............................ 54
Operations and Services Provided... 54
Marketing and Contracts............ 55
i
<PAGE>
PAGE
----
Customers.......................... 55
Competition........................ 55
Properties......................... 55
Employees.......................... 56
Government Regulation.............. 56
Risk Management; Litigation........ 57
TEI SELECTED FINANCIAL DATA.......... 58
TEI MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 59
General............................ 59
Results of Operations.............. 59
Liquidity and Capital Resources.... 61
Seasonality........................ 62
Factors that May Affect Future
Results......................... 62
Accounting Standards............... 62
Year 2000.......................... 62
BUSINESS OF HWG...................... 64
General............................ 64
Services........................... 64
Relationship with S.G. Cowen....... 66
Effects of Interest Rates.......... 66
Competition........................ 67
Government Regulation.............. 67
Facilities......................... 69
Employees.......................... 69
Risk Management; Litigation........ 69
HWG SELECTED FINANCIAL DATA.......... 70
HWG MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 71
General............................ 71
Components of Revenues and
Expenses........................ 72
Results of Operations.............. 73
Liquidity and Capital Resources.... 74
Effects of Inflation............... 75
Year 2000.......................... 75
BUSINESS OF PMT...................... 77
General............................ 77
Services........................... 77
Clients and Marketing.............. 77
Effects of Interest Rates.......... 78
Competition........................ 78
Government Regulation.............. 78
Facilities......................... 79
Employees.......................... 79
Risk Management; Litigation........ 79
PMT SELECTED FINANCIAL DATA.......... 80
PMT MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 81
General............................ 81
Components of Revenues and
Expenses........................ 81
Results of Operations.............. 82
Liquidity and Capital Resources.... 83
Effects of Inflation............... 84
Year 2000.......................... 84
BUSINESS OF SPIRES................... 86
General............................ 86
Ownership.......................... 86
Services........................... 86
Clients............................ 87
Intellectual Property.............. 87
Marketing.......................... 88
Relationship with Clearing
Brokers......................... 88
Effects of Interest Rates.......... 89
Competition........................ 89
Government Regulation.............. 89
Facilities......................... 90
Employees.......................... 90
Risk Management; Litigation........ 90
SPIRES SELECTED FINANCIAL
DATA............................... 92
SPIRES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. 93
General............................ 93
Components of Revenues and
Expenses........................ 94
Results of Operations.............. 95
Liquidity and Capital Resources.... 97
Effects of Inflation............... 97
Year 2000.......................... 98
MANAGEMENT OF PGG AFTER THE
TRANSACTIONS....................... 100
Board of Directors and Executive
Officers........................ 100
Key Employees...................... 102
Board of Directors Classes;
Director Compensation........... 104
ii
<PAGE>
PAGE
----
EXECUTIVE COMPENSATION............... 104
Stock Option Grants................ 105
Incentive Plan..................... 105
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................... 108
SUMMARY BUSINESS STRATEGY OF PGG..... 109
Industry Overview.................. 109
Business Strategy.................. 110
PRINCIPAL SHAREHOLDERS OF TEI........ 112
PRINCIPAL SHAREHOLDERS OF HWG........ 113
PRINCIPAL SHAREHOLDERS OF
PMT................................ 114
PRINCIPAL OWNERS OF SPIRES........... 115
PRINCIPAL SHAREHOLDERS OF PGG AFTER
TRANSACTIONS....................... 116
DESCRIPTION OF PGG CAPITAL STOCK..... 117
Common Stock....................... 117
Preferred Stock.................... 117
Anti-Takeover Provisions........... 118
Limitation on Directors' Liability
and Indemnification of Directors
and Officers.................... 119
Transfer Agent and Registrar....... 119
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF PGG, TEI, HWG AND PMT........... 120
General............................ 120
Authorized Capital................. 120
Voting Requirements and Quorums of
Shareholder Meetings............ 121
Shareholder Proposals.............. 121
Election of Directors.............. 122
Vacancies on the Board of
Directors....................... 122
Number and Term of Directors....... 122
Removal of Directors............... 123
Amendment of Bylaws................ 123
Action by Written Consent and
Special Meetings of
Shareholders.................... 124
Indemnification of Directors and
Officers........................ 124
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF PGG, PARTNERS OF SPIRES......... 126
General............................ 126
Liquidity and Marketability........ 126
Transferability.................... 126
Purchase and Repurchase Rights..... 127
Antidilution Rights................ 127
Financial Reporting................ 128
Taxation........................... 128
Cash Distributions................. 128
Liquidation Rights................. 128
Right to Compel Dissolution........ 129
Limited Liability.................. 129
Continuity of Existence............ 129
Issuance of Senior Securities...... 129
Voting Rights...................... 129
Meetings of
Partners/Shareholders........... 130
Right to List of
Partners/Shareholders........... 130
Replacement of General
Partners/Directors.............. 131
Amending the Partnership
Agreement/Articles of
Incorporation and Bylaws........ 131
Anti-Takeover Provisions........... 131
Certain Legal Rights............... 132
Fiduciary Duties................... 132
Limits on Directors' and
Management's Liabilities........ 132
LEGAL MATTERS........................ 133
EXPERTS.............................. 133
WHERE YOU CAN FIND MORE
INFORMATION........................ 134
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
iii
<PAGE>
SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL INFORMATION THAT IS IMPORTANT TO YOU. FOR
MORE ON THE TRANSACTIONS AND THEIR TERMS, YOU SHOULD READ THIS ENTIRE DOCUMENT,
ITS ATTACHMENTS, AND OTHER DOCUMENTS IT REFERS TO. SEE "WHERE YOU CAN FIND MORE
INFORMATION" (PAGE 134).
THE COMPANIES
Four existing companies propose to combine under a newly created public
holding company in a tax free transaction. The participants in the combination
are:
Pinnacle Global Group, Inc............. PGG was formed by TEI to become the
public holding company which will own
and operate the separate businesses
now operated by the four combining
companies. PGG's principal executive
office, as well as TEI's, is at 5599
San Felipe, Suite 1212, Houston,
Texas 77056. Its telephone number is
(713) 263-7510.
TEI, Inc............................... TEI is a holding company which
disposed of various businesses from
1995 through 1997, leaving it with
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 under and above ground
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. Its 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
office is at 5599 San Felipe, Suite
301, Houston, Texas 77056. Its
telephone number is (713) 993-4600.
Pinnacle Management & Trust Company.... PMT is a Texas chartered private
independent trust company. It
specializes in asset management and
fiduciary services for clients
throughout the southwestern United
States. At September 30, 1998, PMT
had $431 million in assets under
management. PMT's principal executive
office is at 5599 San Felipe, Suite
300, Houston, Texas 77056. Its
telephone number is (713) 993-4675.
Spires Financial, L.P.................. Spires is a regional investment
banking and brokerage services firm.
It focuses on fixed-income securities
and whole loan and loan servicing
transactions. In 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.
Spires also brokers residential,
consumer and commercial loans, and
places mortgage servicing on a
national basis. Spires' principal
executive office is at 5151 San
Felipe, Suite 1300, Houston, Texas
77056. Its telephone number is (713)
572-5000.
WHEN THIS DOCUMENT REFERS TO "PGG" AS OF ANY TIME AFTER COMPLETION OF THE
COMBINATION, IT IS REFERRING TO THE RESULTING COMBINED ENTERPRISE AS A WHOLE.
1
<PAGE>
THE TRANSACTIONS
TEI and the other three combining companies and their shareholders and
partners have signed an agreement to combine the four companies under PGG. This
Agreement and Plan of Reorganization, as amended -- or the
"Agreement" -- provides for a series of related simultaneous transactions. In
these "Transactions":
o TEI, HWG and PMT will all become wholly owned PGG subsidiaries by
merging with three new PGG subsidiaries formed to accomplish the
mergers;
o PGG will indirectly acquire 100% ownership of Spires through
contributions to PGG of direct and indirect ownership interests in
Spires; and
o The ownership interests in all four combining companies will be
exchanged for PGG common shares.
If the Transactions are completed, PGG's board of directors will consist of
12 members: six designated by TEI and six by HWG, PMT and Spires. PGG's
management will include 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 100), for
information relating to PGG's board members, executive officers and key
employees.
The Transactions are intended to be tax-free to the TEI shareholders and
the other combining company owners for federal income tax purposes. For more
details, see "The Transactions -- Federal Income Tax Consequences" (pages 36
through 38).
The Transactions will be accounted for as purchases by TEI of PGG and the
other combining companies, as described under "The Transactions -- Accounting
Treatment" (page 38).
Each combining company's board of directors has approved the Agreement and
the Transactions. The board approvals are subject to the approval of the
shareholders and owners of the combining companies and to the other conditions
of the Agreement.
You should review "The Transactions -- General" and "-- Ownership
Structure of PGG After the Transactions" (pages 24 through 25) for a better
description of the Transactions and an organizational chart of PGG after the
Transactions.
CONVERSION OF SECURITIES
CONVERSION OF TEI COMMON STOCK.__IN THE TEI MERGER, EACH TEI COMMON SHARE
WILL CONVERT INTO .25 OF A COMMON SHARE OF PGG. TEI shareholders can exchange
their TEI share certificates for PGG share certificates when they complete and
return a letter of transmittal to the Exchange Agent. On completion of the
exchange, the former TEI shareholders will own 50.02% of the then outstanding
PGG common stock. TEI SHAREHOLDERS SHOULD NOT SURRENDER TEI STOCK CERTIFICATES
FOR EXCHANGE UNTIL AFTER THE TEI MERGER CLOSES AND THE SHAREHOLDER RECEIVES A
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
Each outstanding option to purchase TEI common shares will convert into an
option to purchase a number of PGG common shares equal to one-fourth of the
number of TEI shares covered by the converted TEI option. The exercise price per
share will be four times that of the converted TEI stock option. The term,
vesting schedule and other features of the replacement PGG options will be the
same as for the converted TEI options.
CONVERSION OF SECURITIES OF COMBINING COMPANIES AND RELATED ENTITIES.__IN
THE HWG AND PMT MERGERS, EACH HWG COMMON SHARE WILL CONVERT INTO ABOUT 41.674
PGG COMMON SHARES AND EACH PMT COMMON SHARE WILL CONVERT INTO ABOUT 5.871 PGG
COMMON SHARES. In the mergers, all stock of HWG and PMT will convert into
2,375,000 shares of PGG common stock. The former HWG shareholders, as a group,
and former PMT shareholders, as a group, will each receive 1,187,500 shares. IN
THE SPIRES TRANSACTION, ALL OWNERSHIP INTERESTS IN THE SPIRES' ENTITIES WILL BE
EXCHANGED FOR 1,187,500 COMMON SHARES OF PGG. THE PGG SHARES WILL BE ALLOCATED
PRO RATA AMONG THE SPIRES OWNERS BASED ON THEIR OWNERSHIP INTERESTS IN SPIRES.
Upon the conversion, the former
2
<PAGE>
owners of the three other combining companies will own 49.98% of the then
outstanding PGG common stock.
The total number of PGG common shares to be issued for the three financial
services companies was negotiated by TEI with the other three companies as a
group. When the total number of shares was agreed to with the group, the other
three companies negotiated among themselves, in heavy, arms-length negotiations,
the allocation among them of the total PGG shares offered by TEI.
See "The Agreement -- Manner and Basis of Converting Securities" (pages
43 through 44), and "The Transactions -- Conflicts of Interests" (pages 39
through 40) for a more complete discussion of the before and after ownership of
the combining companies.
POST-CLOSING OWNERSHIP.
After the Transactions, PGG will be owned by these four groups (determined
at ______________, 1998):
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 PGG common shares
which will be granted to replace outstanding TEI options.
(2) Assumes the exercise before the Transactions of all outstanding HWG and PMT
options and warrants, as required by the Agreement.
REASONS FOR THE TRANSACTIONS
Over the last three years, TEI disposed of all of its operations except its
liquid waste business. Since January 1997, TEI has been evaluating strategies
and financial alternatives for maximizing shareholder value. TEI believes that
combining with HWG, PMT and Spires is an attractive opportunity to restructure
itself as a financial services firm. In recent years the financial services
industry has grown dramatically. Despite recent market volatility, TEI believes
the long-term trends in the industry are positive, particularly considering:
o the increase in investment funds resulting mostly from changing
demographic patterns,
o industry consolidation,
o financial services deregulation, and
o rapid changes in technology and customer demand.
TEI believes the acquisition of the other combining companies brings TEI
regional name recognition in the industry and a proven management team which can
compete in this 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 28 through 31)
for a more complete discussion of this subject.
RECOMMENDATION OF THE TEI BOARD
TEI'S BOARD OF DIRECTORS BELIEVES THE TEI MERGER AND THE SHARE ISSUANCE IN
THE COMBINATION WITH HWG, PMT AND SPIRES ARE IN THE BEST INTERESTS OF TEI AND
ITS SHAREHOLDERS. THE BOARD UNANIMOUSLY RECOMMENDS THAT THE TEI SHAREHOLDERS
VOTE TO APPROVE THESE TRANSACTIONS.
3
<PAGE>
See "The TEI Special Meeting -- Recommendations of the TEI Board of
Directors" (page 41) and "The Transactions -- Conflicts of Interest" (pages
39 through 40) for further discussions of the TEI board's recommendation and
potential conflicting interests they may have in the Transactions.
J. P. MORGAN SAYS TRANSACTIONS FINANCIALLY FAIR TO TEI SHAREHOLDERS
J.P. Morgan has rendered an opinion to the board of directors of TEI, dated
the same date as this Proxy Statement/Prospectus, that, based on and subject to
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.
J.P. Morgan will be paid $250,000 for its opinion. For a discussion of the basis
of J.P. Morgan's opinion, see "The Transactions -- Opinion of J.P. Morgan"
(pages 32 through 36), and the full text of the opinion set forth in Appendix E.
CLOSING OF THE TRANSACTIONS
All of the Transactions will be completed at the same time. The closing
should occur within five days following TEI shareholder approval.
CONDITIONS TO THE TRANSACTIONS
Important conditions to the Transactions include:
o TEI shareholder approval.
o Approvals by the HWG shareholders, the PMT shareholders and the Spires
partners.
o Approval of the PGG common shares to be issued in the Transactions for
quotation on the Nasdaq National Market.
o Texas Banking Commissioner approval for the PMT transaction.
o Delivery of legal and other professional opinions, including tax
opinions.
o Exercise of all outstanding HWG and PMT options and warrants.
o TEI meeting these financial criteria at or shortly before the closing
of the Transactions:
-- consolidated adjusted current assets of $29.0 million or more;
-- consolidated net working capital of $27.6 million or more;
-- consolidated adjusted net worth of $26.6 million or more;
-- cash, cash equivalents and short-term investments totaling at least
$27.0 million, without counting amounts spent for transaction
expenses.
o Other conditions customary in similar transactions.
None of the Agreement's parties will waive any condition to closing
requiring TEI shareholder approval under Texas law or the rules of the Nasdaq
National Market, or involving compliance with other applicable laws. The
Agreement's conditions are more completely described under "The
Agreement -- Terms of the Agreement -- Conditions to the Transactions" (pages
44 through 45).
REGULATORY REQUIREMENTS
The Transactions are contingent upon Texas Banking Commissioner approval of
the PMT transactions. No other unsatisifed federal or state regulatory
requirements must be met to complete 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 120 through 133) for a description of differences between the
rights of PGG common shareholders and the rights attending equity interests in
the combining companies.
4
<PAGE>
THE TEI SPECIAL MEETING AND THE APPROVAL PROCESS GENERALLY
DATE, TIME AND PLACE
The TEI Special Meeting will be held on December 31, 1998, at The
Houstonian Hotel, The Elm Room, 111 North Post Oak Lane, Houston, Texas 77024,
at 9:00 a.m. (Houston, Texas time).
PURPOSES OF THE TEI MEETING
The purpose of the TEI Special Meeting is to consider and vote on: (1) the
TEI merger agreement, (2) the issuance of 3,562,500 PGG shares in TEI's
combination with HWG, PMT and Spires, and (3) such other business as may be
properly presented to the meeting.
WHO CAN VOTE AT THE TEI MEETING
Only record holders of TEI shares 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 14,251,012 shares of TEI common stock outstanding. Each share
will have one vote on each matter acted on at the TEI Special Meeting.
WHO MUST APPROVE THE TRANSACTIONS
TEI. The presence, in person or by proxy, at the TEI Special Meeting of
the holders of a majority of the outstanding TEI common shares on the TEI record
date is necessary for a quorum. At least two-thirds of the outstanding TEI
common shares is required to approve the TEI merger agreement, and at least a
majority of the shares present at the meeting is required to approve the
issuance of the 3,562,500 shares. TEI shareholders holding 5,618,912 shares, or
39.4% of all outstanding shares, have committed to vote for the TEI merger and
the share issuance. As of the TEI record date, directors and executive officers
of TEI and their affiliates beneficially owned 4,951,580 TEI common shares.
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 agreed to vote for the HWG merger, thus
insuring its approval. As of the date of this Proxy Statement/Prospectus, the
directors and executive officers of HWG and their affiliates beneficially owned
16,360 HWG shares.
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 agreed to vote for the PMT merger, thus insuring its
approval. As of the date of this Proxy Statement/Prospectus, directors and
executive officers of PMT and their affiliates beneficially owned 121,383 PMT
shares.
SPIRES. The affirmative vote of the holders of all 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
agreed to vote in favor of the Spires transaction, thus insuring its approval.
As of the date of this Proxy Statement/Prospectus, the general partners and the
executive officers of Spires and their affiliates beneficially owned 91% of the
general partnership interests and 70% of the limited partnership interests of
Spires.
NO APPRAISAL RIGHTS
TEI's shareholders cannot seek appraisal of their shares under Texas law.
None of the other combining company owners can seek appraisal of their
securities under Texas or Delaware law, as described under, "The
Transactions -- No Appraisal Rights" (page 39).
RISK FACTORS
Before deciding how to vote at the TEI Special Meeting, you should review
"Risk Factors" (pages 14 through 23).
5
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
This unaudited pro forma financial data shows financial results as if TEI
and the other combining companies had been combined in the periods shown. Pro
forma combined figures are simply an arithmetical combination of TEI's and the
other combining companies' separate historical financial results, with certain
adjustments. Under accounting rules, TEI is acquiring PGG and the other
combining companies. This will create goodwill (and related amortization
charges) in the pro forma combined financial results. The amount of goodwill
will be based on the difference between the fair value of the PGG shares
transferred to the direct and indirect owners of the other combining companies
in the Transactions and the net fair market value of the other combining
companies' identifiable assets. You should not assume that the combining
companies would have achieved the depicted results if they actually had been
combined at the dates and for the periods shown.
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STATEMENT OF INCOME DATA
(UNAUDITED)(1)
Liquid waste revenues................ $ 2,726 $ 2,287
Commissions.......................... 10,843 8,351
Investment banking................... 2,544 1,437
Fees and services.................... 1,078 1,079
Interest and dividends............... 2,447 2,184
Securities gains and other........... 1,317 1,014
----------------- ------------------
Total revenues.................. 20,955 16,352
----------------- ------------------
Liquid waste operating expenses...... 2,190 1,760
Compensation and benefits(2)......... 10,935 8,201
Brokerage and clearance.............. 789 636
Interest expense..................... 661 892
Other general and
administrative(3).................... 5,547 4,380
----------------- ------------------
Total expenses.................. 20,122 15,869
----------------- ------------------
Income before income taxes........... 833 483
Income tax provision(4).............. 650 408
----------------- ------------------
Income from continuing operations.... $ 183 $ 75
================= ==================
Basic earnings per share from
continuing operations.............. $ 0.03 $ 0.01
================= ==================
Weighted average shares -- basic..... 7,124 7,125
================= ==================
Diluted earnings per share from
continuing operations.............. $ 0.03 $ 0.01
================= ==================
Weighted average shares -- diluted... 7,124 7,125
================= ==================
SEPTEMBER 30,
1998
---------------
(IN THOUSANDS)
PRO FORMA BALANCE SHEET DATA
(UNAUDITED)(1)
Cash, cash equivalents, investment
securities and securities
inventory.......................... $44,931
Total assets......................... 80,608
Total liabilities.................... 17,283
Shareholders' equity................. 63,335
- ------------
(1) The unaudited pro forma combined financial data presented (1) does not
necessarily indicate the results that would have been obtained had the
Transactions actually occurred on the dates assumed, (2) is based on
preliminary estimates of the fair value of the net assets to be acquired and
certain assumptions management deems appropriate and (3) should be read in
conjunction with other historical and pro forma financial statements and the
related notes included later in this document.
(2) Gives effect to changes in compensation and benefits to the former
principals of Spires who previously received partnership distributions.
(3) Reflects 25-year amortization of goodwill from the Transactions.
(4) Reflects income taxes at the marginal tax rate on Spires' and PMT's taxable
income taxed at the owner level.
6
<PAGE>
SUMMARY HISTORICAL COMBINING COMPANIES FINANCIAL DATA
These tables show financial results actually achieved by each of the
combining companies. The annual historical financial figures are derived from
TEI's and the other combining companies audited financial statements. Financial
figures at and for the nine months ended September 30, 1997 and 1998 are
unaudited, but the combining companies believe their 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
nine-month results indicate 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 separate combining company
financial statements and related notes included in this Proxy
Statement/Prospectus.
TEI
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Liquid waste revenues................. $ 2,375 $ 2,199 $ 2,726 $ 2,066 $ 2,287
--------- --------- --------- --------- ---------
Gross profit (loss)................... 1,058 645 535 503 527
Selling, general and administrative
expenses........................... 2,197 2,428 2,625 2,020 1,932
--------- --------- --------- --------- ---------
Income (loss) from operations......... (1,139) (1,783) (2,090) (1,517) (1,405)
Other income (expense), net........... 749 910 1,530 1,145 1,163
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before provision for
income taxes....................... (390) (873) (560) (372) (242)
Provision (benefit) for income
taxes.............................. (150) (339) (160) (49) (81)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations......................... (240) (534) (400) (323) (161)
Income (loss) from discontinued
operations, including dispositions
net of tax......................... (8,349) 1,289 (2,382) (990) (108)
--------- --------- --------- --------- ---------
Net income (loss)..................... $ (8,589) $ 755 $ (2,782) $ (1,313) $ (269)
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per
share:
From continuing operations......... $ (0.01) $ (0.04) $ (0.03) $ (0.02) $ (0.01)
From discontinued operations....... (0.59) 0.09 (0.17) (0.07) (0.01)
--------- --------- --------- --------- ---------
Net earnings (loss) per share...... $ (0.60) $ 0.05 $ (0.20) $ (0.09) $ (0.02)
========= ========= ========= ========= =========
Weighted average common shares
outstanding...................... 14,230 14,237 14,244 14,244 14,251
========= ========= ========= ========= =========
</TABLE>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- --------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 11,422 $ 12,810 $ 15,173
Short term investments............. 18,426 15,516 13,617
Working capital.................... 29,002 30,034 29,159
Total assets....................... 43,034 39,043 38,783
Long-term debt, excluding current
portion......................... -- -- --
Shareholders' equity............... 40,433 37,665 37,376
7
<PAGE>
HWG
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Commissions........................ $ 1,364 $ 2,896 $ 4,151 $ 3,250 $ 2,839
Investment banking................. 1,085 722 2,544 864 1,437
Interest and dividends............. 25 38 57 39 99
Securities gains and other......... 395 340 290 272 261
--------- --------- --------- --------- ---------
Total revenues.................. 2,869 3,996 7,042 4,425 4,636
--------- --------- --------- --------- ---------
Compensation and benefits.......... 1,981 3,461 5,096 3,276 3,199
Brokerage and clearance............ 343 419 567 416 413
Interest expense................... 25 22 38 28 9
Other general and administrative... 980 1,271 898 620 716
--------- --------- --------- --------- ---------
Total expenses.................. 3,329 5,173 6,599 4,340 4,337
--------- --------- --------- --------- ---------
Income (loss) before income
taxes.............................. (460) (1,177) 443 85 299
Income tax provision............... -- -- 142 -- 102
--------- --------- --------- --------- ---------
Net income (loss).................. $ (460) $ (1,177) $ 301 $ 85 $ 197
========= ========= ========= ========= =========
Basic and diluted earnings (loss)
per share (pro forma for periods
prior to conversion to a taxable
corporation).................... $ (82.72) $ (94.52) $ 24.70 $ 7.05 $ 8.06
========= ========= ========= ========= =========
Weighted average shares
outstanding..................... 5,560 12,455 17,906 12,063 24,403
========= ========= ========= ========= =========
</TABLE>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 118 $ 648 $ 1,539
Investment securities........... 101 144 244
Total assets.................... 1,247 1,947 2,391
Shareholders' equity............ 117 885 2,118
8
<PAGE>
PMT
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Fees and services.................. $ 379 $ 653 $ 1,078 $ 769 $ 1,079
Interest and dividends............. 68 67 98 79 78
Securities gains and other......... 33 10 233 140 293
--------- --------- --------- --------- -----------
Total revenues.................. 480 730 1,409 988 1,450
--------- --------- --------- --------- -----------
Compensation and benefits.......... 417 487 667 444 565
Other general and administrative... 384 458 358 266 345
--------- --------- --------- --------- -----------
Total expenses.................. 801 945 1,025 710 910
--------- --------- --------- --------- -----------
Net income (loss).................. $ (321) $ (215) $ 384 $ 278 $ 540
========= ========= ========= ========= ===========
</TABLE>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- --------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 91 $ 537 $1,723
Investment securities........... 681 1,793 1,377
Total assets.................... 2,342 2,457 3,451
Shareholders' equity............ 2,288 2,288 3,396
9
<PAGE>
SPIRES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $ 4,700 $ 5,512
Interest and dividends............. 237 564 800 552 844
Securities gains and other......... 455 394 749 393 460
--------- --------- --------- --------- ---------
Total revenues.................. 7,533 8,280 8,241 5,645 6,816
--------- --------- --------- --------- ---------
Compensation and benefits.......... 2,169 3,023 3,392 2,276 2,975
Brokerage and clearance............ 111 235 222 170 223
Interest expense................... -- 228 615 453 883
Other general and administrative... 1,157 1,548 1,827 1,235 1,571
--------- --------- --------- --------- ---------
Total expenses.................. 3,437 5,034 6,056 4,134 5,652
--------- --------- --------- --------- ---------
Net income......................... $ 4,096 $ 3,246 $ 2,185 $ 1,511 $ 1,164
========= ========= ========= ========= =========
</TABLE>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 2,043 $ 2,072 $ 1,450
Securities inventory............ 5,455 18,056 13,226
Total assets.................... 11,271 35,224 19,538
Partners' capital............... 4,920 4,790 3,999
10
<PAGE>
UNAUDITED COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for TEI and the
other 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
September 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 document. The
unaudited pro forma combined financial data do not necessarily indicate the
operating results or financial position that would have occurred had the
Transactions been completed at the beginning of the earliest period presented
and should not be construed as indicating future operations.
AS OF AND FOR THE
---------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
TEI
Earnings (loss) per share from
continuing operations--basic and
diluted:
Historical(a) $ (0.03) $ (0.01)
Pro Forma Combined(c)........... 0.03 0.01
Cash Dividends declared per common
share:
Historical...................... $ -- $ --
Pro Forma Combined(d)........... -- --
Book Value per common share:
Historical(b)................... $ 2.64 $ 2.62
Pro Forma Combined.............. 8.89
HWG
Earnings (loss) per share--basic and
diluted:
Historical(a)................... $ 16.80 $ 8.06
Pro Forma Equivalent(e)......... 1.74 0.42
Cash Dividends declared per common
share:
Historical...................... $ -- $ --
Pro forma Equivalent(e)......... -- --
Book Value per common share:
Historical(b)................... 49.67 82.90
Pro Forma Equivalent(e)......... 370.45
PMT
Earnings (loss) per share--basic and
diluted:
Historical(a)................... $ 3.08 $ 3.54
Pro Forma Equivalent(e)......... 0.20 0.06
Cash Dividends declared per common
share:
Historical...................... $ 3.00 $ --
Pro Forma Equivalent(e)......... --
Book Value per common share:
Historical(b)................... $ 18.36 $ 22.26
Pro forma Equivalent(e)......... 52.18
SPIRES
Earnings (loss) per partnership
unit--basic and diluted:
Historical(a)................... $ 21,845.25 $11,636.87
Pro Forma Equivalent(e)......... 356.25 118.75
Cash Dividends declared per
partnership unit:
Historical...................... 23,146.47 19,548.82
Pro Forma Equivalent(e)......... -- --
Book Value per partnership unit:
Historical(b)................... $ 47,899.92 $39,987.97
Pro Forma Equivalent(e)......... 105,568.75
11
<PAGE>
- ------------
(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. The weighted average
number of shares or units outstanding is as follows:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
Pro Forma Combined................... 7,120,509 7,125,759
TEI.................................. 14,244,012 14,251,012
HWG.................................. 17,906 24,403
PMT.................................. 124,608 152,551
Spires............................... 100 100
(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 or partnership units outstanding at the end of each period. Spires'
book value per unit is based on 100 units outstanding.
(c) The unaudited pro forma earnings (loss) per common share is based upon the
weighted average number of common and common equivalent shares outstanding
for each period at the exchange ratio of 1 to .25 shares of PGG common stock
for each share of the entities.
(d) There are no pro forma cash dividends per share because TEI, PGG's
predecessor, has not paid cash dividends in the past. PGG does not intend to
pay cash dividends in the foreseeable future.
(e) The equivalent pro forma amounts are determined by multiplying the pro forma
combined income per share from continuing operations, pro forma combined
book value per share and pro forma combined dividends per share by the
respective exchange ratios for HWG, PMT and Spires. The exchange ratio, the
number of PGG shares each entity will receive for its shares or units, is as
follows:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
HWG.................................. 58.14 41.67
PMT.................................. 6.71 5.87
Spires............................... 11,875.00 11,875.00
12
<PAGE>
COMPARATIVE MARKET PRICE DATA
TEI COMMON STOCK
TEI's common stock is quoted on the Nasdaq National Market under the symbol
"TANK." This 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 before 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 before the date of this Proxy Statement/Prospectus, the last sale
price per share of TEI common stock was $ . At November 6, 1998, there were
about 280 common shareholders of record. 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................... 31/4 15/8
Second Quarter.................. 31/32 21/8
Third Quarter................... 27/16 11 /16
Fourth Quarter.................. 21/2 11 /16
1997
First Quarter................... 25/16 19/16
Second Quarter.................. 115/16 19/16
Third Quarter................... 115/16 11 /32
Fourth Quarter.................. 21/4 11 /32
1998
First Quarter................... 115/16 11 /32
Second Quarter.................. 21/2 13/4
Third Quarter................... 25/8 11/2
Fourth Quarter (through December
4, 1998)...................... 21/4 15/16
SECURITIES OF THE OTHER COMBINING COMPANIES
No market value information is available for the securities of the other
combining companies since there is no established trading market for them. HWG
has never paid dividends on its common stock. PMT has declared and paid one cash
distribution of about $.04 million, which accrued in 1997. Since inception,
Spires has made quarterly tax distributions and year-end distributions, in cash.
Spires made cash distributions of approximately: $4.4 million in 1995, $3.3
million in 1996, and $2.2 million in 1997.
POST-TRANSACTIONS DIVIDEND POLICY
After the Transactions, PGG intends 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 factors
such as PGG's earnings, financial condition, cash flows from operations, current
and anticipated cash needs and expansion plans and any restrictions that may be
imposed under PGG's current and future credit facilities.
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RISK FACTORS
THESE RISK FACTORS SHOULD BE CAREFULLY CONSIDERED BY TEI SHAREHOLDERS
BEFORE THEY DECIDE HOW
TO VOTE. SOME OF THESE RISKS, INCLUDING MARKET, REGULATORY, LIQUIDITY AND CREDIT
RISKS, ARE INHERENT IN THE FINANCIAL SERVICES BUSINESS AND CAN BE SUBSTANTIAL.
LIMITED OPERATING HISTORY AND RECENT LOSSES; ABSENCE OF COMBINED OPERATING
HISTORY
TEI began its remaining liquid waste operations in 1994. Both HWG and PMT
began operations in 1994. Spires began operations in 1995. Accordingly, each of
the combining companies has a limited operating history, which makes it
difficult to evaluate their operating performances. While the combining
companies generated pro forma combined operating income for each of the last
three years, most of the income was attributable to Spires. TEI has incurred
significant operating losses during the first nine months of 1998, and during
each of the last three years. HWG and PMT each had profitable operations for the
first time in 1997, generating net income of $0.3 million in the case of HWG,
and $0.4 million in the case of PMT. Again, for the nine months ended September
30, 1998, HWG generated net income of $0.2 million, and PMT generated net income
of $0.5 million. However, both HWG and PMT had operating losses for 1995 and
1996. Also, at September 30, 1998, HWG had an accumulated deficit of $(1.7)
million. Spires has generated significant operating income for each of the last
three years and the first nine 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
other combining companies had profitable operations during 1997 and for the nine
months ended September 30, 1998, these operations may not continue to be
profitable in the future or on a sustained basis. In addition, TEI's operations
may continue to be unprofitable.
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. 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 PGG'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 difficulty in selling securities, hedging securities
positions and investing funds under management.
The securities business is subject to significant risks, particularly in
volatile or illiquid trading markets. The risks include:
o trading losses o customer fraud
o losses resulting from the o employee fraud
ownership or underwriting o issuer fraud
of securities o litigation and errors
o risks associated with o misconduct and failures in
principal activities processing transactions
o the failure of counter
parties to meet
commitments
PGG's retail broker-dealer operations, as well as its investment banking,
institutional sales, proprietary trading, investment advisory and other
services, will be even more vulnerable to these risks during volatile trading
markets and fluctuations in the volume of market activity.
In addition, PGG will be subject to risks inherent in extending credit to
the extent its clearing brokers permit PGG's customers to purchase securities on
margin. The margin risk increases during 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 PGG'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 these and other factors:
o economic and political conditions,
o broad trends in business and finance
o legislation and regulations affecting the national and international
business and financial communities
o currency values
o inflation
o market conditions
o the availability and cost of short-term or long-term funding and
capital
o the credit capacity of the securities industry in the marketplace
o the level and volatility of interest rates.
Any of these factors can contribute to reduced levels of trading activity,
securities offerings and merger and acquisition activities, all of which can
result in lower revenues from PGG's brokerage, trading, institutional sales and
investment banking activities. See "Business of HWG -- Effects of Interest
Rates" (pages 66 through 67), "Business of PMT -- Effects of Interest Rates"
(page 78) and "Business of Spires -- Effects of Interest Rates" (page 78) for
a discussion of the effects of interest rates on the business of the other
combining companies.
SIGNIFICANT COMPETITION
FINANCIAL SERVICES. PGG's proposed financial services business and the
securities business in general are highly competitive. The principal competitive
factors influencing PGG's proposed financial services business are its:
o professional staff
o reputation in the marketplace
o existing client relationships
o ability to commit capital to client transactions and its mix of market
capabilities
PGG'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 combining companies compete directly with national and regional full
service broker-dealers and, to a lesser extent, with discount brokers, dealers,
investment banking firms, investment advisors and certain commercial banks. They
also compete for asset management and fiduciary services with commercial banks,
private trust companies, insurance companies and others. Domestic commercial
banks and large international banks have recently entered the securities
business, including markets in which they compete. PGG expects competition from
domestic and international banks to increase as a result of recent and
anticipated legislative and regulatory initiatives in the United States to
remove or relieve restrictions on commercial banks relating to the sale of
securities.
The financial services industry has become considerably more concentrated
as many securities firms have either ceased operations or been acquired by or
merged into other firms. Many of these larger firms have significantly greater
financial and other resources than will PGG and can offer their customers more
product offerings, lower pricing, broader research capabilities, access to
international markets and other products and services not offered by PGG.
PGG will also face competition from a rapidly developing discount or
electronic brokerage services industry. These competitors may have lower costs
and may offer their customers more attractive pricing or other terms. PGG also
anticipates competition from underwriters who attempt to effect public offerings
using non-traditional means of distribution, including through electronic media
like the Internet. In addition, issuers may try to sell their securities
directly to purchasers, including through electronic media such as the Internet.
If issuers and purchasers of securities can transact business without financial
intermediaries such as PGG, then the Company's operating results could be
adversely affected. See "Business of HWG -- Competition" (page 67), "Business
of PMT -- Competition" (page 78) and "Business of Spires -- Competition"
(page 89) for a more detailed discussion of the competitive environment
surrounding each of the other combining companies.
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LIQUID WASTE. The liquid waste industry is highly fragmented and very
competitive. PGG will compete with other liquid waste processing facilities and
alternative disposal methods, both legal and illegal, of certain waste streams
provided by area landfills. In addition, competitive products and services will
continue to be successfully developed and marketed by others. The market for the
various resellable by-products now recovered by TEI is also competitive and is
served by several large companies and a number of smaller, owner-operated
companies.
PGG will also face competition from customers who seek to enhance and
develop their own methods of disposal instead of using the services of third
parties like PGG. Increased use of internal processing and disposal methods and
other competitive factors could have a material adverse effect on PGG's proposed
business, results of operations and financial conditions.
Some competitors of TEI'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 matures, competition can be expected to
increase.
As a result of these competitive factors, PGG's liquid waste business may
not become profitable and may not generate cash flow adequate for its operations
and to support internal growth. See "Business of TEI -- Competition" (page 55)
for a further discussion of competitive factors involving TEI's business.
DEPENDENCE ON THE ABILITY TO RETAIN AND RECRUIT KEY PERSONNEL
GENERAL. PGG will depend on the continuing efforts of its executive
officers and senior management. That dependence may be intensified by PGG's
decentralized operating strategy. If executive officers or members of senior
management leave PGG, until it attracts and retains qualified replacements,
PGG's business or prospects could be adversely affected. Further, PGG's recent
success of the combining companies can in some measure be attributed to the
entrepreneurial spirit of their senior management. To the extent PGG, as a
larger, more structured organization than any of the combining companies, fails
to sustain this entrepreneurial attitude, the impetus for PGG's continued
success could be adversely affected.
FINANCIAL SERVICES PERSONNEL. PGG will derive 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. PGG's future success 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. Demand for these professionals has
led to escalating compensation packages in the industry. Upfront payments,
increased payouts and guaranteed contracts have made recruiting these
professionals more difficult and can lead to departures from current employers.
Departures can also cause client defections due to the close relationship
between the client and the professional. If PGG's attempts to attract, recruit
and retain skilled professionals are impaired for any reason, it could have a
material adverse effect on PGG's business prospects and operating results.
GEOGRAPHIC CONCENTRATION OF CERTAIN BUSINESS
Because HWG and PMT focus on investors and capital market clients based in
the southwestern United States, a significant economic downturn in that region
could adversely affect PGG's revenues. HWG and PMT accounted for approximately
40.3% of the combined companies' pro forma combined revenues for 1997, and 37.2%
for the nine months ended September 30, 1998. As a result, an economic downturn
in that region could adversely affect the companies in the region and reduce
PGG's underwriting and brokerage business relating to those companies. In
addition, a regional economic downturn could have an adverse effect on PGG's
retail clients or emerging and middle-market companies or growth industries
within the region, which could in turn adversely affect PGG.
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 PGG's liquid waste revenues.
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LITIGATION AND SECURITIES LAW LIABILITY ASSOCIATED WITH FINANCIAL SERVICES
BUSINESS
PGG's proposed financial services business will involve substantial risks
of liability. From time to time PGG 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 in the
plaintiffs' accounts. Though none of the combining companies have historically
incurred material liability for 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
seeking 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 in underwritten offerings of
securities or statements made by securities analysts. These liabilities can
arise under federal laws, such as Rule 10b-5 under the Exchange Act and Section
11 of the Securities Act and similar state statutes and common law doctrines.
The risk of liability may be higher for an underwriter which, like HWG, is
active in the underwriting of securities offerings for emerging and
middle-market companies due to the higher degree of risk and volatility
associated with the securities of these companies. The defense of these or any
other lawsuits or arbitrations may divert the efforts and attention of PGG's
management and staff, and PGG may incur significant legal expense in defending
this litigation or arbitration. See also "-- Business Subject to Extensive
Regulation" (pages 19 through 21) for a discussion of regulatory matters
affecting the financial services industry.
POTENTIAL ENVIRONMENTAL LIABILITY ASSOCIATED WITH LIQUID WASTE BUSINESS
PGG, through ERRI, will process and dispose of various types of
non-hazardous wastes at its North Carolina processing facility. PGG acts or
omissions that could give rise to environmental liabilities and the nature of
the liabilities include:
ACT/OMISSION NATURE OF LIABILITY
- --------------------------------------------------------------------------
o a PGG owned or operated o substantial monetary penalties
facility causes environmental o an order reducing or
damage terminating the responsible
o waste transported by PGG causes operations
environmental damage at another o the revocation or denial of
site permits or other approvals necessary
o PGG fails to comply with for continued operation or
environmental and land use laws expansion of a facility
and regulations or a permit or o liability for environmental
consent order damage at PGG's facility or adjacent
o a facility owned or operated by property or environmental
PGG or the soil or groundwater damage at another site
at the facility is or becomes associated with waste
contaminated transported by PGG
o liability under CERCLA or
comparable state laws
o criminal liability for PGG or
its officers
Also, citizens' groups, adjacent landowners or governmental entitles could
oppose the issuance of a permit or approval to PGG or allege violations of PGG's
operating permits or laws or regulations to which it is subject. Any of these
liabilities could have a material adverse effect on PGG's business, results of
operations and financial condition. The Comprehensive Environmental Response
Compensation and Liability Act 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. Liability under the Resource Conservation and Recovery Act, 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,
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CERCLA and comparable state laws can be substantial. If imposed upon PGG, they
could materially and adversely effect PGG. See "Business of TEI -- Government
Regulation" (pages 55 through 56).
During the ordinary course of its operations, PGG may receive citations or
notices from governmental authorities claiming noncompliance with its permits or
environmental or land use laws and regulations. PGG intends to work with the
authorities to resolve the issues raised by these citations or notices. PGG may
not always be successful in this regard, and its failure to resolve a
significant issue could have a material adverse effect on PGG.
DEPENDENCE ON SYSTEMS AND SOFTWARE
PGG's financial services business will depend 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. The delays could have a material adverse effect on PGG's operating
results. Systems failure or interruptions could be caused by a natural disaster,
power or telecommunications failure, act of God, act of war or otherwise. If a
failure or interruption occurs, back-up procedures and capabilities may be
inadequate.
PGG, through Spires, will use 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 could adversely effect
PGG's ability to solicit and execute orders. Spires' proprietary software is
also dependent on 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 PGG'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 adversely effect
PGG. See "Business of Spires -- Services" (pages 86 through 87) and "Business
of Spires -- Intellectual Property" (pages 87 through 88) for a discussion of
the services provided by Spires and its proprietary software.
FLUCTUATIONS IN OPERATING RESULTS
PGG's revenues and operating results may fluctuate from quarter to quarter
and from year to year due to a combination of factors like:
o the number of underwritten and merger and acquisition transactions
completed by its clients;
o the level of institutional and retail brokerage transactions,
o levels of assets under management;
o variations in personnel costs;
o litigation expenses; and
o the expenses of establishing any new business units.
PGG's revenues from an underwriting transaction will be recorded only when
the underwritten security begins trading. 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 PGG'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 imposing net capital
requirements which will affect what will be each broker-dealer subsidiary of
PGG, 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.
Ultimately, it could require the firm's liquidation. In addition, under Texas
law, PGG's Texas trust subsidiary, PMT, will be required to maintain a minimum
net capital of $1.5 million.
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HWG's and Spires' compliance with these net capital rules could limit
operations that require intensive 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 PGG to
withdraw capital in situations where its broker-dealer and trust company
subsidiaries have more than the minimum required capital. PGG may be limited in
its ability to pay dividends, implement its strategies, pay interest or repay
principal on its debt and redeem or repurchase its outstanding shares. In
addition, a change in these net capital rules or 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. Like the securities industry in general, PGG's
registered broker-dealer and investment advisor subsidiaries will be subject to
extensive regulation in the United States at both the federal and state levels.
As broker-dealers, HWG and Spires are subject to the regulations covering all
aspects of the securities business, including:
o sales methods o record keeping
o trade practices among o limitations on business
broker-dealers activities
o use and safekeeping of o conduct of directors, officers
customers' funds and
securities and employees
o capital structure
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 PGG's clients will have to 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, 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 agreement, including a direct assignment or a transfer of a "controlling
block" of the adviser's voting securities or, under some circumstances, upon
the transfer of a "controlling block" of the voting securities of its parent
corporation. A transaction is not an assignment under either act if it does not
result in a change of actual control or management of the investment advisor.
Any assignment of PGG'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 cause an assignment of
HWG's investment advisory agreements under the statutes. Before the
Transactions, HWG must obtain the required consent of its investment advisory
clients (other than investment companies) of the assignment caused by the HWG
merger. In addition, future issuances of PGG common stock and sales of PGG
common stock by existing shareholders could result in an assignment of PGG's
investment advisory agreements. HWG or PGG may be unable to obtain the necessary
client consents to the contract assignments resulting from the HWG merger or
from future transactions. The failure to obtain these consents for a significant
number of clients could have a material adverse effect on PGG'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, called "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 could result in adverse
consequences, including (1) censure, (2) civil penalties, (3) fines, (4)
cease-and-desist orders, (5) the suspension of a broker-dealer, investment
adviser or futures commission merchant, (6) the statutory disqualification of
officers or employees or (7) other adverse consequences which could have a
material adverse effect on PGG. Even if none of these actions are
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taken, the administrative or judicial proceedings or arbitrations could have a
material adverse effect on PGG's perceived creditworthiness, reputation and
competitiveness. Financial services clients or others who allege that they have
been damaged by a violation of applicable regulations also may seek to obtain
compensation from PGG, including the unwinding of any transactions with PGG.
Additional legislation or regulations, or changes in the methods or enforcement
of existing regulations by governmental entities or SROs may materially and
adversely affect PGG.
PGG'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 PGG's
underwriting, merger and acquisition and principal investment business in a
given period could be affected by (1) existing and proposed tax legislation, (2)
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board), and (3) changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities. From time to time, various antitakeover
legislation and legislation that could affect the benefits from financing
leveraged transactions with high-yield securities have been proposed. If
enacted, they could adversely affect the volume of merger and acquisition
business. This could have an adverse affect on PGG's underwriting, advisory and
trading revenues related to that business.
PGG's trust subsidiary, PMT, will operate in a highly regulated environment
and will be subject to extensive supervision and examination by Texas regulatory
agencies. As a Texas chartered trust company, PMT is subject to the Texas Trust
Company Act, the rules and regulations under that act, and supervision by the
Texas Banking Commissioner. These laws are intended primarily for the protection
of PMT's clients, rather than its investors. The Texas Trust Company Act
requires or imposes:
o periodic examinations by the office of the Banking Commissioner;
o furnishing periodic financial statements to the Banking Commissioner;
o minimum net capital maintenance;
o fiduciary record-keeping;
o bonding for the protection of clients;
o restrictions on investments of restricted capital;
o lending and borrowing limitations;
o prohibitions against certain activities;
o prior approval from the Banking Commissioner 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)
and;
o broad regulatory powers if the trust company violates certain
provisions of Trust Company Act or is determined to be in a
"hazardous condition."
While PMT believes it is in material compliance with these laws and
regulations, it may not be able to continue compliance, or these laws or
regulations may change adversely. Either event could have a material adverse
effect on PGG.
PGG's ability to comply with laws and rules relating to its financial
services business will depend in large part upon establishing and maintaining a
compliance system to monitor compliance, and PGG's ability to attract and retain
qualified compliance personnel. Although the combining companies believe that
they are in material compliance with these laws and regulations, they may not be
able to comply in the future. Any noncompliance could have a material adverse
effect on PGG.
LIQUID WASTE. The operations of what will be PGG'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, Resource
Conservation and Recovery Act and the Clean Air Act. If existing regulatory
requirements change, PGG may have to make significant unanticipated capital and
operating expenditures. Although PGG
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believes ERRI is in material compliance with applicable laws and regulations, it
may not stay in compliance. Governmental authorities may seek to impose fines
and penalties on PGG or to revoke or deny the issuance or renewal of operating
permits for failure to comply with applicable laws and regulations. Under these
circumstances, PGG might be required to reduce or cease operations or conduct
site remediation until a problem is remedied, which could have a material
adverse effect on PGG. In addition, if PGG's liquid waste operations result in
the release of hazardous substances, PGG could incur liability under the
Comprehensive Environmental Response Compensation and Liability Act.
ERRI's facility also requires 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, PGG may have to obtain
additional operating permits or approvals for its facility. The process of
obtaining a required permit or approval may be lengthy and expensive. The
issuance of the permits or the obtaining of the approval may be opposed by the
public. If PGG cannot obtain or maintain 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
While PGG will maintain liability insurance, the insurance will be subject
to coverage limits. Certain policies exclude coverage for certain securities
laws violations and environmental contamination. Liability insurance may not
continue to be available to PGG on commercially reasonable terms. Potential
liabilities that may be incurred by PGG may not be covered by its insurance. The
dollar amount of potential liabilities may exceed the policy limits. The
insurance carrier may not satisfy its obligations under the policy. See
"-- Litigation and Securities Law Liability Associated with Financial Services
Business" (pages 16 and 17) and "-- Potential Environmental Liability
Associated with Liquid Waste Business" (pages 17 through 18) for a discussion
of potential liabilities associated with PGG's businesses.
LOSSES DUE TO FRAUD OR MISTAKES OF CUSTOMERS OR EMPLOYEES
PGG will be 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. PGG's risk management procedures and internal controls may not
prevent these losses from occurring.
MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH MARKET-MAKING, PRINCIPAL
TRADING,
ARBITRAGE AND UNDERWRITING ACTIVITIES
PGG's market making, principal trading and underwriting activities will
involve the purchase, sale or short sale of securities as principal. These
activities will subject PGG'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 PGG's resale of purchased securities or repurchase
of securities sold short. These activities subject PGG'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 PGG has extended credit to repay PGG. 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 PGG's inability to liquidate assets or redirect illiquid investments.
As a result of its proposed underwriting and merchant banking activities,
PGG 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. These
concentrations increase PGG's exposure to specific credit and market risks.
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SIGNIFICANT VOTING CONTROL BY MANAGEMENT AND SHAREHOLDERS OF COMBINING COMPANIES
Immediately after the Transactions, the shareholders of the three companies
combining with TEI, and the executive officers and directors of PGG, will
beneficially own approximately 56.6% of the outstanding PGG common stock. If
these persons were to act in concert, they would be able to exercise control
over PGG's affairs, including the election of the entire board of directors of
PGG and, subject to Part Thirteen of the Texas Business Corporation Act, 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 businesses
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 completion costs exceed the aggregate contract price.
Past estimates of completion costs have varied significantly, and it is possible
that excess completion costs could be incurred within the next two years.
Through September 30, 1991, the purchaser has incurred about $1.6 million in
costs on contracts totalling about $2.2 million in contract price. However, the
purchaser recently informed TEI that the estimated cash to complete the
contracts will be about $2.4 million resulting in about $.2 million in
additional liability to TEI. If the purchaser does not complete the contracts,
or if it incurs more excess costs in completing the contracts, TEI could incur
more liability to either the former customers or the purchaser.
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 disable
an entire system. In 1992, TEI purchased and developed new software, which it
has tested and believes is Year 2000 compliant. The combining companies believe
that their current systems, which are significant to operations, are or will be
Year 2000 compliant.
The combining companies are now reviewing all vendor supplied hardware,
software, data feeds and other systems and equipment to ascertain Year 2000
compliance. They expect to complete this review by December 31, 1998. As
registered broker-dealers, each of HWG and Spires was required to conduct a
complete review of the potential impact of Year 2000 issues and report its
findings to the NASD and the SEC no later than August 31, 1998. An updated
report is due no later than April 30, 1999. An initial report was filed with the
NASD and SEC by HWG on August 6, and by Spires on August 31, 1998, each without
response from the NASD or the SEC. PMT was required to file, and did file, a
Year 2000 report with the Texas Banking Commissioner, who accepted the report
without comment. The Company cannot guarantee that any Year 2000 problems in
other companies' software, equipment or systems on which it relies will be
timely resolved or that other companies' failure to resolve their problems, or
resolutions incompatible with PGG's systems, would not have material adverse
effect on PGG. For more detailed information relating to each combining
company's Year 2000 problems and state of readiness, see "TEI Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000" (pages 62 through 63), "HWG Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000" (pages 75 through
76), "PMT Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000" (pages 84 through 85) and "Spires
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000" (pages 98 through 99).
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 representatives of
the combining companies. PGG has applied for the PGG common stock to be quoted
on the Nasdaq National Market, but an active trading market may not develop
after consummation of the Transactions, or, if it does, it may
22
<PAGE>
not 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 PGG and changing conditions in the economy in
general, in PGG's businesses in particular, or in the industry of one of PGG"s
major client groups. In addition, the stock markets periodically experience
significant price and volume volatility which may affect the market price of the
PGG common stock for reasons unrelated to PGG or its operating performance.
PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER EFFECTS
PGG's articles of incorporation authorize the issuance, without shareholder
approval, of one or more series of preferred stock having preferences, powers
and rights (including dividend, distribution and voting preferences over the PGG
common stock) determined by PGG's board of directors. See "Description of PGG
Capital Stock -- Preferred Stock" (page 117) for a more detailed discussion of
this subject.
Provisions of PGG's articles of incorporation and bylaws and the Texas
Business Corporation Act may delay or prevent an attempt to obtain control of
PGG, whether by means of a tender offer, business combination, proxy contest or
otherwise. These provisions include (1) the authorization of "blank check"
preferred stock, (2) classification of the board of directors, (3) 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, (4) a restriction on the
ability of shareholders to take actions by less than unanimous written consent,
and (5) a restriction on business combinations with interested parties. See
"Description of PGG Capital Stock" (pages 117 through 119) for a discussion of
the attributes associated with ownership of PGG capital stock.
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 forward looking-statements may be
found in the material under "Summary," "Risk Factors," "The
Transactions -- Reasons for the Transactions and -- Business Combination
Costs -- Anticipated Consolidation Benefits," "Business" of each of the
combining companies, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of 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. PGG's actual
results may differ significantly from management's expectations, and thus from
the results discussed in the forward looking statements. Factors that may cause
such differences include those described in "Risk Factors," "Information
Provided by Financial Services Companies," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" of
each of the combining companies.
23
<PAGE>
THE TRANSACTIONS
GENERAL
TEI is furnishing this Proxy Statement/Prospectus to its shareholders in
connection with the solicitation of proxies by the TEI board of directors for
use at the TEI Special Meeting to be held on December 31, 1998 and at any
adjournment or postponements of the meeting.
At the Special Meeting, TEI shareholders will be asked to approve two
proposals:
Proposal 1 -- the TEI merger agreement and the merger it contemplates;
and
Proposal 2 -- the issuance of 3,562,500 PGG common shares to the HWG,
PMT and Spires owners.
The terms of these transactions are set forth in the Agreement. Under the
Agreement, the following Transactions simultaneously are to occur:
(1) THE TEI MERGER -- TEI will merge with a newly formed PGG merger
subsidiary. About the TEI Merger:
o it will be on terms set out in a separate merger agreement signed
when the Agreement was signed;
o TEI will survive the merger and, upon its completion, become a
wholly owned subsidiary of PGG; and
o each TEI common share outstanding when the merger is completed
will convert into .25 of a PGG common share.
(2) THE HWG AND PMT MERGERS -- HWG and PMT will merge with two separate
newly formed PGG merger subsidiaries. About these mergers:
o they will be on terms set out in two separate merger agreements
signed when the Agreement was signed;
o HWG and PMT will survive the mergers, and, upon their completion,
become wholly owned subsidiaries of PGG;
o all equity securities of HWG outstanding when the HWG merger is
completed will convert into a total of 1,187,500 PGG common
shares; and
o all equity securities of PMT outstanding when the PMT merger is
completed will convert into a total of 1,187,500 PGG common
shares.
(3) THE SPIRES TRANSACTIONS -- PGG will indirectly acquire 100% ownership
of Spires through a series of contributions made to PGG of direct and indirect
ownership interests in Spires. In these transactions:
o five of the six Spires limited partners will contribute their
Spires limited partnership interests to PGG;
o all of the stock of a corporation which indirectly through a
subsidiary owns all of the stock of a sixth corporate limited
partner of Spires, will be contributed to PGG;
o all of the stock of Spires' two corporate general partners will
be contributed to PGG;
o PGG will contribute all these direct and indirect limited
partnership interests in Spires to a new PGG subsidiary;
o PGG will contribute all the stock of the two corporate general
partners of Spires to a second new PGG subsidiary; and
o in exchange for the contributed Spires related equity interests,
PGG will issue a total of 1,187,500 PGG common shares to the
holders of those interests.
24
<PAGE>
As a result of the Transactions, PGG will own directly or indirectly 100%
of the equity ownership of each of the combining companies. See " -- Ownership
Structure of PGG After the Transactions" and "The Agreement -- Manner and
Basis of Converting Securities."
This Proxy Statement/Prospectus also constitutes a prospectus of PGG, which
is part of the Registration Statement on Form S-4 filed by PGG with the SEC
under the Securities Act, to register the shares of PGG common stock to be
issued in the Transactions.
OWNERSHIP STRUCTURE OF PGG AFTER THE TRANSACTIONS
The chart below depicts the ownership of PGG after the Transactions. To
simplify the illustration, the chart does not attribute ownership of PGG shares
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 before the Transactions of all outstanding HWG and PMT options and
warrants, as required by the Agreement. Accordingly, the ownership percentages
shown on the chart differ from those under the caption "Principal Shareholders
of PGG after Transactions."
<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>
25
<PAGE>
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 asked about 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 begin discussions.
Messrs. Campbell and Harris have known each other personally and professionally
for over five years. In the meeting, Mr. Campbell outlined his criteria for the
ideal merger candidate. The criteria included (1) profitability; (2) revenue
growth potential; (3) qualified and experienced management team; (4)
participation within an industry with favorable market conditions and
consolidation potential; and (5) an ability to use TEI's public company
platform, liquidity and capital to enhance operations. After briefly discussing
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 briefly outlined certain
business and financial matters relating to HWG and PMT. Mr. Campbell expressed
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 initial meeting's participants, 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 first introduced the possibility of
Spires' participation in the combination to increase the revenues of a combined
entity and its service capabilities. The parties briefly discussed 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 other combining companies might appeal
to TEI and its shareholders. At that point, the parties agreed to begin
preliminary due diligence relating to the business and financial matters of the
companies.
In the week of February 16, 1998, representatives of TEI and the other
combining companies provided each other with information relating to certain
business, financial and accounting matters regarding their companies.
Representatives of each of the companies internally reviewed and discussed the
information. On March 6, 1998, the parties met again to discuss in greater
detail the items discussed at the February 9th meeting, and to consider
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 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,
they discussed that:
o Messrs. Harris and Garrison would serve as the primary executive
officers of any resulting combined company;
o the board of directors would consist of 11 members, six designated by
TEI and five by the other combining companies; and
26
<PAGE>
o the former TEI shareholders would retain slightly more than 50% of the
outstanding shares of any combined company and the former owners of
the other combining companies would receive slightly less than 50%.
TEI then engaged outside counsel to prepare separate drafts of letters of
intent with each of the three financial service companies. The letters were to
be signed by TEI and presented to the other combining companies for execution
pending TEI board approval. At a special TEI board meeting held on April 28,
1998, the proposed combination was discussed and the letters of intent were
approved. Following the TEI board meeting, TEI management executed the letters
of intent and presented them to representatives of the other companies, which
then signed 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. Instead, it
resulted from intense arm's length negotiating among the senior executives of
the four entities, with 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 proposed Transactions would need to be accretive to 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 transactions were circulated on May 28, 1998. Many telephone discussions
among the parties concerning various aspects of the proposed combination and the
related documents continued through mid-August 1998. 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 to during
this process included, among others:
o a change in the structure of the transaction with Spires for
federal income tax purposes;
o an increase in the number of directors comprising the full PGG
board from 11 to 12, six to be designated by TEI and six by the
other combining companies;
o a prohibition on 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) it may disclose to the TEI shareholders the board's
position on certain tender offers;
o the granting to the non-TEI parties of a termination right in
certain cases if the TEI board withdraws or amends adversely its
recommendation for the proposed combination or approves or
recommends an alternative transaction;
o TEI's agreement to lend up to $825,000 to holders of outstanding
PMT options to fund the exercise of these options before closing;
and
o the addition of a condition that TEI satisfy certain adjusted
current assets, working capital and net worth requirements at or
near the closing.
At a special board meeting held on August 18, 1998, the TEI board
considered the proposed Agreement and Transactions. TEI management presented a
comprehensive analysis of the proposed Transactions, including an overview of
the three financial services companies, and a description of their operations,
financial conditions and competitive positions. 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
methods used in connection with its financial analysis of the Transactions (see
"-- Opinion of J.P. Morgan"). The TEI board reviewed with TEI's counsel, the
principal features of the Agreement and the Transactions. The
27
<PAGE>
board also received formal due diligence reports, and then unanimously approved
the Agreement in its final form. The Agreement was then executed by the
appropriate officers of the signing companies on the evening of August 18th.
At Spires' request, the Agreement was amended and restated to again change
for federal income tax reasons the structure of the Spires transactions. A draft
of the revised agreement was circulated to the parties on August 31, 1998. The
revision added new affiliated Spires entities and their owners as parties. As a
result of this request, TEI required additional representations and warranties
with respect to these new entities and their 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 signed on October 2, 1998.
REASONS FOR THE TRANSACTIONS
TEI
THE TEI BOARD HAS UNANIMOUSLY DETERMINED THAT THE TEI MERGER AND THE SHARE
ISSUANCES ARE IN THE BEST INTERESTS OF TEI AND ITS SHAREHOLDERS AND HAS APPROVED
THE TEI MERGER AGREEMENT. THE TEI BOARD UNANIMOUSLY RECOMMENDS THAT THE TEI
SHAREHOLDERS VOTE IN FAVOR OF THE TEI MERGER AGREEMENT AND THE SHARE ISSUANCES
AT THE TEI SPECIAL MEETING.
ADVANTAGES. In recent years the financial services industry has grown
dramatically. Even in light of recent market volatility, TEI believes the
long-term trends in the industry remain positive, given:
o the increase in investment funds resulting mostly from changing
demographic patterns,
o industry consolidation,
o financial services deregulation, and
o rapid changes in technology and customer demands.
As the financial services industry continues to consolidate, the number of
quality and affordable financial services firms within the southwest region has
reduced. TEI believes the combination will give it regional name recognition
within the industry and an experienced and knowledgeable management team that
can compete in the financial services market. For the TEI shareholders, on a pro
forma basis, the Transactions 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 unquantified improved
earnings and cash flow potential for the long-term growth of PGG, as successor
to TEI, and enhanced shareholder value.
For these reasons, the TEI board believes that the terms and conditions of
the Agreement, and the TEI merger and the share issuances, are in the best
interest of TEI and its shareholders. In reaching its conclusions, the TEI board
considered:
o 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 on each of the other
companies;
o management's belief that the long-term trend in the financial
services industry remains positive, despite the recent volatility
in the industry, especially in light of an increase in investment
funds as a result of several industry conditions;
o the limited number of available quality and affordable regional
financial service firms focused on the southwest region;
o the reputation and experience of the other companies' management
teams, several members of which have had personal business dealings
with TEI board members;
28
<PAGE>
o unquantified cross-selling opportunities and operating efficiencies
that may result from the Transactions, see "Summary Business
Strategy of PGG -- Business Strategy";
o the advice of, and financial analyses prepared by, J.P. Morgan (see
"--Opinion of J.P. Morgan");
o the advice of counsel that the PGG common stock issuable to the TEI
shareholders in the Transactions should be received tax-free for
federal income tax purposes;
o the corporate governance aspects of the Transactions, including
that TEI directors would continue to constitute one-half of the PGG
board and that certain of TEI's management would continue in
significant capacities with the Company; and
o the number of PGG common shares to be issued to the HWG
shareholders, the PMT shareholders and the Spires owners in the
Transactions, and the resulting percentage ownership of the
combined enterprise.
DISADVANTAGES. In addition to anticipated advantages, the TEI board
considered:
o the recent volatility of the equity markets and the related impact
on the financial services industry:
o the challenges inherent in combining the operating managements of
TEI and the other companies and establishing a single unified
corporate culture, which is not assured; and
o the ability of the combined enterprise to achieve the benefits
intended by the Transactions would significantly depend on its
success in leveraging existing client relationships among the three
financial services companies, which also cannot be assured.
This discussion of the information and factors considered by the TEI board
is not exhaustive. Because it considered so many factors in evaluating the
Transactions, the TEI board did not find it practicable to, and did not quantify
or otherwise assign relative weights to, specific factors it considered. In
addition, individual members of the TEI board may have given different weight to
different factors.
THE COMBINING COMPANIES
THE BOARDS OF HWG AND PMT, AND EACH OF THE SPIRES GENERAL PARTNERS, HAVE
UNANIMOUSLY DETERMINED THAT THE TRANSACTIONS, AS APPLIED TO THEM, ARE IN THE
BEST INTERESTS OF THEIR COMPANIES AND THEIR SHAREHOLDERS AND PARTNERS, AND HAVE
APPROVED THE TRANSACTIONS. 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 its shareholders. In making its
determination, the HWG board considered:
o the Transactions would combine the complementary businesses of the
three financial service companies with limited overlap and present
the potential for cross-selling opportunities;
o the Transactions would effectively diversify the three financial
service companies into a broader array of financial services and
give them a competitive edge in the consolidating financial
services industry;
o 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 to compete in
the consolidating financial services market;
o the combining companies would possess greater financial resources
as a publicly held company with access to TEI's current cash
surplus;
29
<PAGE>
o with greater financial resources, the combining companies could
pursue internal and external (e.g., acquisitions) growth
opportunities, as well as diversification and enhanced recruiting
opportunities;
o the reputation and experience of the management teams of Spires,
PMT and TEI, with whom members of the HWG board have had prior
dealings;
o the Transactions would provide the HWG shareholders with a
significant increase in liquidity and, HWG believes, increased
shareholder value;
o 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
o the board of directors of PGG would consist of 12 members, two of
whom would be representatives of HWG, so that the former HWG
shareholders would be assured 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: (1) the
uncertainty inherent in combining the operations and the strategies of the
combining companies and (2) the ability of PGG to achieve the benefits intended
by its 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 its shareholders. In making its
determination, the PMT board considered:
o the Transactions would combine the complementary businesses of the
combining companies with limited overlap and present the potential
for cross-selling opportunities;
o 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;
o 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 to compete in
the consolidating financial services market;
o the combining companies would possess greater financial resources
as a publicly held company with access to TEI's current liquid
resources;
o with greater financial resources, the combining companies could
pursue internal and external (e.g., acquisitions) growth
opportunities, as well as diversification and enhanced recruiting
opportunities;
o the reputation and experience of the management teams of Spires,
HWG and TEI, with whom certain members of the PMT board have had
prior dealings;
o the Transactions would provide the PMT shareholders with a
significant increase in liquidity and, PMT believes, increased
shareholder value;
o 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
o the board of directors of PGG would consist of 12 members, two of
whom would be representatives of PMT so that the former PMT
shareholders would be assured 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: (1) the
uncertainty inherent in combining the operations and the strategies of the
combining companies and (2) the ability of PGG to achieve the benefits intended
by the Transactions in a timely manner.
30
<PAGE>
SPIRES. The general partners of Spires have determined that the terms and
conditions of the Transactions applicable to Spires are in its best interests
and the best interests of its partners. In making their determination, the
Spires general partners considered:
o the Transactions would combine the complementary businesses of the
combining companies with limited overlap and present substantial
cross-selling opportunities;
o the expectation (without a firm commitment from PGG) that Spires
will have access to $15 million in capital.
o the combined enterprises would have greater financial resources to
pursue internal growth opportunities in Spires' core business,
diversification opportunities into other related and complimentary
businesses, and enhanced recruiting capabilities;
o the reputation and knowledge of the management teams at HWG and
PMT, several of whom are known to Spires management;
o the Transactions will provide to partners of Spires a significant
increase in liquidity as a result of ownership of a public company;
o the board of directors of PGG would be expanded to 12 members, two
of whom would be representatives of Spires, so that the former
partners of Spires would be assured continued representation in the
leadership of the combined enterprise; and
o 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:
(1) the uncertainty that converting from an entrepreneurial partnership to a
publicly held corporation might produce different business conditions that
adversely impact partners or employees and (2) the uncertainty inherent in
combining the operations and the strategies of the combining companies.
BUSINESS COMBINATION COSTS -- ANTICIPATED CONSOLIDATION BENEFITS
The combining companies expect to incur non-recurring merger related costs
estimated at $1.1 to $1.4 million. The estimate includes direct transaction
costs consisting of investment banking, legal, accounting, printing, listing
application and miscellaneous shareholder meeting fees and expenses. There may
be opportunities for operational and administrative cost savings, though no
potential savings have been quantified.
INFORMATION PROVIDED BY FINANCIAL SERVICES COMPANIES
The three financial services companies furnished TEI, J.P. Morgan and each
other, internal estimates of projected five-year net income beginning with 1998.
TEI did not furnish any comparable information to the financial services
companies or to J.P. Morgan.
The internal estimates of projected net income furnished by the three
financial services companies are summarized below. They are being disclosed to
you only because they were furnished to TEI and J.P. Morgan, and not because
they were prepared with a view to public disclosure, and not because PGG, TEI or
any of the financial services companies will rely on them, or thinks you should
rely on them, for any purpose. As you review this information and in considering
what weight, if any, you will give it, keep in mind that:
o The estimates should not be regarded as representations or
predictions of future results.
o Actual future results may be materially lower, and in the case of
HWG for 1998, will be materially lower, than those indicated in
the estimates.
o The internal estimates were prepared on the basis of assumptions
which may prove to have been wrong.
o The assumptions upon which the estimates were based involved
judgments of the managements of the financial services companies
concerning future economic, financial market, competitive and
regulatory conditions, all of which are difficult or impossible to
predict and many of which are beyond the control of the financial
services companies.
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<PAGE>
o The estimates were not prepared in compliance with the guidelines
concerning financial projections promulgated by the American
Institute of Certified Public Accountants.
o The estimates do not purport to present future operations in
accordance with generally accepted accounting principles.
o The estimates were not furnished to or compiled, audited, or
otherwise reviewed by any accounting firm, and no accounting firm,
including any of those named in this document, assumes any
responsibility for the estimates.
o In its review of the estimates, TEI applied its own judgment and
determined that for its purposes downward adjustments, in some
cases in significant amounts, were appropriate.
o J.P. Morgan, in its discounted cash flow analysis prepared in
connection with its fairness opinion, adjusted the estimates to
reflect more moderate growth in revenues and lower operating
margins.
o The estimates were prepared in May and June 1998 (before the
market volatility which characterized the last half of the year),
and have not been, and will not be, updated to reflect any events
or conditions occurring since then. As a result, the estimates are
not reliable guides for estimating future performance.
o Any of the disclosed "Risk Factors" described at pages 14
through 23, which you should review in connection with your review
of the estimates, could cause the actual results of any of the
financial services companies to differ materially from its
estimates.
o The estimates constitute forward-looking statements of the type
described in Section 27A of the Securities Act and Section 21E of
the Exchange Act and are subject to the safe harbors created by
those statutes.
o The Spires estimates assume that $15 million of capital will be
made available to it by PGG, but PGG has no commitments to make
capital available to Spires, may choose to deploy its capital
elsewhere, or may not have capital which it can make available to
Spires.
o HWG's estimate of its 1998 net income assumed that several
substantial fee generating transactions would be concluded in
1998. Those transactions are now rescheduled for closing in early
1999, and it is possible one of or more of them may never be
consummated. Thus, subsequent events have shown HWG's estimate of
its 1998 net income was based on assumptions which later proved to
have been incorrect, and that HWG's actual income for 1998 will be
substantially less than what HWG had estimated.
o In making its current recommendation to the TEI shareholders
concerning the Transactions, TEI's board of directors is not
relying upon these estimates; nor are the boards or general
partners of the other combining companies in connection with the
recommendations to their companies' owners.
The following table, which should be reviewed only after consideration of
the foregoing caveats, summarizes the five-year net income projections furnished
to TEI and J.P. Morgan by the three financial services companies:
FIVE-YEAR PROJECTIONS
(AS OF JUNE 1998)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET INCOME
HWG................................... $ 4,150,740 $ 4,954,092 $ 5,692,761 $ 6,420,155 $ 7,176,681
Pinnacle.............................. 492,294 807,635 1,164,869 1,530,778 1,829,985
Spires................................ 1,171,984 1,729,562 2,443,309 3,464,171 4,189,282
</TABLE>
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OPINION OF J.P. MORGAN
TEI retained J.P. Morgan to deliver a fairness opinion in connection with
the proposed Transactions. The terms of the engagement, including the fee
arrangements and indemnification obligations on the part of TEI described in
more detail below, are set out in a May 4, 1998 letter agreement with J.P.
Morgan.
At the TEI board meeting on August 18, 1998, J.P. Morgan rendered its oral
opinion to the board that, at that 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 confirmed its August 18, 1998 oral opinion in its
written opinion to the board, dated the date of this Proxy Statement/Prospectus,
that, at that 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 on the structure, the specific amount of the consideration, or any other
aspects of the Transactions, or to provide services other than to deliver its
opinion. J.P. Morgan did not participate in negotiations with respect to the
terms of the Transactions, and has assumed that their terms are the most
beneficial terms from TEI's perspective that under the circumstances could be
negotiated among the Transactions' parties.
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. The TEI shareholders are urged to read the
whole opinion. 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 the shareholder should vote at the TEI Special Meeting. This document
summary of the opinion is qualified in its entirety by reference to the
opinion's full text.
In arriving at its opinion, J.P. Morgan reviewed, among other things:
o the Agreement;
o this Proxy Statement/Prospectus;
o the audited financial statements of the combining companies for
the fiscal year ended December 31, 1997, and the unaudited
financial statements of the combining companies for the period
ended June 30, 1998, in the case of its initial verbal opinion,
and September 30, 1998, in the case of the later written
confirmation;
o certain publicly available information concerning the businesses
of the combining companies and of certain other companies engaged
in comparable businesses, and the reported market prices for
certain comparable companies' securities;
o publicly available terms of certain transactions involving
comparable companies and the consideration paid for those
companies;
o the terms of other business combinations deemed relevant by J.P.
Morgan; and
o certain internal financial analyses and forecasts prepared by the
combining companies and their managements.
J.P. Morgan also held discussions with certain members of the management of
the combining companies with respect to certain aspects of the Transactions, the
past and current operations of the combining companies, the financial condition
and future prospects and operations of the combining companies, and certain
other matters J.P. Morgan believed necessary to its inquiry. J.P. Morgan also
visited certain representative facilities of 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 the combining companies or otherwise reviewed by J.P.
Morgan. J.P. Morgan has not assumed any
33
<PAGE>
responsibility or liability for that information. 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 the combining companies to which such
analyses or forecasts relate. J.P. Morgan also assumed that the Transactions
will have the tax 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 the combining companies were
prepared by the managements of the companies. No combining company publicly
discloses internal management projections like those provided to J.P. Morgan,
and the projections were not prepared for public disclosure. These projections
were based on many inherently uncertain variables and assumptions which may be
beyond the control of management, including, 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 the projections.
J.P. Morgan's opinion is based on economic, market and other conditions and
the information made available to J.P. Morgan as of the date of the opinion.
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 its opinion. J.P. Morgan expressed no opinion as to
the price at which PGG common stock will trade in the future.
In keeping 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 used by J.P. Morgan in giving its
August 18, 1998 oral opinion. Using these methods, which are summarized below,
J.P. Morgan estimated three ranges of values for the financial services
companies taken as a whole, as shown in this chart:
VALUE RANGES
In Millions
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Public Trading Multiples ............... $30 - $45
Selected Transaction Analysis .......... $24 - $35
Discounted Cash Flow Analysis (1) ...... $43 - $65
- --------------------------
(1) Base case.
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<PAGE>
PUBLIC TRADING MULTIPLES. Using publicly available information, J.P.
Morgan compared selected financial data of the three financial services
companies with similar data for selected publicly traded companies in businesses
which J.P. Morgan judged to be analogous. The selected companies were:
Legg Mason Hambrecht & Quist
Raymond James McDonald & Co.
Jefferies Group Interstate Johnson Lane
Morgan Keegan 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:
MULTIPLE MEDIAN LOW HIGH
- ------------------------------------- ------ --- ----
Price to book value.................. 2.9x 1.7x 3.4x
Price to LTM net income.............. 19.9x 7.5x 22.7x
Price to 1998 net income............. 14.7x 9.8x 28.0x
Price to 1999 net income............. 13.6x 8.9x 20.5x
These multiples were then applied to the evaluated companies' book value,
LTM net income, 1998 estimated net income, and 1999 estimated net income,
yielding implied values for the three financial services 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. ING Barings/Furman Selz
BankBoston/Robertson Stephens First Union/Wheat First
Societe Generale/Cowen, CIBC/Oppenheimer
BankAtlantic/Ryan, Beck & Co. NationsBank/Montgomery
Fifth Third/Ohio Co. BankAmerica/Robertson Stephens
U.S. Bancorp/Piper Jaffray SBC Warburg/Dillon Read
First Chicago/Roney & Co. Bankers Trust/Alex Brown
Travelers/Salomon Dean Witter/Morgan Stanley
Fleet/Quick & Reilly
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:
MULTIPLE MEDIAN LOW HIGH
- ------------------------------------- ------ ---- ----
Price to book value.................. 3.2x 1.3x 8.7x
Price to LTM revenues................ 1.3x 0.6x 3.9x
Price to LTM net income.............. 14.4x 10.7x 22.8x
Price to forward 12 months net
income............................. 15.1x 9.9x 20.1x
Price to forward 24 months net
income............................. 15.2x 8.8x 18.7x
J.P. Morgan applied the range of multiples derived from such analysis to
the evaluated companies' book value, LTM revenues, LTM net income, forward 12
months net income, and forward 24 months net income, and arrived at an estimated
range of equity values for the evaluated 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 evaluated companies
is between $24 and $36 million.
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<PAGE>
DISCOUNTED CASH FLOW ANALYSIS. J.P. Morgan conducted a discounted cash
flow analysis for the purpose of determining the combined value of the evaluated
companies. J.P. Morgan calculated the free cash flows that the evaluated
companies are expected to generate during fiscal years 1998 through 2003 based
upon financial projections prepared by the management of the evaluated 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 evaluated 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
evaluated 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%. The discount rate range
was calculated by estimating the cost of debt financing and the cost of equity
financing for the combining companies, taking into account such variables as
company size, industry risk, and debt and equity market conditions. Based on the
base case projections and the indicated discount rate range, 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 its analyses and by reviewing the assumptions upon which
its analyses were based and the factors considered in its analyses.
The summary set forth above does not completely describe the analyses or
data presented by J.P. Morgan. The preparation of a fairness opinion is a
complex process not readily susceptible to partial analysis or summary
description. J.P. Morgan believes that the summary set forth above and its
analyses must be considered as a whole and that selecting parts of the summary,
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 it deemed reasonable, including assumptions about 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 analysis. J.P. Morgan's analyses do not indicate actual
values or actual future results. Actual values may be higher or lower than those
indicated. Moreover, J.P. Morgan's analyses are not appraisals and do not
reflect 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 on the Transactions based on its 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 related to
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.
This was TEI's first engagement of J.P. Morgan.
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 and their customers accounts. Accordingly, they may at any time
hold long or short positions in such securities.
36
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
GENERAL. This section summarizes the opinions of Porter & Hedges, L.L.P.,
counsel to TEI, and PricewaterhouseCoopers LLP, advisor to the other combining
companies, as to the material federal income tax consequences associated with
participation in the Transactions. Copies of both opinions are included as
exhibits to the Registration Statement. Combining company shareholders and
owners should be aware that the opinions are not binding on the Internal Revenue
Service or the courts, and the IRS and the courts may adopt contrary positions.
No ruling has been requested from the IRS on any of the opinions and statements
described in this summary. The opinions and statements may not 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 concerned party in light of the party's
particular circumstances. Nor do they apply to parties subject to special
treatment under federal income tax laws. Excluded parties include dealers in
securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, S corporations, foreign corporations, and persons
who are not citizens or residents of the United States. The opinions and this
summary do not cover persons who hold equity securities of a combining company
as part of a hedge, straddle, "synthetic security" or other integrated
investment. Also, 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 Internal Revenue Code, Treasury Regulations, IRS
rulings and pronouncements, and judicial decisions now in effect, all of which
may change by legislative, judicial or administrative action. Any changes may be
applied retroactively so as to adversely affect a party.
The IRS Restructuring and Reform Act of 1998 was enacted in July 1998. It
contains an assortment of complex changes to the Code, some of which could
affect participants in the Transactions. 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 MATERIAL FEDERAL INCOME TAX CONSEQUENCES EXPECTED TO RESULT FROM THE
TRANSACTIONS ARE DISCUSSED IN THIS SUMMARY. YOU SHOULD CONSULT YOUR OWN TAX
ADVISERS ABOUT THE FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO YOU
IN CONNECTION WITH THE TRANSACTIONS, PARTICULARLY THE APPLICATION TO YOU OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
THE TEI MERGER. Based on factual representations by PGG, the combining
companies and certain owners of the combining companies as well as the
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:
o Considered in combination with the other Transactions, the TEI
merger will qualify as a transfer under Section 351 of the Internal
Revenue Code or as a "reorganization" under Section 368 of the
Code;
o No income, gain or loss will be recognized by TEI or PGG as a
result of the TEI merger;
o No income, gain, or loss will be recognized by any TEI shareholder
as a result of the TEI merger on the exchange of such TEI
shareholder's TEI shares for PGG shares;
o The aggregate tax basis of the PGG common stock received by a TEI
shareholder in the TEI merger will be the same as his aggregate tax
basis in the TEI common stock exchanged for the PGG common stock;
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<PAGE>
o The holding period of PGG common stock received by a TEI
shareholder in exchange for TEI common stock in the TEI merger will
include the holding period of the TEI common stock converted into
the PGG common stock; but only if the TEI common stock is held as a
capital asset when the TEI merger is completed; and
o 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 OTHER TRANSACTIONS. Based on factual representations by PGG, the
combining companies and certain of the owners of the combining companies, as
well as assumptions set forth in its opinion, PricewaterhouseCoopers LLP has
rendered the following opinions as to the material federal income tax
consequences of the Transactions:
o Considered in combination with the TEI merger, the other
Transactions will qualify as a transfer under Section 351 of the
Internal Revenue Code or as a "reorganization" under Section 368
of the Code;
o No income, gain or loss will be recognized by HWG, PMT, Spires, or
their owners, as a result of the Transactions;
o No income, gain or loss will be recognized by any equity owner of a
combining company (excluding TEI) as a result of the Transactions;
and
o The aggregate basis and holding period of their PGG common stock
will be the same as the aggregate tax basis and holding period of
the equity interests exchanged for their PGG common stock.
BACKUP WITHHOLDING. Under the backup withholding rules, a TEI shareholder
or equity owner of another combining company may be subject to backup
withholding at the rate of 31% on dividends and proceeds of redemption unless
the owner:
o is a domestic corporation or comes within certain other exempt
categories and, when required, demonstrates its status as such, or
o 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 owner's
federal income tax liability. PGG may require these shareholders or owners to
establish an exemption from backup withholding or to make arrangements
satisfactory to PGG for the payment of backup withholding. Any shareholder or
owner who does not provide PGG with a current taxpayer identification number may
be subject to penalties imposed by the IRS.
ACCOUNTING TREATMENT
Under generally accepted accounting principles, the Transactions will be
accounted for as "purchases" by TEI of PGG, HWG, PMT and Spires. Accordingly,
results of operations of each "acquired" company will be included in TEI's
consolidated results of operations from and after the completion date of the
Transactions. In preparing TEI's consolidated financial statements, TEI will
establish a new accounting basis for the assets and liabilities of those
entities based upon their fair market value and TEI's purchase price, plus
Transaction costs.
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 TEI's common stock
is currently included for quotation on the Nasdaq National Market, because
consummation of the Transactions will cause a "change in control" of TEI under
rules of The Nasdaq Stock Market, Inc., PGG must file an original
38
<PAGE>
application with Nasdaq to approve its common stock for quotation on the Nasdaq
National Market. The consummation of the Transactions is conditioned on the
approval of the PGG shares for quotation on the Nasdaq National Market.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of PGG common stock issuable, in the Transactions will be freely
transferable, except for persons subject to the lock-up agreement being executed
in connection with the Agreement and PGG common shares received by deemed
"affiliates" (as defined under the Securities Act) of TEI or any of the other
combining companies on or before completion of the Transactions. Shares received
by affiliates may be resold by them only in transactions permitted by the resale
provisions of Rule 145 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 a party as well as the party's principal shareholders.
The Agreement requires that certain affiliates of PGG (after giving effect to
the Transactions) execute a written agreement to not offer or sell or otherwise
dispose of any shares of PGG common stock issued to them in the Transactions in
violation of the Securities Act or the SEC's rules and regulations. See "The
Agreement -- Terms of the Agreement -- Conditions to the Transactions
and -- Lock-Up Agreements."
NO APPRAISAL RIGHTS
No combining company shareholder or owner will be able to dissent from the
Transactions or receive an agreed or judicially appraised value for his equity
interest in a combining company. Under the Texas Business Corporation Act, there
are no appraisal rights for shares designated as a national market security on
an interdealer quotation system of the NASD, if such shareholder is not required
to accept for the exchange of such shares: (1) different consideration from the
consideration to any other holder of shares of the same class or (2)
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 since the TEI merger
agreement calls for all TEI shareholders to receive the same type of
consideration for their TEI shares. In addition, under other applicable state
laws, there are no appraisal rights for a holder of equity securities who votes
to approve the transaction in which the exchange of securities will occur. Thus,
none of the shareholders or owners of the other combining companies will have
appraisal rights with respect to their equity interests, since they have agreed
to vote to approve their company's transaction.
CONFLICTS OF INTEREST
Donald R. Campbell, Tony Coelho, W. Blair Waltrip, James Greer, T.G. Bogle
and T. Craig Benson, each of whom is currently a director of TEI, will become
directors of PGG on consummation of the Transactions. 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 other combining companies, will be appointed directors of PGG on
completion of the Transactions.
When the Transactions close, certain directors and officers of 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 both HWG and PMT. Titus H. Harris, Jr. and Richard C. Webb,
each of whom is a director and executive officer
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<PAGE>
of HWG, are also directors of PMT. Shareholders who own capital stock in both
HWG and PMT together own about 68.5% of the outstanding common stock of HWG, and
about 32.0% of the outstanding stock of PMT, including shares held by Messrs.
Garrison, Harris and Webb. Peter W. Badger beneficially owns about 21.8% of the
outstanding Spires partnership interests and about 6.2% of PMT's outstanding
stock.
Because Messrs. Harris, Garrison and Webb serve on the boards of both HWG
and PMT, and because Mr. Badger, a PMT director, has a significant interest,
indirectly through controlled corporations, in Spires, these four individuals,
in their capacities as combining company directors, were called upon to approve
or reject transactions involving more than one company in which they were
interested. When the transactions were put to a board vote, these directors
considered that they were acting on two discreet transactions with PGG and
TEI -- one involving HWG, and one involving PMT -- and did not perceive there to
be a conflict since both companies, not one or the other, were presented with a
transaction opportunity. In the preceding negotiations among the three financial
services companies over the allocation of the total number of PGG common shares
to be issued to the non-TEI parties, each of these directors remained sensitive
to the interests of his dual constituencies and relied in part on other officers
and directors not similarly situated to keep him reminded of each company's best
interest. For example, Stephen M. Reckling, the executive vice president and a
director of PMT, and Stephen D. Strake, the president and chief operating
officer of PMT, both of whom are significant PMT shareholders, and neither of
whom are HWG officers or directors, were active participants in the negotiations
on behalf of PMT. Mr. Badger did not act for PMT in these negotiations. Messrs.
Harris and Garrison, who led these negotiations for HWG, are significant
shareholders of both PMT and HWG, and thus considered themselves to be
sufficiently motivated to obtain the best possible terms for both companies.
Based on their ownership of capital stock of the combining companies, the
following persons, each of whom is a current director and/or executive officer
of TEI or will become one when the Transactions close, will beneficially own the
following number of PGG common shares on the closing:
BENEFICIAL OWNER SHARES OWNED
- ------------------------------------- ------------
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 368,292
R. L. Waltrip 186,730
T. G. Bogle 76,792
James H. Greer 25,500
Tony Coelho 14,666
T. Craig Benson 10,500
All of these shares will be received on conversion of securities of a
combining company at the same conversion rates as apply to all other securities
exchanged in the Transactions.
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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
approve:
o the TEI merger agreement;
o the issuance of 3,562,500 PGG common shares to the owners of the
other combining companies; and
o 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 of both proposals. See "The
Transactions -- Conflicts of Interest."
VOTING AT THE TEI SPECIAL MEETING; RECORD DATE
TEI has set November 6, 1998, as the record date to determine 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 the record
date are entitled to notice of and to vote at the TEI Special Meeting. On the
record date, there were 14,251,012 TEI common shares outstanding. It takes a
majority of such shares, present in person or represented by proxy, to
constitute a quorum at the TEI Special Meeting, and each issued and outstanding
share of TEI common stock is entitled to one vote on the approval of the TEI
merger agreement and the share issuances. The affirmative vote of the holders of
(1) at least two-thirds of the outstanding shares of TEI common stock is
required to adopt the TEI merger agreement and (2) 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
5,618,912 TEI shares, or 39.4% of all outstanding shares, have agreed to vote
their shares in favor of both proposals. Their agreement is irrevocable.
PROXIES
TEI shares represented by a proxy in the form enclosed, signed and returned
to TEI before or at the TEI Special Meeting, and not revoked, will be voted at
the TEI Special Meeting in accordance with the proxy's voting instructions.
Shares represented by proxies with no voting instructions will be voted FOR
adoption of both proposals.
TEI shareholders are asked to complete, sign, date and promptly return the
enclosed proxy card in the postage paid envelope to ensure that their shares are
voted at the TEI Special Meeting. A proxy may be revoked at any time before the
exercise of any authority it grants. Revocation may be by (1) execution and
delivery of a later-dated proxy covering the same shares, (2) giving written
notice of revocation to the Secretary of TEI before the vote at the TEI Special
Meeting or (3) voting in person at the meeting. Attendance at the meeting is not
enough to revoke a 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. A failure to vote will will be the same as a vote against 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 TEI shares, and since approval of the share issuances requires the
affirmative vote of at least a majority of the outstanding TEI shares present at
the meeting, abstentions and broker non-votes with respect to TEI shares will
also have the same effect as negative votes.
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 meeting,
the persons named as proxies intend to use their judgment in voting on such
matters.
41
<PAGE>
SOLICITATION OF PROXIES
Solicitation of proxies for the TEI Special Meeting may be made in person
or by mail, telephone, telecopy or telegram. TEI will bear the cost of the proxy
solicitation. Officers and employees of TEI, who will receive no compensation
above their regular salaries for their services, may solicit proxies from the
TEI shareholders in person or by mail, telephone, telecopy or telegram. TEI has
asked 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, upon request, TEI will
reimburse reasonable forwarding expenses to those holders.
TEI SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
42
<PAGE>
THE AGREEMENT
THE FOLLOWING DISCUSSION BRIEFLY SUMMARIZES THE MATERIAL PROVISIONS OF THE
AGREEMENT. A COPY OF THE AGREEMENT IS INCLUDED IN THIS DOCUMENT AS APPENDIX A.
THIS SUMMARY IS QUALIFIED BY REFERENCE TO THE AGREEMENT, WHICH YOU ARE
ENCOURAGED TO READ.
CLOSING OF THE TRANSACTIONS
The Agreement provides that the TEI, HWG and PMT mergers are to be
completed at the same date and time specified in the articles of merger to be
filed for each merger. The Spires transaction is to be completed at the same
time as the three mergers. If the TEI merger agreement and the share issuances
are approved by the TEI shareholders and all other conditions to the
Transactions are satisfied or waived, the Transactions should be completed not
later than five business days after the TEI Special Meeting.
MANNER AND BASIS OF CONVERTING SECURITIES
CONVERSION OF TEI COMMON STOCK. Upon completion of the TEI merger, each
share of outstanding TEI common stock will automatically convert into .25 of a
share of PGG common stock. As a result, the former holders of TEI common stock
will own 50.02% of the outstanding PGG common stock when the TEI merger is
completed. Shortly after the TEI merger, 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 merger's completion and for use in
exchanging certificates representing TEI shares for PGG certificates. Once the
TEI merger is completed, there will be no further registration of transfers on
TEI's stock transfer books for previously outstanding TEI shares. 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 will be issued in the TEI merger. Instead, the number
of PGG shares to be exchanged for TEI shares will be rounded upward to the
nearest whole share. Until a TEI shareholder surrenders his outstanding
certificate to the Exchange Agent, with a letter of transmittal, the existing
certificate will be considered to represent the right to receive a certificate
representing PGG common stock in exchange for the TEI certificate.
Upon the TEI merger, each outstanding option to purchase a number of TEI
common shares will automatically convert into an option to purchase one-fourth
that number of shares of PGG shares, an exercise price per share four times the
per share exercise price of the converted TEI 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 OTHER COMBINING COMPANIES AND RELATED
ENTITIES. In HWG and PMT mergers, each share of outstanding HWG common stock
will automatically convert into 41.674 shares of PGG common stock, and each
share of outstanding PMT common stock will automatically convert into 5.871 PGG
common shares. When the Transactions are completed, all of the outstanding
capital stock of HWG and PMT will be converted into a total of 2,375,000 shares
of PGG common stock. The former HWG shareholders, as a group, and the former PMT
shareholders, as a group, will each be entitled to receive 1,187,500 PGG shares.
At the same time, all of the Spires related equity securities to be contributed
to PGG will be exchanged for 1,187,500 shares of PGG common stock. The PGG
shares will be allocated pro rata among the Spires owners based on their
ownership interests in Spires. Upon closing of the Transactions, the former
owners of the other combining companies will own 49.98% of the then outstanding
PGG common shares. Promptly after the Transactions, the Exchange Agent will
deliver the PGG common stock to the former owners of the other combining
companies, since they must provide to PGG before the closing of the certificates
representing their equity interest in the other combining companies. After the
Transactions, there will be no further
43
<PAGE>
registration of transfers on the stock/partnership interest transfer books of
the other combining companies.
TERMS OF THE AGREEMENT
REPRESENTATIONS AND WARRANTIES. In the Agreement, its parties have each
made various customary representations and warranties as to, among other things:
o their corporation's or o financial statements
partnership's organization
and compliance with law o litigation
o their capitalizations o material contracts
o the authority and o compliance with broker-dealer
enforceability of the Agreement regulatory requirements
o absence of conflicts o employee benefit matters
o their businesses and o labor matters
financial condition
o tax matters
o required approvals or consents
o environmental matters
These representations and warranties will expire when the Transactions
close.
The shareholders and owners of the other combining companies have agreed to
vote their shares and partnership interests in the other combining companies
(and the Spires related entities) in favor of the Transactions. PGG, TEI and the
HWG shareholders, PMT shareholders and Spires owners have 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 Internal Revenue Code. The owners of certain Spires related entities
involved in the Transactions have also made representations and warranties
specifically concerning these Spires related entities, including, among, other
things, corporate or partnership organization, absence of conflicts, litigation,
capitalization and the absence of unrelated assets and liabilities (subject to
certain limited exceptions). These representations and warranties will survive
the completion of the Transactions.
CONDITIONS TO THE TRANSACTIONS. The obligations of the parties to complete
the Transactions are subject to satisfaction or waiver of certain conditions on
or before the closing. These include:
o The continuing truthfulness of the representations made in the
Agreement.
o The absence of a governmental order, law or private action
preventing the Transactions or seeking to prevent them.
o All parties' compliance with the Agreement's terms.
o Texas Banking Commissioner approval of PMT's participation in the
Transactions.
o Compliance with all broker-dealer regulatory requirements
applicable to HWG and Spires in connection with the Transactions.
o The required TEI shareholder approvals.
o The required approvals by the shareholders and partners of the
other combining companies.
o The absence of a material adverse change in any combining company.
o Receipt of customary opinions of counsel.
o Delivery of tax opinions.
o SEC effectiveness of this Proxy Statement/Prospectus.
o Approval of the PGG common shares for listing on the Nasdaq
National Market.
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<PAGE>
o TEI's compliance with the following financial requirements shortly
before completion of the Transactions:
-- consolidated adjusted current assets of $29.0 million or more;
-- consolidated net working capital of $27.6 million or more;
-- consolidated adjusted net worth of $26.6 million or more;
-- cash, cash equivalents and short-term investments totaling
$27.0 million or more, without counting amounts spent for
transaction expenses.
o Exercise of all outstanding HWG and PMT options and warrants.
o Receipt of releases from the owners of the non-TEI combining
companies.
o Delivery of "affiliate letters" from certain affiliates of the
other combining companies.
OBLIGATIONS PENDING CLOSING. The Agreement imposes obligations and
restrictions on its parties pending the Transactions. The affirmative
obligations include:
o Conducting business in the usual manner.
o Permitting inspection of records by the Agreement's other parties.
o Delivery of periodic financial statements to the other parties.
o Notification of emergencies or adverse events.
o Maintenance of confidentiality.
o Obtaining required approvals and consents.
The Agreement's restrictions prohibit or restrict to agreed levels:
o amendments to its material organizational documents
o changes in capitalization
o dividends and distributions
o new debt
o bonuses and salary increases
o new leases and other long-term commitments
o acquisitions and mergers
o dispositions of material assets
o capital expenditures
o payment of non-current liabilities
o any collective bargaining agreements
TEI has also agreed to: (1) prepare and file with the SEC a proxy
statement/prospectus under the Securities Act to register the shares of PGG
common stock being issued in the Transactions and (2) lend up to $825,000 to
holders of options to purchase shares of PMT common stock to enable such holders
to exercise their PMT options before the Transactions are completed.
OTHER AGREEMENTS. Each combining companies has agreed to (1) call a
meeting of its shareholders or partners, as soon as practicable after
effectiveness of the registration statement filed for the Transactions and (2)
hold its meeting within 40 days following the mailing of the definitive proxy
statement/prospectus in the case of TEI, and within 30 days after effectiveness
of the registration statement in the case of the other combining companies. HWG
agreed to request the consent of its noninvestment company advisory clients to
the assignment of their investment advisory related agreements as a result of
the HWG merger and in accordance with the Investment Advisers Act. TEI and PMT
have agreed, to (1) prepare and file an application under the Texas Trust
Company Act with
45
<PAGE>
the Texas Banking Commissioner seeking the Commissioner's approval of the PMT
merger and the acquisition of control of PMT by PGG and (2) cooperate with any
further requests by the Commissioner in the processing of the application. The
Agreement releases the shareholders and partners of the non-TEI companies from
any claims or liabilities any non-TEI company may have against them before
completion of the Transactions or which are based on an act or omission
occurring before completion of the Transactions, except for obligations under
the Agreement.
PRE-CLOSING DISTRIBUTIONS AND REDEMPTIONS BY SPIRES AFFILIATED
ENTITIES. Spires Financial Partners, Inc. is a corporate general partner of
Spires. Before its shareholders contribute its stock to PGG, it will distribute
to its shareholders all of its cash and cash equivalents, leaving as its sole
asset its partnership interest in Spires. The shareholders of Spires Financial
Partners, Inc. have agreed to deposit in escrow a portion of the distribution
proceeds equal to 110% of the corporation's estimated federal income tax
liability for the short tax period ending when the Transactions are completed.
The escrow deposit will be distributed to PGG to the extent necessary to pay the
corporation's actual federal income tax liability for the short tax period once
the liability is finally determined. Any excess escrowed funds will be disbursed
for the account of the shareholders of Spires Financial Partners, Inc.
LOCK-UP AGREEMENTS. When the Transactions are completed, a designated
group of new PGG shareholders will be required to deliver to PGG letters under
which they will agree for a period of one year not to sell, grant any option or
otherwise transfer any shares of PGG common stock or securities convertible into
or exercisable for PGG common shares. The designated group consists of:
o those designated in the Agreement as the "Waltrip Group
Shareholders";
o each officer or director of PGG;
o each holder of 2.5% or more of PGG's outstanding common shares; and
o each member of any SEC Rule 13d-1 group which holds 10% or more of
PGG's outstanding common shares.
In the Agreement, the "Waltrip Group Shareholders" include 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. As long as any former shareholder of HWG or PMT or any
former Spires owner remains subject to SEC Rule 144 or 145 with respect to his
sale of PGG shares, PGG has agreed to make and keep current public information
available as prescribed by Rule 144(c) and to furnish a written statement to
that effect to the extent reasonably requested by the former shareholder or
owner.
TERMINATION. The Agreement may be terminated at any time before the
Transactions are completed by:
o mutual consent of the boards of directors of the combining
companies;
o the board of directors of any combining company if the Transactions
are not completed by January 31, 1999 (or any later mutually agreed
date), other than because of a breach of the Agreement by the
terminating party;
o by any party if the TEI shareholders fail to approve the TEI merger
and the share issuances at the TEI Special Meeting; or
o by the board of directors of any other combining company 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."
In 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
46
<PAGE>
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 (1) any breach or
default in the performance by any TEI party of any of its covenants or
agreements contained in the Agreement and (2) any breach by a TEI party relating
to the specific transaction tax representations in Article VIII of the
Agreement. The Agreement also requires the shareholders and partners of the
other combining companies to severally indemnify the combining companies and
each other shareholder or partner of the combining companies (or of the Spires
related entities) from all losses, expenses (including reasonable attorneys'
fees and expenses) or liabilities arising out of (1) any breach or default in
the performance by such shareholder or partner of any of its or his covenants or
agreements contained in the Agreement, (2) any breach of representation or
warranty relating to the representations in Article VII of the Agreement or (3)
any breach by such shareholder or partner relating to the transaction tax
related representations in Article VIII of the Agreement. The Agreement further
requires the shareholders of the Spires general partners to jointly and
severally indemnify the combining companies and each other shareholder or owner
of the combining companies and the Spires related entities from all losses and
expenses (including reasonable attorneys' fees and expenses) or liabilities
arising out of any income tax liability of a 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
September 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 nine months ended September 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 unaudited
condensed financial statements of TEI, HWG, PMT and Spires for the nine months
ended September 30, 1998 and the audited historical financial statements of TEI,
HWG, PMT and Spires for the year ended December 31, 1997 included later 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>
COMBINING COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TEI HWG PMT SPIRES ADJUSTMENTS PRO FORMA
--------- ---------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ 15,173 1,539 $ 1,723 $ 1,450 $ 484A
(540)B
(2,263)B
(1,100)D $16,466
Deposits held by clearing brokers.... -- -- -- 1,114 -- 1,114
Investment securities................ 13,617 244 1,378 -- -- 15,239
Securities inventory................. -- -- -- 13,226 -- 13,226
Accounts and commissions receivable,
net................................ 676 161 48 607 -- 1,492
Notes receivable..................... -- -- -- -- 1,259A
(1,259)F --
Due from brokers/dealers............. -- 142 -- 2,190 -- 2,332
Income tax receivable................ -- 119 -- -- -- 119
Property and equipment, net.......... 5,008 97 115 360 -- 5,580
Intangible assets, net............... 2,134 -- -- -- 19,864D 21,998
Other assets......................... 2,175 89 187 591 -- 3,042
--------- ---------- --------- ------- ----------- ---------
Total assets............... $ 38,783 $ 2,391 $ 3,451 $19,538 16,445 80,608
========= ========== ========= ======= =========== =========
Accounts payable and accrued
liabilities........................ $ 1,407 $ 272 $ 55 $ 482 $-- $ 2,216
Due to clearing broker/dealer........ -- -- -- 12,883 -- 12,883
Securities sold not yet purchased.... -- -- -- 2,174 -- 2,174
--------- ---------- --------- ------- ----------- ---------
Total liabilities.......... 1,407 272 55 15,539 -- 17,273
--------- ---------- --------- ------- ----------- ---------
Shareholders' equity:................
Common stock.................... 152 26 153 -- 55A
(234)E
36D
(117)C 71
Additional paid-in capital...... 33,135 3,943 3,649 -- 1,688A
(9,280)E
27,182D
(4,071)C 56,246
Notes receivable for shares
issued........................ -- -- -- -- (1,259)F (1,259)
Unearned compensation........... -- (68) -- -- 68E --
Retained earnings (deficit)..... 8,308 (1,782) (304) -- 2,086E 8,308
Partners' capital............... -- -- -- 3,999 (3,999)E --
Treasury stock.................. (4,188) -- -- -- 4,188C --
Unrealized loss on securities
available for sale............ (31) -- (102) -- 102E (31)
--------- ---------- --------- ------- ----------- ---------
Total shareholders'
equity.................. 37,376 2,119 3,396 3,999 16,445 63,335
--------- ---------- --------- ------- ----------- ---------
Total liabilities and
shareholders' equity.... $ 38,783 $ 2,391 $ 3,451 $19,538 $16,445 $80,608
========= ========== ========= ======= =========== =========
</TABLE>
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<PAGE>
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............... 1492 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 824I 10,935
Brokerage and clearance.............. -- 567 -- 222 -- 789
Interest expense..................... 8 38 -- 615 -- 661
Other general and administrative..... 1,669 898 358 1,827 795H 5,547
------ ------ ----- ------ ----------- ---------
Total expenses.................. 4,823 6,599 1,025 6,056 1,619 20,122
------ ------ ----- ------ ----------- ---------
Income (loss) before income taxes.... (560) 443 384 2,185 (1,619) 833
Income tax provision (benefit)....... (160) 142 -- -- 668J 650
------ ------ ----- ------ ----------- ---------
Income (loss) from continuing
operations......................... $ (400) $ 301 $ 384 $2,185 $(2,287) $ 183
====== ====== ===== ====== =========== =========
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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<PAGE>
COMBINING COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 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................ $ 2,287 $ -- $ -- $ -- $ -- $ 2,287
Commissions.......................... -- 2,839 -- 5,512 -- 8,351
Investment banking................... -- 1,437 -- -- -- 1,437
Fees and services.................... -- -- 1,079 -- -- 1,079
Interest and dividends............... 1,163 99 78 844 -- 2,184
Securities gains and other........... -- 261 293 460 -- 1,014
--------- --------- ------ --------- ------------ ---------
Total revenues.................. 3,450 4,636 1,450 6,816 -- 16,352
--------- --------- ------ --------- ------------ ---------
Liquid waste operating expenses...... 1,760 -- -- -- -- 1,760
Compensation and benefits............ 780 3,199 565 2,975 682I 8,201
Brokerage and clearance.............. -- 413 -- 223 -- 636
Interest expense..................... -- 9 -- 883 -- 892
Other general and administrative..... 1,152 716 345 1,571 596H 4,380
--------- --------- ------ --------- ------------ ---------
Total expenses.................. 3,692 4,337 910 5,652 1,278 15,869
--------- --------- ------ --------- ------------ ---------
Income (loss) before income taxes.... (242) 299 540 1,164 (1,278) 483
Income tax provision (benefit)....... (81) 102 -- -- 387J 408
--------- --------- ------ --------- ------------ ---------
Income (loss) from continuing
operations......................... $ (161) $ 197 $ 540 $ 1,164 $ (1,665) $ 75
========= ========= ====== ========= ============ =========
Basic earnings (loss) per share from
continuing operations.............. $ (0.01) $ 0.01
========= =========
Weighted average shares
outstanding........................ 14,251 (7,126) G 7,125
========= ============ =========
Diluted earnings (loss) per share
from continuing operations......... $ (0.01) $ 0.01
========= =========
Weighted average shares
outstanding........................ 14,251 (7,126) G 7,125
========= ============ =========
</TABLE>
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<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 as required under
the Agreement. As a result, 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 through
September 30, 1998, of $540 and the distribution of Spires partners'
capital of $2,263, 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 other 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 8,454
---------
Goodwill $ 19,864
=========
E. To eliminate the adjusted historical equity accounts of the other
combining companies.
HWG historical equity $ 2,119
Shares issued -- Note A 434
PMT historical equity 3,396
Less distribution -- Note B (540)
Shares issued -- Note A 1,309
Spires historical equity 3,999
Less distribution -- Note B (2,263)
---------
Adjusted historical equity $ 8,454
=========
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:
9/30/98 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
============== ==============
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<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%:
9/30/98 12/31/97
--------- ---------
Historical pretax income of the
other combining companies ...................... $2,003 $3,012
Less additional Spires
compensation and benefits ...................... 682 824
------ ------
1,321 2,188
X 37% X 37%
------ ------
489 810
Less historical income tax provision
of the other combining companies ............... 102 142
------ ------
Adjustment ....................................... $ 387 $ 668
====== ======
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<PAGE>
BUSINESS OF TEI
GENERAL
TEI is a publicly owned holding company that conducts business through its
wholly owned subsidiaries. TEI was incorporated in Texas in June 1989 to acquire
stock of Tanknology Corporation International in a reorganization involving a
private offering of TEI securities. During 1995, 1996 and 1997, TEI disposed of
all of its operations, except for ERRI, which it acquired in 1994. ERRI provides
liquid waste management services, including collection, processing, recovery and
disposal services. TEI's operations focus mainly 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 mostly in Charlotte, North Carolina
and surrounding areas.
The discontinued TEI operations include:
(1) 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);
(2) Tanknology Canada (1988), Inc., a provider of leak detection
services in Canada (Tanknology Canada was incorporated in 1988 and sold in
October 1996);
(3) USTMAN Industries, Inc. 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);
(4) Mankoff Equipment, Inc. 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);
(5) Engineered Systems, Inc., 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).
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 and around Charlotte, North
Carolina. In addition to collecting fees relating to its liquid waste management
services, TEI derives revenues from the sale of by-products such as 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 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"). 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 separation techniques, TEI processes those
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<PAGE>
materials to produce low-grade fuel oil which is resold to asphalt plants, fuel
blending companies and other industrial facilities like concrete and textile
plants.
MARKETING AND CONTRACTS
TEI's services are marketed through a sales force of two commissioned
independent sales agents and three in-house sales managers. 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 mainly targeted at wastewater and waste oil generators.
TEI performs its liquid waste management services under several
arrangements, including standard written service orders, specified contract and
long-term negotiated agreements. As is industry practice, most of TEI's
contracts are terminable at the discretion of the customer with TEI entitled to
reimbursement of costs and payment of fees earned through the termination date.
TEI's contracts also make TEI responsible for customer losses and expenses
caused by 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, TEI provided liquid waste management services to approximately
700 customers, up from 635 customers in 1996. TEI's customer base covers a broad
range of industries, and includes many repeat customers. During 1997, Universal
Refining (15.8% of total operating revenues), Chem-Group (13.4%) and Holston
Companies (12.3%) were TEI's largest customers. Also, during 1996, Holston
Companies accounted for about 12.0% of TEI's total revenues from continuing
operations. The loss of any of these important 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 barriers to entry in the liquid waste industry.
They include formalized procedures of customers' acceptance, licenses, permits,
and the need for specially-equipped facilities and trained personnel.
PROPERTIES
TEI leases about 3,610 square feet of office space for its principal
executive offices in Houston, Texas. The 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 14,800 square foot
processing plant built in 1997. TEI believes that the existing facilities are
well-maintained and adequate for existing and planned operations.
55
<PAGE>
EMPLOYEES
At September 30, 1998, TEI had 35 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 apply or may apply to one or more of TEI's
existing operations. TEI believes that it is not now 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 United States waters. 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 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 for 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.
RESOURCE CONSERVATION AND RECOVERY ACT OF 1976. 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. The
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 under RCRA, and states have adopted
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. TEI's
activities are therefore not subject to the requirements of Subtitle C of RCRA.
COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY
ACT. 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.
Though TEI does not accept, and does not intend to accept, hazardous waste
at any of its facilities, if TEI's operations resulted in the release or
improper disposal of hazardous substances, TEI
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could incur CERCLA liability. TEI is not aware of any such event, but it may
have disposed or 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 into groundwater.
TEI is not aware of any claims against it or any of its subsidiaries based
on CERCLA. Nonetheless, a required cleanup action at one more of its sites 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 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. The
liability could be based upon statute, negligence, strict liability, contract or
otherwise. In addition, TEI must often indemnify its customers or other third
parties against certain risks related to TEI's services, including damages
stemming from environmental contamination. See "-- Marketing and Contracts."
TEI has implemented 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. Coverages include general
liability, comprehensive property damages, workers' compensation and other
coverage customary in its industry. However, the insurance is subject to
coverage limits and certain policies exclude coverage from damages due to
environmental contamination. A claim not covered or only partially covered by
insurance could have a material adverse effect on TEI. Insurance may not
continue to be available to the Company, or available at reasonable rates, and
potential liabilities may not be covered by its insurance. TEI's insurance
carriers may not meet their obligations or the dollar amount of such liabilities
may 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 its tank testing group
before October 25, 1996. At September 30, 1998, TEI has recorded an
approximately $0.8 million liability for this contingency. TEI is not currently
involved in any litigation TEI believes will have a material adverse effect on
its financial condition or its results of operations.
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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 nine months ended September 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 nine months ended
September 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 their related notes included later in this document.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues............................. $ -- $ 2,478 $ 2,375 $ 2,199 $ 2,726 $ 2,066 $ 2,287
Cost of services..................... -- 1,338 1,317 1,554 2,191 1,563 1,760
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................... -- 1,140 1,058 645 535 503 527
Selling, general and administrative
expenses........................... 1,335 1,922 2,197 2,428 2,625 2,020 1,932
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............ (1,335) (782) (1,139) (1,783) (2,090) (1,517) (1,405)
Other income (expense), net.......... 324 251 749 910 1,530 1,145 1,163
--------- --------- --------- --------- --------- --------- ---------
Loss from continuing operations
before income taxes................ (1,011) (531) (390) (873) (560) (372) (242)
Benefit for income taxes............. (384) (200) (150) (339) (160) (49) (81)
--------- --------- --------- --------- --------- --------- ---------
Loss from continuing operations...... (627) (331) (240) (534) (400) (323) (161)
Income (loss) from discontinued
operations, net of tax............. 5,544 1,874 (8,349) 1,289 (2,382) (990) (108)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............... $ 4,917 $ 1,543 $ (8,589) $ 755 $ (2,782) $ (1,313) $ (269)
========= ========= ========= ========= ========= ========= =========
Basic and diluted earnings (loss) per
share:
From continuing operations...... $ (0.04) $ (0.02) $ (0.01) $ (0.04) $ (0.03) $ (0.02) $ (0.01)
From discontinued operations.... 0.37 0.13 (0.59) 0.09 (0.17) (0.07) (0.01)
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per share... $ 0.33 $ 0.11 $ (0.60) $ 0.05 $ (0.20) $ (0.09) $ (0.02)
========= ========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding........................ 14,741 14,420 14,230 14,237 14,244 14,244 14,251
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------- SEPTEMBER 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 $15,173
Short-term investments.......... 9,841 7,483 3,695 18,426 15,516 13,617
Working capital................. 29,146 26,301 24,896 29,002 30,034 29,159
Total assets.................... 55,358 52,917 42,277 43,034 39,043 38,783
Long-term obligations........... -- -- -- -- -- --
Shareholders' equity............ 48,841 48,238 39,665 40,433 37,665 37,376
</TABLE>
- ------------
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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 THEIR
RELATED NOTES INCLUDED LATER IN THIS DOCUMENT. ALL STATEMENTS OTHER THAN
HISTORICAL FACTS INCLUDED IN THE FOLLOWING DISCUSSION ABOUT 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, SUCH EXPECTATIONS
MAY PROVE TO HAVE BEEN WRONG.
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 75.7 77.0
--------- --------- --------- --------- ---------
Gross profit......................... 44.6 29.3 19.6 24.3 23.0
Selling, general and administrative
expenses........................... 92.6 110.4 96.3 97.8 84.5
--------- --------- --------- --------- ---------
Loss from operations................. (48.0) (81.1) (76.7) (73.5) (61.5)
Other income (expense), net.......... 31.6 41.4 56.1 55.4 50.9
--------- --------- --------- --------- ---------
Loss from continuing operations
before income taxes................ (16.4) (39.7) (20.6) (18.1) (10.6)
Income tax benefit................... (6.3) (15.4) (5.9) (2.4) (3.5)
--------- --------- --------- --------- ---------
Loss from continuing operations...... (10.1) (24.3) (14.7) (15.7) (7.1)
Income (loss) from discontinued
operations and gain (loss) on sale
of discontinued operations......... (351.6) 58.6 (87.3) (47.9) (4.7)
--------- --------- --------- --------- ---------
Net income (loss).................... (361.7)% 34.3% (102.0)% (63.6)% (11.8)%
========= ========= ========= ========= =========
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues from wastewater treatment and waste oil recycling services at
TEI's ERRI division increased by 11% from $2,066,000 during the nine months
ended September 30, 1997 to $2,287,000 during the nine months ended September
30, 1998. Such revenue improvement is mainly due to a greater volume of
wastewater processed during 1998 versus 1997.
TEI sold 2,052,000 gallons of recycled oil during the nine months ended
September 30, 1998 at an average price of $0.17 per gallon versus sales of
2,548,000 gallons of recycled oil at an average price of $0.21 per gallon during
the nine months ended September 30, 1997.
Gross profit increased by 5% to $527,000 during the first nine months of
1998 from $503,000 during the prior-year period. When measured as a percentage
of sales, the gross margin decreased to 23% during the first nine months of 1998
from 24% during 1997. Such gross profit improvement is principally due to the
revenue increase partially offset by increased costs for the nine months ended
September 30, 1998 as described above.
Selling, general and administrative expenses decreased by $88,000 to
$1,932,000 during the January to September 1998 period from $2,020,000 during
the comparable quarters of 1997 primarily due to lower legal and payroll costs.
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<PAGE>
Other income and expense, consisting mainly of interest earned on TEI's
investments, and gains and losses on the disposition of fixed assets, totaled
$1,163,000 during the first nine months of 1998 compared to $1,145,000 during
the first nine months of 1997.
During the nine months ended September 30, 1998, TEI recorded a loss of
$269,000 compared to a loss of $1,313,000 during the first nine months of 1997.
Such 1997 loss includes a $990,000 provision for disposition of ESI. The 1998
loss includes a $109,000 charge to discontinued operations to increase the
liability for estimates to complete ESI projects.
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
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<PAGE>
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
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, TEI 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 September 30, 1998, TEI had cash, cash equivalents, and short-term
investments of $28,790,000 and had no significant cash commitments of such funds
other than the normal requirements to operate TEI's continuing operations. These
funds are being invested in liquid high credit quality instruments pending any
decision by TEI's board of directors regarding the TEI's future direction. For
the nine months ended September 30, 1998, net cash provided by operations
totaled $490,000 versus net cash used in operations of $4,032,000 during the
same period in 1997. Current year cash provided by operations is the result of
working capital changes totaling $807,000, and partially offset by a net loss of
$269,000, and non-cash revenue and expenses of $47,000.
Working capital changes during the January to September 1998 period include
the reduction of accounts payable and accrued liabilities of $313,000, primarily
related to the payment of accrued compensation expenses. Working capital changes
also include a decrease in income tax receivable due to the collection of such
tax; and an increase in other noncurrent assets, comprised of prepaid expenses
related to the Transactions.
Due to the weak demand for oil in ERRI's operating area over the last nine
months and the resulting low prices, its customers are experiencing declining
demand and margins and are purchasing smaller volumes of reclaimed oil, despite
the fact that the 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 three months and those balances are expected to return to more normal
levels; however, if oil prices remain at current levels
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<PAGE>
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 first three quarters of 1998 were $614,000,
mainly for the purchase of machinery and processing equipment at 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 for 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 September 30, 1998. In 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 date 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. TEI continues to experience
significant changes in these estimates and it is reasonably possible that such
changes could occur in the future resulting in additional losses to TEI. The
purchaser has notified TEI that delays and installation problems on several
contracts have significantly increased estimated costs to complete those
contracts. As a result, TEI has recorded an additional charge to discontinued
operations of $109,000, net of tax to increase the liability estimates to
complete its ESI projects.
SEASONALITY
TEI experiences no noticeable seasonal variations in its continuing liquid
waste business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
TEI's wastewater treatment business is performing at levels below
expectations and, should the Transactions be consummated, would be the only
non-financial service business owned and operated by the Company. As a result,
management is considering alternatives including selling ERRI, although no
decision has been made. ERRI incurred an operating loss of $356,000 for the
three months ended September 30, 1998, including noncash charges for
depreciation and amortization of $184,000, and a $47,000 pre-tax loss to
write-down waste oil inventory to its estimated market value. Further inventory
write-down could occur. In addition, if management is unable to improve
profitability of ERRI, the goodwill associated with that business may be
impaired. Should TEI elect to sell ERRI, TEI may not recover all of its
investment.
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 systems and
applications to correctly interpret the century from a date in which the year is
represented by only two digits. A computer system or application that is not
Year 2000 compliant could not correctly process certain data, or in extreme
situations, could disable an entire system.
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TEI has developed the following multi-phase plan to resolve potential Year
2000 problems relating to its information technology ("IT") systems and
embedded chip technology at its ERRI liquid waste facility:
Phase I: Identify and evaluate all IT systems and embedded chip technology
according to their potential business impact.
Phase II: Identify IT systems and embedded chip technology that use date
functions and assess them for Year 2000 functionality.
Phase III: Reprogram or replace equipment/systems, where necessary, to ensure
Year 2000 readiness.
Phase IV: Test code modifications and material equipment/systems to ensure
successful operation in a post-1999 environment.
Phase V: Adoption of contingency plans in the case of potential Year 2000
failures.
TEI has completed Phase I and is now identifying IT systems and embedded
chip technology using date functions and assessing them for Year 2000 compliance
under Phase II. In addition, in 1992, TEI purchased and developed new accounting
software, which it has tested and believes is Year 2000 compliant.
TEI relies on many third-party vendors and suppliers for a variety of goods
and services, including operating supplies, banking, telecommunications and
utilities, such as water and electricity. Many of TEI's operations would be
adversely affected if these supplies and services were curtailed as a result of
a vendor's or supplier's Year 2000 problems. TEI is contacting those third-party
vendors and suppliers whose services, if curtailed, would have an adverse effect
on TEI, to ensure that they have an effective plan to address the Year 2000
problem. However, TEI has received to date little information from these vendors
and suppliers and does not have sufficient information to assess whether its
third-party relationships will be Year 2000 ready. TEI intends to make further
inquiry in February 1999 with those material vendors and suppliers who do not
respond by January 31, 1999.
TEI has incurred approximately $6,000 for Year 2000 costs as of September
30, 1998, and estimates that its total Year 2000 costs will not exceed $100,000.
All of these Year 2000 costs are expected to be used for remediation and some of
these costs may be recurring. Due to the small amounts normally incurred for IT
matters, TEI does not specifically budget for its IT items as part of its
capital expenditure budget. TEI expects cash on hand, cash from operations and
available borrowings to be sufficient to fund these expenditures. No IT projects
have been deferred due to TEI's Year 2000 efforts.
If TEI's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process customer orders, process financial transactions, bill customers or
report accurate data to management, shareholders and customers, as well as
business interruptions or shutdowns, financial losses and litigation related to
Year 2000 issues.
TEI has begun to develop contingency/recovery plans aimed at ensuring the
continuity of critical business functions before and after December 31, 1999. As
part of this process, TEI plans to develop reasonably likely failure scenarios
for its critical IT systems, embedded chip technology in its ERRI liquid waste
facility, and material third-party relationships. Once these scenarios are
identified, TEI will develop plans designed to reduce the impact to TEI, and
provide methods of returning to normal operations, if one or more of those
scenarios occur. TEI cannot guarantee that it will be able to resolve all of its
Year 2000 issues, and any critical unresolved Year 2000 issues at TEI or any of
its material third parties could have a material adverse effect on TEI's results
of operations and financial condition. TEI expects its contingency and recovery
planning to be substantially complete by September 30, 1999.
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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:
o participation in the underwriting of corporate securities,
o merchant banking
o trading of fixed-income and equity securities
o equity research
o distribution of mutual fund, insurance and other investment
products.
Retail brokerage services accounted for approximately 59%, and investment
banking services accounted for approximately 36%, of HWG's 1997 revenues.
Founded in 1994, HWG is headquartered in Houston, Texas. HWG is a privately
held company with 43 shareholders, of whom 36 are HWG employees. HWG performs
its financial services through a staff of over 60 professionals and support
personnel. Its professionals average more than 15 years experience in the
securities business. HWG believes its primary strengths are:
o the experience, reputation and tenure of its investment
executives, which have often led to long-term client and business
relationships;
o its high level of employee commitment, evidenced by significant
employee ownership in HWG;
o its personalized, service-oriented culture emphasizing
responsiveness to client and regional market demands;
o its focus on emerging and middle market companies in target
industries in which HWG has specialized expertise or a regional
presence; and
o 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.
HWG began operations in February 1994, and thus has a limited operating
history upon which to evaluate it's operating performance and prospects.
However, HWG's revenues have steadily increased since formation, as shown below:
YEAR REVENUES
- -------------------------------------
1995................................. $2.9 million
1996................................. $4.0 million
1997................................. $7.0 million
HWG achieved its first profitable year in 1997 with net income of
approximately $0.3 million. In the first nine months of 1998, HWG generated net
income of about $0.2 million. HWG incurred operating losses in both 1995 and
1996 and had an accumulated deficit at September 30, 1998 of about $(1.7)
million.
SERVICES
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
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U.S. government and municipal securities. Commissions are charged on both
exchange and over-the-counter agency transactions under commission rate tables
formulated by HWG. Discounts from these rates are granted in certain cases and
the commission rate table may periodically change. 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,
primarily 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 over 15 years experience in the securities brokerage business. HWG
believes 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, employee ownership, advanced technologies and
competitive compensation packages, has allowed HWG to recruit and retain
experienced and productive brokers.
HWG management believes its retail service business will continue to be a
significant source of revenues for the foreseeable future. Commissions and sales
credits as a percentage of total revenues for the last three years were: 48% for
1995; 73% for 1996; 59% for 1997.
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,
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 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. HWG's financial advisory services include advice on
mergers, acquisitions and divestitures, fairness opinions and financing
strategies. HWG can also provide valuations, litigation support and financial
consulting services. These financial advisory services are typically provided to
emerging or middle market companies with a presence in the southwestern United
States.
HWG participates in underwritten public securities distributions as a
member of underwriting syndicates or of selling groups lead-managed by national
investment banking firms. As of September 30, 1998, HWG has participated in 11
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.
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Historically, private debt and equity financing activities have accounted
for a majority of HWG's investment banking revenues. Total investment banking
revenue as a percentage of HWG's total revenues for the last three years were:
38% for 1995; 18% for 1996; 36% for 1997.
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 some 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., an early stage biotechnology
company dedicated to the development of marketable products and services for the
treatment of genetic diseases. There is no assurance that BioCyte will ever
develop any commercially marketable products.
PRINCIPAL TRANSACTIONS
HWG makes markets, buying and selling as principal, in common stocks,
convertible preferred stocks, warrants and other securities traded on Nasdaq or
other OTC markets. At September 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 those of the industry.
HWG has an uncommitted financing arrangement with S.G. Cowen under 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 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. HWG therefore retains risk with respect to those accounts. HWG
seeks to control the risks associated with these activities by requiring clients
to maintain margin collateral in compliance with regulatory and internal
guidelines. HWG and S.G. Cowen monitor required margin levels daily and, under
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
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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 from fees which are generally based on the market value
of assets under management. Consequently, significant fluctuations in the values
of securities, which can occur with changes in interest rates or changes in
other economic factors, may materially affect the amount of assets under
management, and thus, 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 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 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 many securities firms have either ceased
operations or have been acquired by or merged into other firms. These 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 give such firms 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. 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. If issuers and purchasers of securities can 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 Self Regulatory Organizations. These
SROs include, among others, all the national securities and commodities
exchanges and the NASD. Subject to approval by the SEC and certain other
regulatory authorities, SROs adopt rules that govern the industry and conduct
periodic examinations of HWG's operations. HWG is also 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-
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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 of Rule 15c3-1 under the Exchange Act. The net capital rules, which
specify minimum net capital requirements for registered broker-dealers, are
designed to measure the financial soundness and liquidity of broker-dealers. The
net capital rules also:
(1) require that broker-dealers notify the SEC, in writing, two business
days before making withdrawals or other distributions of equity capital or
lending money to certain related persons if 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;
(2) 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
(3) provide that the SEC may, by order, prohibit withdrawals from capital
of a broker-dealer for a period of up to 20 business days, if the withdrawals
would exceed, in any 30-day period, 30% of the broker-dealer's excess net
capital and if the SEC believes the withdrawals would be detrimental to the
financial integrity of the firm or would unduly jeopardize the broker-dealer's
ability to pay its customer claims or other liabilities.
HWG is also subject to "Risk Assessment Rules" imposed by the SEC which
require that certain broker-dealers maintain and preserve certain information,
prescribe risk management policies and procedures and report on the financial
condition of certain affiliates whose financial and securities activities are
reasonably likely to have a material impact on the financial and operational
condition of the broker-dealers. Certain "Material Associated Persons" (as
defined in the Risk Assessment Rules) of the broker-dealers and the activities
conducted by such Material Associated Persons may also be subject to SEC
regulation. In addition, the possibility exists that, on the basis of the
information it obtains under the Risk Assessment Rules, the SEC could seek
authority over 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, (1)
limitations on the ability of investment advisers to charge performance-based or
non-refundable fees to clients, (2) record-keeping and reporting requirements,
(3) disclosure requirements, (4) limitations on principal transactions between
an advisor or its affiliates and advisory clients, and (5) general anti-fraud
prohibitions. The state securities law requirements applicable to registered
investment advisers are in certain cases more comprehensive than those imposed
under federal securities laws.
As a registered investment adviser under the Investment Advisers Act, HWG
is subject to regulations which cover various aspects of HWG's business,
including compensation arrangements. Under the Investment Advisers Act, every
investment advisory agreement with HWG's clients must expressly provide that the
agreement may not be assigned by the investment adviser without the client's
consent. Under the Investment Company Act, every investment adviser's agreement
with a registered investment company must provide for the agreement's automatic
termination if it is assigned. Under both the Investment Advisers Act and the
Investment Company Act, an investment advisory agreement is deemed to have been
assigned when there is a direct or indirect transfer of the agreement, including
a direct assignment or a transfer of a "controlling block" of the firm's
voting securities or, under certain circumstances, upon the transfer of a
"controlling block" of the voting securities of its parent corporation. A
transaction is not, however, an assignment under the Investment
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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.
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 to
obtain before the closing the consent of each of its non-investment company
advisory clients to the deemed assignment.
FACILITIES
HWG's facilities consist of a 22,000 square foot leased office facility in
Houston, Texas. HWG recently entered into a new five-year lease which begins in
March 1999. This lease is on rental and other terms HWG believes are
commercially reasonable. HWG believes the existing facility is well-maintained
and adequate for existing and planned operations.
EMPLOYEES
At September 30, 1998, HWG had a total of 60 employees -- 33 engaged in
retail brokerage, 21 in investment banking, and six in accounting,
administration and operations. Of these, 35 were classified as professionals and
25 were classified in support positions. No HWG employees are subject to a
collective bargaining agreement. HWG believes its relations with its employees
generally are good.
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
the plaintiffs were unsuitable for their portfolios, or that the investment
executives engaged in excessive trading in the plaintiffs' accounts. While
historically HWG has not incurred material liability in litigation or
arbitration, substantial liabilities in connection with such matters may occur
in the future.
In recent years, there has been a substantial amount of litigation
involving the securities industry, including class action lawsuits that
generally seek substantial damages and other suits seeking punitive damages.
Companies engaged in the underwriting of securities, including HWG, are subject
to substantial potential liability, including for material misstatements or
omissions in prospectuses and other communications in underwritten offerings of
securities or statements made by securities analysts, under federal laws, such
as Rule 10b-5 under the Exchange Act and Section 11 of the Securities Act and
similar state statutes and common law doctrines. The risk of liability may be
higher for an underwriter which, like HWG, is active in the underwriting of
securities offerings for emerging and middle-market companies due to the higher
degree of risk and volatility associated with the securities of those companies.
The defense of these or any other lawsuits or arbitrations may divert the
efforts and attention of 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 depends in large part upon the establishment and
maintenance of a compliance system designed to monitor compliance with such laws
and rules, and on HWG's ability to attract and retain qualified compliance
personnel. Although HWG believes it is in material compliance with such rules
and regulations, HWG may in the future be subject to disciplinary or other
actions due to claimed noncompliance, which could have a material adverse effect
on HWG.
HWG is a party to various legal proceedings which are of an ordinary or
routine nature incidental to HWG's operations. HWG believes it has adequately
reserved for such litigation matters and that they will not have a material
adverse effect on its financial condition or results of operations.
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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 nine months
ended September 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 nine months ended September 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 their related notes included
later in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $ 3,250 $ 2,839
Investment banking.............. 713 1,085 722 2,544 864 1,437
Interest and dividends.......... 17 25 38 57 39 99
Securities gains and other...... 60 395 340 290 272 261
---------- --------- --------- --------- --------- ---------
Total revenues............. 1,482 2,869 3,996 7,042 4,425 4,636
---------- --------- --------- --------- --------- ---------
Compensation and benefits....... 1,217 1,981 3,461 5,096 3,276 3,199
Brokerage and clearance......... 144 343 419 567 416 413
Other........................... 742 1,005 1,293 936 648 725
---------- --------- --------- --------- --------- ---------
Total expense.............. 2,103 3,329 5,173 6,599 4,340 4,337
---------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes......................... (621) (460) (1,177) 443 85 299
Income tax provision............ -- -- -- 142 -- 102
---------- --------- --------- --------- --------- ---------
Net income (loss)............... $ (621) $ (460) $ (1,177) $ 301 $ 85 $ 197
========== ========= ========= ========= ========= =========
Basic and diluted earnings
(loss) per share (pro forma
for periods prior to
conversion to a taxable
corporation).................. $ (289.24) $ (82.72) $ (94.52) $ 24.70 $ 7.05 $ 8.06
========== ========= ========= ========= ========= =========
Weighted average shares
outstanding................... 2,147 5,560 12,455 17,906 12,063 24,403
========== ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997 1998
--------- --------- --------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment securities........... $ 65 $ 361 $ 101 $ 144 $ 244
Total assets.................... 581 1,215 1,247 1,947 2,391
Shareholder's equity............ (156) 308 117 885 2,118
</TABLE>
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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 nine months of
1998, HWG generated net income of approximately $0.2 million. HWG incurred
operating losses in both 1995 and 1996 and had an accumulated deficit at
September 30, 1998 of approximately $(1.7) 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 $0.4
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
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clients. Although no assurance can be given, 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 6.6% of total expenses
in 1997.
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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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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% $ 3,250 73.4%
Investment banking............... 1,085 37.8 722 18.0 2,544 36.1 864 19.5
Interest and dividends........... 25 0.9 38 1.0 57 0.8 39 0.9
Securities gains and other....... 395 13.8 340 8.5 290 4.1 272 6.2
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 2,869 100.0 3,996 100.0 7,042 100.0 4,425 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Compensation and benefits........ 1,981 69.0 3,461 86.6 5,096 72.4 3,276 74.0
Brokerage and clearance.......... 343 12.0 419 10.5 567 8.0 416 9.4
Other............................ 1,005 35.0 1,293 32.4 936 13.3 648 14.7
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses.............. 3,329 116.0 5,173 129.5 6,599 93.7 4,340 98.1
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax...... (460) (16.0) (1,177) (29.5) 443 6.3 85 1.9
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (460) (16.0)% $ (1,177) (29.5)% $ 301 4.3% $ 85 1.9%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
REVENUES:
Commissions...................... $ 2,839 61.2%
Investment banking............... 1,437 31.0
Interest and dividends........... 99 2.1
Securities gains and other....... 261 5.7
--------- ---------
Total revenues.............. 4,636 100.0
--------- ---------
EXPENSES:
Compensation and benefits........ 3,199 69.0
Brokerage and clearance.......... 413 8.9
Other............................ 725 15.6
--------- ---------
Total expenses.............. 4,337 93.5
--------- ---------
Income (loss) before income tax...... 299 6.5
--------- ---------
Net income (loss).................... $ 197 4.3%
========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues increased 4.8% from $4.4 million to $4.6 million principally from
a 66.4% increase in HWG's investment banking revenues from approximately $0.9
million for the nine months ended September 30, 1997 to approximately $1.4
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 nine months of 1998. This increase was partially offset by a
12.6% decrease in commissions from approximately $3.2 million for the nine
months ended September 30, 1997 to approximately $2.8 million for the comparable
period in 1998 primarily due to market volatility and reduced volume.
Total expenses remained relatively flat. Compensation and benefits
decreased due to lower commissions. Other expenses increased $77,000 partly due
to increases in the investment banking staff. The number of commissioned brokers
was the same for both nine month periods.
HWG recorded net income of $197,000 for the nine months ended September 30,
1998 compared to a net income of $85,000 for the nine months ended September 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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HWG recorded its first profit for a full year period during 1997,
generating net income of $0.3 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. A private offering begun in November 1997,
resulted in the infusion of $272,532 by December 31, 1997. Subsequent private
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 and cash equivalents of $1,538,631 at September 30, 1998, or
64.0% of total assets. At this same time, current liabilities were $249,271 with
accrued commissions payable the largest component. At September 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 $2,118,470 at September 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. Under the Agreement, these
options must be exercised prior to closing of the Transactions. The exercising
optionees may issue notes for the exercise price of their options. Repayment of
the notes will add 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 September 30, 1998, HWG had net
capital of $1,525,772 or approximately 18% of aggregate indebtedness, which is
$1,425,772 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 about $23,000, which were funded from operations and its equity
offering. HWG currently does not intend to incur material capital expenditures
in the near term.
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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. These third parties
include:
o trading counter parties o clearing houses
o financial intermediaries o commercial banks
o securities exchanges o market data and pricing service providers
o depositories o telecommunications and utility providers
o clearing agencies
HWG's operations and financial results may be adversely affected if these
third parties do not adequately address the Year 2000 Problem and HWG is unable
to make timely contingency plans.
A Year 2000 failure at HWG or at a material third party could have a
material adverse effect on HWG's business by impairing its ability to, among
other things:
o gather and process information vital to strategic decision making
by both HWG and its customers;
o perform pricing calculations;
o execute customer transactions;
o maintain accurate books and records and provide timely reports;
o access audit facilities for both HWG and its customers; and
o undertake risk management functions.
As a registered broker dealer, HWG was required to conduct a complete
review of the potential impact of Year 2000 issues and report its findings to
the NASD and SEC no later than August 31, 1998. An updated report is due no
later than April 30, 1999. HWG filed its initial report with the NASD and SEC on
August 6, 1998, without response from the NASD or the SEC.
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.
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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 cost estimated not to exceed $25,000. Of these total Year 2000 costs,
about $5,000 are expected to be used for remediation, which represents an
estimated 20% of HWG's 1999 information technology budget. Some of these costs
may be recurring. HWG believes that cash from operations will be sufficient to
fund these costs. No information technology projects have been deferred due to
HWG's Year 2000 efforts.
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.
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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
mostly 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, (1) direct access to an experienced, knowledgeable and service-oriented
staff with local decision-making authority and (2) a record of strong investment
performance results.
PMT began operations in June 1994, and thus, has a limited operating
history upon which to evaluate its operating performance and prospects. PMT has
increased revenues for each year of operations, generating revenues of
approximately $0.5 million in 1995, $0.7 million in 1996 and $1.4 million in
1997. PMT achieved its first year of profitable operations in 1997, in the first
nine months of 1998 it had net income of $0.5 million. PMT incurred operating
losses in both 1995 and 1996 and had shareholders' equity at September 30, 1998
of about $3.4 million.
PMT is privately held by 52 shareholders, including 11 employee
shareholders.
SERVICES
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 the client's needs are
satisfied. PMT recently licensed a new trust accounting software which provides
its clients with many additional benefits, including flexible statement packages
and access to account information on the Internet through a link established
between PMT's "home page" and the licensor of the software's database.
PMT derives its revenues mainly from asset management and fiduciary fees
based on a percentage of assets under administration. At September 30, 1998, PMT
had $431 million of assets under management representing an increase of 8.6%
from $397 million at September 30, 1997. The actual fee charged is based on a
rate schedule formulated by PMT from time to time. Rates vary depending on the
services being provided and the amount of assets involved. PMT believes that
this fee structure, as opposed to transactional commissioned-based arrangements,
more closely aligns PMT's interests with its clients and helps develop long-term
client relationships. Fees and services as a percentage of PMT's total revenues
for the last three years were: 79% in 1995; 89% in 1996; and 77% in 1997.
CLIENTS AND MARKETING
At September 30, 1998, PMT provided trust services to approximately 150
clients who are mainly 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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PMT believes marketing and business development is a company-wide
responsibility. 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 of 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 Texas Trust Company Act, the rules and
regulations promulgated under that act and supervision by the Texas Banking
Commissioner. These laws are intended primarily for the protection of PMT's
clients, rather than for the benefit of investors. The Texas Trust Company Act
provides for, and regulates, a variety of matters, such as:
o periodic examinations by the office of the Texas Banking
Commissioner;
o furnishing periodic financial statements to the Commissioner;
o minimum net capital maintenance requirements;
o fiduciary record-keeping requirements;
o bonding requirements for the protection of clients;
o restrictions on investments of restricted capital;
o lending and borrowing limitations;
o prohibitions against engaging in certain activities;
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o prior regulatory approval for certain corporate events (E.G.,
mergers, sale/purchase of all or substantially all of the assets
and transactions transferring control of the trust company);
o broad regulatory powers if the trust company violates certain
provisions of Texas Trust Company Act or is determined to be in a
"hazardous condition" (as the law defines that term); and
o other matters.
While PMT believes it is in material compliance with these laws, rules and
regulations, PMT may not be able to continue compliance in the future, or these
laws, rules or regulations may change adversely, either of which could have a
material adverse effect on PMT.
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. The lease expires in February 1999. PMT has entered into a new
five-year sublease with HWG relating to this property. The lease begins in March
1999. PMT believes (1) its rental and other terms are commercially reasonable
and (2) the existing facility is well-maintained and adequate for existing and
planned operations.
EMPLOYEES
At September 30, 1998, PMT had a total of 13 employees. Seven 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 in 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, substantial liabilities in connection
with such matters may 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, PMT may in the future 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.
PMT has never been a party to any litigation.
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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 nine months
ended September 30, 1997 and 1998 and as of September 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 nine months ended September 30, 1997 and 1998
and as of September 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 their related notes included later in this document.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $ 769 $ 1,079
Interest and dividends.......... 32 68 67 98 79 78
Securities gains and other...... -- 33 10 233 140 293
--------- --------- --------- --------- --------- ---------
Total revenues............. 60 480 730 1,409 988 1,450
--------- --------- --------- --------- --------- ---------
Compensation and benefits....... 200 417 487 667 444 565
Other general and
administrative................ 179 384 458 358 266 345
--------- --------- --------- --------- --------- ---------
Total expenses............. 379 801 945 1,025 710 910
--------- --------- --------- --------- --------- ---------
Net income (loss)............... $ (319) $ (321) $ (215) $ 384 $ 278 $ 540
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997 1998
--------- --------- --------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment securities........... $ 891 $ 411 $ 681 $ 1,793 1,377
Total assets.................... 1,351 1,078 2,342 2,457 3,451
Shareholders' equity............ 1,337 1,019 2,288 2,288 3,396
</TABLE>
- ------------
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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 77% of total
revenues in 1997 and 74% of revenues for the nine months ended September 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, using 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. "SunGard"
has made its year 2000 modifications, which are now being tested by its clients.
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,
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(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.
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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% $ 769 77.8%
Interest and dividends........... 68 14.1 67 9.2 98 7.0 79 8.0
Securities gains and other....... 33 6.9 10 1.4 233 16.5 140 14.2
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 480 100.0 730 100.0 1,409 100.0 988 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Compensation and benefits........ 417 86.9 487 66.7 667 47.3 444 44.9
Other............................ 384 80.0 458 62.7 358 25.4 266 27.0
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses.............. 801 166.9 945 129.4 1,025 72.7 710 71.9
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (321) (66.9)% $ (215) (29.4)% $ 384 27.3% $ 278 28.1%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
REVENUES:
Fees and services................ $ 1,079 74.4%
Interest and dividends........... 78 5.4
Securities gains and other....... 293 20.2
--------- ---------
Total revenues.............. 1,450 100.0
--------- ---------
EXPENSES:
Compensation and benefits........ 565 39.0
Other............................ 345 23.8
--------- ---------
Total expenses.............. 910 62.8
--------- ---------
Net income (loss).................... $ 540 37.2%
========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues increased 47.0% from $988,000 during the nine months ended
September 30, 1997 to $1,450,000 for the comparable period in 1998. This
increase was principally due to a $310,000 increase in fees and services for the
nine months ended September 30, 1998 as compared to the same period in 1997.
PMT's total assets under management grew from $397 million at September 30, 1997
to $431 million at September 30, 1998, as a result of 75 new relationships that
were added during this period.
Compensation and benefits increased from $444,000 during the first nine
months of 1997 to $565,000 in the comparable 1998 period. PMT added two officers
during this period to assist in the management of operations.
Net income increased 94.2% from $278,000 (28.1% of revenues) to $540,000
(37.2% of revenues) during the nine months ended September 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
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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 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. At September 30 1998, 26,443 warrants
have been exercised, increasing capital by a total of $688,000. 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. Under the
Agreement, the remainder of the "founders' warrants" and all the outstanding
options will be exercised before 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 $3.4 million in capital and no funded debt as of September 30,
1998. PMT plans to distribute 100% of the fiscal year 1998 net income prior to
the closing of the Transactions. At September 30, 1998, liquid assets
represented approximately 90.0% 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 $3.5 million as of September 30, 1998.
Shareholders' equity was approximately $3.4 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 September 30, 1998, PMT had capital of
$3.5 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 September
30, 1998, PMT had total liabilities of only $55,000 against total shareholders'
equity of approximately $3.4 million.
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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.
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. These third parties
include:
o software providers o clearing houses
o financial intermediaries o commercial banks
o securities exchanges o market data and pricing service providers
o depositories o telecommunications and utility providers
o clearing agencies
PMT's operations and financial results may be adversely affected if these
third parties do not adequately address the Year 2000 Problem and PMT is unable
to make timely contingency plans.
A Year 2000 failure at PMT or at a material third party could have a
material adverse effect on PMT's business by impairing its ability to, among
other things:
o gather and process information vital to strategic decision making
by both PMT and its customers;
o perform pricing calculations;
o execute customer transactions;
o maintain accurate books and records and provide timely reports;
o access audit facilities for both PMT and its customers; and
o undertake risk management functions.
PMT's licensed "SunGard" system has been Year 2000 modified, and the
modifications are now being client tested.
PMT was required to conduct a complete review of the potential impact of
Year 2000 issues and report its findings to the Texas Banking Commissioner. PMT
filed its initial report with the Texas Banking Commissioner on August 3, 1998,
who accepted the report without comment.
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.
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<PAGE>
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. PMT has incurred essentially no Year 2000 costs as of September 30, 1998,
and estimates that its total Year 2000 costs will not exceed $10,000. Of these
total Year 2000 costs, about $2,500 are expected to be used for remediation,
which represents an estimated 25% of the 1999 information technology budget.
Some of these costs may be recurring. PMT expects that cash from operations will
be sufficient to fund these costs. No information technology projects have been
deferred due to PMT's Year 2000 efforts.
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. 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 brokering and, to
a lesser extent, trading in fixed-income securities. Its other significant
activities include brokering 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. Its
professionals average more than eight years experience in the securities
business. Management believes its success is based in a large part, on its (1)
state-of-the-art set of integrated proprietary trading tools delivered to
institutional clients over the Internet, (2) experienced, knowledgeable and
specialized professional staff focused primarily on the fixed-income securities
markets and (3) commitment to unique, personalized service and support for its
clients.
Spires began operations in January 1995, so it has a limited operating
history upon which to evaluate its operating performance and prospects. Spires
has been profitable since inception, generating net income of $4.1 million for
1995, $3.2 million for 1996 and $2.2 million for 1997. Its revenues for the
corresponding years were $7.5 million, $8.3 million and $8.2 million.
OWNERSHIP
Spires is a privately owned Delaware limited partnership. It has two
corporate general partners, one of which is controlled by three Spires
principals who are active in the partnership's management, and one of which is
ultimately controlled by foreign investors. Of Spires' seven limited partners,
five are corporations controlled by active Spires' managers, and two are
entities under ultimate foreign control.
SERVICES
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. In the last three years,
commissions on institutional sales as a percentage of total revenues were: 35%
in 1995; 36% in 1996; and 39% in 1997.
TRADING. Rather than trading a wide variety of securities in direct
competition with Wall Street firms, Spires has developed a niche strategy to
proprietarily trade certain fixed-income securities, including U.S. government
securities, certain mortgage related securities and collateralized mortgage
obligations. In its trading activities, Spires generally acts as a wholesaler.
It buys round-lot and odd-lot positions, sells round-lot and odd-lot positions
and acts as market-maker in round-lot and odd-lot positions. The majority of
Spires' counterparts in these transactions are other broker-dealers. Spires'
trading operations generally seek to generate profits based on trading spreads,
rather than through speculation on the direction of the market. In the last
three years, revenues from trading activities as a percentage of total revenues
were: 56% for 1995; 42% for 1996; and 25% for 1997.
The positions carried in Spires' trading accounts fluctuate
significantly. The size of the securities positions on any one date may not be
representative of Spires' exposure on another date because the securities
positions vary substantially depending on economic and market conditions, the
allocation of capital among types of inventories, customer demands and trading
volume. The aggregate value of
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inventories that Spires' can carry is limited by certain requirements under the
net capital requirements of the Exchange Act.
Spires has established procedures designed to reduce the risks of its
trading activities. It employs a hedging strategy designed to insulate the net
value of its trading inventory from fluctuations in the general level of
interest rates. However, it is not possible to hedge completely the risks of
interest rate fluctuations for some of the fixed-income securities that Spires
trades, primarily because the price movements of financial instruments typically
used to hedge long positions in such securities may not precisely mirror the
price movements of the hedged securities under all market conditions. In
addition to its hedging procedures, Spires seeks to mitigate the risks
associated with its proprietary trading activities by subjecting its trading
inventory positions and profit and loss statements to daily review by its senior
management. Senior management reviews daily the profit and loss and inventory
positions of the trading desks. However, such procedures may not prevent such a
loss, which could adversely affect Spires' business, financial condition,
results of operations or cash flows.
OTHER ACTIVITIES. Institutional client securities transactions are
executed on either a cash or margin basis. Under the current clearing
arrangement with Daiwa Securities America, Inc. in an institutional margin
transaction, credit is extended to a client through Daiwa for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Spires receives income from
interest charged on such extensions of credit. Although income from interest
charged has not historically been a significant source of revenue, in the
future, the financing of margin purchases can be an important revenue source,
since interest rate paid by the client on funds loaned through Spires exceeds
Spires' interest costs for net customer debit balances paid to Daiwa. Spires'
gross interest revenues are affected not only by prevailing interest rates, but
also by the volume of business conducted on a margin basis. By permitting a
client to purchase on margin, Spires takes the risk that market declines could
reduce the value of the collateral below the principal amount loaned, plus
accrued interest, before the collateral can be sold. Amounts loaned are limited
by margin regulations of the Board of Governors of the Federal Reserve System
and other regulatory authorities and are subject to Daiwa and credit review and
daily monitoring procedures.
Spires is also active as a secondary market broker for residential,
consumer and commercial loans, and derives revenue from the placement of
mortgage servicing and newly "securitized" mortgaged collateral on a
nationwide basis.
In the last three years, revenues from other activities (I.E., whole loan
sales and net interest income) as a percentage of total revenues were: 9% for
1995, 22% for 1996; and 36% for 1997.
CLIENTS
At March 31, 1998, Spires had over 700 institutional clients throughout the
United States, Europe and Japan. Spires institutional clients are mostly 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
complex, successful investors need reliable, accurate and timely information to
make prudent investment decisions. To satisfy this need, Spires has invested
significant capital in an integrated proprietary trading tool known as the
"Spires Financial Network," or "SFN." SFN is delivered to Spires' clients by
direct dial-up or over the Internet. Through the Internet, Spires' employees and
clients access proprietary databases, search engines and analytics of Spires
through its "home page." Minimal investment is required by the client since
all computing is performed on Spires servers in Houston, Texas. Only mouse
clicks and screen graphics are transmitted over the Internet.
SFN proprietary databases provide current and fourteen-year historical
market information relating to, mortgage-backed securities, collateralized
mortgage obligations and other matters. SFN's proprietary search engines and
analytics include:
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o Portfolio Pro -- reduces the client's entire portfolio to a single
security by blending cash flows of each position in the portfolio
according to selected interest rate scenarios; and
o Bond Locator -- permits database searching capabilities by CUSIP,
description or profile. Through applications offered by SFN, Spires
and its clients are better able to achieve liquidity and execution by
matching buyers and sellers of similar securities.
These databases also accelerate securities selection and improve overall
yield and total rate of return by isolating the best investment alternatives
based on the client's investment criteria.
In December 1997, Spires obtained a Global Data License from Bloomberg
Financial Markets. Now Spires can redistribute selected Bloomberg data through
SFN to its clients. As one of the few entities able to redistribute this data,
Spires provides its customers with additional market information not available
from competitors.
SFN is supported by a staff of five full-time system development,
programming and support personnel. These people are responsible for system
maintenance and support and development of proprietary software tools based on
information provided by Spires' brokerage and trading professionals and its
institutional clients.
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 24-person
marketing division located at Spires' Houston headquarters and at 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. Spires arranges the trades, while Daiwa
serves as both principal and clearing agent on those transactions. Other
clearing brokers used by Spires act only as clearing brokers. 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. Because 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 it 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 of
reduced trading volumes.
Spires currently has an uncommitted financing arrangement with these
clearing brokers under 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. Spires therefore retains risk on these accounts. Spires is
required to maintain certain cash or securities on deposit with its clearing
brokers. At September 30, 1998, these deposits totalled about $1.1 million.
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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. Spires' interest income and interest expense
may likewise change as interest rates change.
Interest rates have indirect effects on other aspects of Spires' business.
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
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 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. 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. If issuers and holders of securities can
transact business without the assistance of financial intermediaries such as
Spires, Spires' operating results could suffer.
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, the 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
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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.
As a registered broker-dealer, Spires is subject to certain net capital
requirements of Rule 15c3-1 under the Exchange Act. The net capital rules, which
specify minimum net capital requirements for registered broker-dealers, are
designed to measure the financial soundness and liquidity of broker-dealers. The
net capital rules also:
(1) require broker-dealers to 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;
(2) 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
(3) 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 the withdrawals would be detrimental to the
financial integrity of the firm or would unduly jeopardize the broker-dealer's
ability to pay its customer claims or other liabilities.
Spires is also subject to "Risk Assessment Rules" imposed by the SEC
which require, among other things, that some 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 leases office facilities in Houston and Austin, Texas; Morris
Plains, New Jersey and Westport, Connecticut. The leased facilities total about
18,000 square feet. The firm's Austin and Morris Plains leases expire in 2000,
the Houston lease in 2002, and the Westport lease in 2003.
Each of the leases are on rental and other terms that Spires believes are
commercially reasonable. Spires believes its existing facilities are well
maintained and adequate for existing and planned operations.
EMPLOYEES
At September 30, 1998, Spires had 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, 31 were
classified as professionals and 12 were classified in support positions. No
Spires' employees are subject to a collective bargaining agreement. Spires
believes 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
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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 the plaintiffs by the institutional sales
persons were unsuitable for their portfolios, or that the institutional sales
persons engaged in excessive trading in the plaintiffs' accounts. While
historically Spires has not incurred material liability in such litigation or
arbitration, substantial liabilities in connection with such matters may 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 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, Spires may in the future 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 never been a party to any
litigation or legal proceedings other than regulatory proceedings involving
state licensing and registration issues, which Spires has resolved.
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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 nine
months ended September 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 nine months ended September 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 their related notes
included later in this document.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $ 4,700 $ 5,512
Interest and dividends.......... 237 564 800 552 844
Securities gains and other...... 455 394 749 393 460
--------- --------- --------- --------- -----------
Total revenues............. 7,533 8,280 8,241 5,645 6,816
--------- --------- --------- --------- -----------
Compensation and benefits....... 2,169 3,023 3,392 2,276 2,975
Brokerage and clearance......... 111 235 222 170 223
Interest expense................ -- 228 615 453 883
Other general and
administrative................ 1,157 1,548 1,827 1,235 1,571
--------- --------- --------- --------- -----------
Total expenses............. 3,437 5,034 6,056 4,134 5,652
--------- --------- --------- --------- -----------
Net income...................... $ 4,096 $ 3,246 $ 2,185 $ 1,511 $ 1,164
========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
--------- --------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Securities inventory............ $ 2,600 $ 5,455 $ 18,056 $13,226
Total assets.................... 8,236 11,271 35,224 19,538
Partners' capital............... 5,405 4,920 4,790 3,999
</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.
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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 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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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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Commissions...................... $ 6,841 90.8% $ 7,322 88.4% $ 6,692 81.2% $ 4,700 83.3%
Interest and dividends........... 237 3.2 564 6.8 800 9.7 552 9.8
Other............................ 455 6.0 394 4.8 749 9.1 393 6.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 7,533 100.0 8,280 100.0 8,241 100.0 5,645 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Compensation and benefits........ 2,169 28.8 3,023 36.5 3,392 41.1 2,276 40.3
Brokerage and clearance.......... 111 1.5 235 2.8 222 2.7 170 3.0
Interest expense................. -- -- 228 2.8 615 7.5 453 8.0
Other general and
administrative................. 1,157 15.3 1,548 18.7 1,827 22.2 1,235 21.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total expenses:............. 3,437 45.6 5,034 60.8 6,056 73.5 4,134 73.2
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME........................... $ 4,096 54.4% $ 3,246 39.2% $ 2,185 26.5% $ 1,511 26.8%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
REVENUES:
Commissions...................... $ 5,512 80.9%
Interest and dividends........... 844 12.4
Other............................ 460 6.7
--------- ---------
Total revenues.............. 6,816 100.0
--------- ---------
EXPENSES:
Compensation and benefits........ 2,975 43.7
Brokerage and clearance.......... 223 3.3
Interest expense................. 883 13.0
Other general and
administrative................. 1,571 23.0
--------- ---------
Total expenses:............. 5,652 83.0
--------- ---------
NET INCOME........................... $ 1,164 17.0%
========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
During the first nine months of 1998, sales volume (net of hedge-related
transactions) increased 51.4% over the same period in 1997, to $5.6 billion from
$3.7 billion. The average sales volume per securities trade increased 39.3%, to
$3.9 million from $2.8 million and the number of trades increased slightly, to
1,418 from 1,279.
Revenues increased 20.7%, to $6.8 million for the nine months ended
September 30, 1998 from $5.6 million during the same period in 1997. The average
revenue per securities trade increased 14.1%, to $3,245 for the first nine
months of 1998 from $2,845 in the comparable period in 1997, while the average
transaction margin on the Company's securities business declined 25.0%, to 8
basis points, from 10 basis points during the previous period.
Interest income rose 52.9%, to $843,996 for the nine months ended September
30, 1998, from $552,162 during the same period in 1997 as a result of
maintaining a larger inventory of fixed income securities during 1998 as
compared to 1997. Other income, composed of realized and unrealized gains
(losses) rose 17.0%, to $460,088 for the first nine months of 1998 from $393,189
in the comparable period in 1997.
Total expenses increased 36.7%, to $5.7 million for the nine months ended
September 30, 1998 from $4.1 million for the same period in 1997 due primarily
to a 30.8% 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 1997 period. Spires also hired several high
quality sales/trading personnel during the period to capitalize on its
proprietary technology and brought its salaried payroll up to industry averages.
Clearing expenses increased 31.1%, to $222,604 for the first nine months of
1998 from $169,793 for the comparable period in 1997, consistent with the
overall increase in securities transactions that produced an increase in sales
volume and revenues. Interest expense rose 95.0%, to $882,895 for the nine
months ended September 30, 1998 from $452,736 for the same period in 1997
primarily the result of financing a much larger inventory and the overall
increase in the cost of financing relative to the inventory's average coupon
rate.
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Other expenses increased 27.1%, to $1.6 million for the first nine months
of 1998 from $1.2 million for the comparable period in 1997. This increase was
primarily attributable to a 42.2% increase in EDP services, to $454,937 from
$319,898, as Spires increased its investment in the SFN and added a new branch
office to the network. Professional fees increased 98.2% due to merger expenses,
to $203,135 for the first nine months of 1997 from $102,480 during the same
period in 1997.
Net income for the period declined 23.0%, to $1.2 million for the first
nine months of 1998 from $1.5 million for the comparable period in 1997.
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) 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.
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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 margindeclined 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 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 September 30, 1998 was $4.0 million and working capital
was $3.1 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 September 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
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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.
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. These third parties
include:
o trading counter parties o clearing houses
o financial intermediaries o commercial banks
o securities exchanges o market data and pricing service providers
o depositories o telecommunications and utility providers
o clearing agencies
Spires' operations and financial results may be adversely affected if these
third parties do not adequately address the Year 2000 Problem and Spires is
unable to make timely contingency plans.
A Year 2000 failure at Spires or at a material third party could have a
material adverse effect on Spires' business by impairing its ability to, among
other things:
o gather and process information vital to strategic decision making
by both Spires and its customers;
o perform pricing calculations;
o execute customer transactions;
o maintain accurate books and records and provide timely reports;
o access audit facilities for both Spires and its customers; and
o undertake risk management functions.
As a registered broker-dealer, Spires was required to conduct a complete
review of the potential impact of Year 2000 issues and report its findings to
the NASD and SEC no later than August 31, 1998. An updated report is due no
later than April 30, 1999. Spires filed its initial report with the NASD and the
SEC on August 31, 1998, without response from the NASD or the SEC.
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.
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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.
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. 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 $25,000. Of these total Year 2000 costs, about $20,000 are expected
to be used for remediation, which represents an estimated 3% of Spires' 1998
information technology budget. Some of these costs may be recurring. Spires
believes that cash from operations will be sufficient to fund these costs. No
information technology projects have been deferred due to Spires' Year 2000
efforts.
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
This table sets forth information about PGG's directors and executive
officers upon completion of the Transactions (ages as of November 20, 1998):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITIONS CLASS
- ------------------------------------- --- --------------------------------------------- ----------
<S> <C> <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)................... 52 President of Spires, Director Class III
Richard C. Webb...................... 65 President of HWG, Director Class I
Sean Dobson.......................... 30 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).................. 44 Director Class II
James H. Greer(1)(2)(3).............. 72 Director Class II
T.G. Bogle........................... 68 Director Class I
T. Craig Benson(2)................... 36 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 now 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. Before then, Mr.
Harris served as Senior Vice President of Lovett Underwood Neuhaus & Webb, (a
division of Kemper Securities Group, Inc.) 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 now 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 serves as Chairman and a director of Biocyte,
and as a director of HWG Capital, L.L.C., both of which 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 the Lovett firm from 1983 to 1987, and Director of Research
for Underwood Neuhaus and Co. from 1971 to 1982. Mr. Garrison 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 is a director and will also become Vice Chairman, of PGG
on completion 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. Previously, 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 completion of the Transactions. Mr. Reckling is
one of the founders of PMT and
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from June 1994 to the present has served in various executive capacities at PMT,
currently 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. Mr. Badger founded and has been a
partner and President of Spires since its inception in January 1995. He is also
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 completion of the
Transactions. Mr. Webb co-founded HWG and now 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. Before then, Mr. Webb served in various
capacities with the Lovett firm, which he co-founded in 1981. He is also 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 completion 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. Before joining
Spires, he served as a registered representative for the Westcap Corporation
from February 1994 to July 1994, registered representative for Arbour Financial
Corp. from January 1994 to February 1994, mortgage securities trader for the
MMAR Group from November 1989 to January 1994 and research director for Robert
Thomas 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. Mr. Coelho also
serves as director of several private companies.
W. BLAIR WALTRIP will serve as a director of PGG on completion of the
Transactions and has served as a director of TEI since July 1988. He has been
employed in various capacities for Service Corporation International since 1977
and now serves as that company's Executive Vice President and as a director.
JAMES H. GREER will serve as director of PGG on completion 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 Service Corporation
International and AmeriCredit Corporation, a consumer credit company.
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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.
T. CRAIG BENSON will serve as director of PGG on consummation of the
Transactions and has served as a director of TEI since March 1990. He has been
employed in various capacities for Service Corporation International since 1987
and now serves as that company's Vice President -- International Operations.
KEY EMPLOYEES
The following employees are expected to make significant contributions to
the business of the Company:
HWG
W. WAYNE PATTERSON is the 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 as a
director of Integrated Service and Industrial Supply and Omni U.S.A., Inc., a
public manufacturer of industrial transmissions. Mr. Patterson served as a
Chairman and Chief Executive Officer of each of Texas MicroSystems and BriskHeat
Corporation from 1989 to 1996. Prior to that time, he served in various
executive capacities for Keystone International, Inc., 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. He has held those positions 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 is the President and Chief Executive Officer of BioCyte
Therapeutics, Inc., a corporation majority-owned by HWG and certain affiliates,
and he has been 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 is the Senior Vice President and Chief Financial Officer for
both HWG and PMT. He has held those positions 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 is the President and Chief Operating Officer of PMT. Mr.
Strake has over 13 years of banking experience concentrated in 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
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investment counseling firm specializing in global asset management, until he
joined PMT in 1997. Previously, 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.
LINDA HALCOMB is the 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. Before joining Spires, she served as a Registered
Representative for Westcap Corporation from February 1994 to July 1994, Senior
Analyst for Arbour Financial from January 1994 to February 1994, Senior Analyst
for MMAR Group from November 1989 to January 1994, and financial analyst for
Robert Thomas 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. Before joining
joining Spires, he served as a Vice President for Westcap Corporation from
February 1994 to October 1994, Vice President for MMAR Group 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. Before joining Spires, Mr.
Furman served as a senior vice president for Westcap Corporation 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. Before 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. Before
joining Spires he served as a registered representative for Westcap Corporation
from February 1994 to July 1994 and a registered representative for MMAR Group
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.
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He earlier 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 is divided into three classes. Following a
transition period, each class 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 annual
meeting. The term of the Class II directors will expire at the 2000 annual
meeting, and the term of the Class III directors will expire at the 2001 annual
meeting. Classification of PGG's board could lengthen the time required to
change the composition of a majority of its members. In general, at least two
shareholder meetings will be necessary for shareholders to change 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. Each director who is not a PGG employee will
receive a fee of $1,000 for each Executive Committee meeting attended, and a fee
of $750 for attendance at other committee meetings. Directors may also be
periodically granted Incentive Awards under PGG's Incentive Plan.
EXECUTIVE COMPENSATION
This table shows 1997, 1996 and 1995 compensation earned from HWG, PMT and
Spires by executive officers of those entities who will become executive
officers of PGG. All executive compensation information for executive officers
of TEI who will become executive officers of PGG has been incorporated by
reference into this document.
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> <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
This table shows stock option grants made during 1997 to those executive
officers of HWG, PMT and Spires who will become PGG executive officers, under
PMT's stock option plan. No equity option grants were made (1) by HWG to Messrs.
Harris, Garrision or Webb during 1997 or (2) by Spires to Messrs. Badger or
Dobson or Ms. Adams during 1997. PMT is the only combining (other than TEI)
company that granted stock options in 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 before the Transactions are completed.
INCENTIVE PLAN
The description below summarizes all material features of PGG's 1998
Incentive Plan. The summary is not complete and is qualified by reference to the
Incentive Plan, a copy of which has been filed as an exhibit to the Registration
Statement which includes this document.
GENERAL. The objectives of the Incentive Plan, which has been 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 shareholders) and
enable them to share in PGG's long-term growth and success.
SHARES SUBJECT TO INCENTIVE PLAN. Under the Incentive Plan, PGG may issue
Incentive Awards covering at any one time an aggregate of the greater of (1)
1,100,000 shares of PGG Common Stock and (2) 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 incentive stock options -- or ISOs. On closing of the
Transactions, options covering 170,625 shares of PGG common stock will be
outstanding and 929,375 shares 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. Following the
Transactions, the Committee will consist only of non-employee directors, each of
whom is (1) an "outside director" under Section 162(m) of the Internal Revenue
Code and (2) 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 for the authority to
grant Incentive Awards or take other action on persons who are subject to
Section 16 of the Exchange Act or Section 162(m) of the Internal Revenue Code.
In the case of an Incentive Award to an outside director, the PGG board acts 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 in connection
with any claim by reason of any act or failure to act under the Incentive Plan,
except for an act or omission constituting willful misconduct or gross
negligence.
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ELIGIBILITY. Key employees, including officers (whether or not they are
directors), and consultants of PGG and non-employee directors are eligible to
participate in the Incentive Plan. A key employee generally is any PGG employee
who, in the Committee's opinion, is in a position to contribute materially to
PGG's growth, development and the financial success.
TYPES OF INCENTIVE AWARDS. Under the Incentive Plan, the Committee may
grant "Incentive Awards," which can be (1) incentive stock options
("ISO's"), as defined in Section 422 of the Internal Revenue Code, (2)
"nonstatutory" stock options ("NSOs"), (3) stock appreciation rights
("SARs"), (4) shares of restricted stock, (5) performance units and
performance shares, (6) other stock-based awards, and (7) supplemental payments
dedicated to the payment of income taxes. ISOs and NSOs together are called
"Options." The terms of each Incentive Award will be reflected in an incentive
agreement between PGG 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 has 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 for 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 Committee's
discretion, 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 two.
An employee will not recognize 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 the
exercise date. PGG is not entitled to a tax deduction for the grant or qualified
exercise of an ISO.
An optionee will not recognize income for federal income tax purposes, nor
will PGG be entitled to a deduction, when 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. PGG will generally recognize a tax deduction in the
same amount at the same time.
This summary is not a complete statement of the relevant provisions of the
Internal Revenue 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 both in combination, 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 exercise date 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, but the
exercise price per share must be at least 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 a substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal of PGG, as determined by the Committee. Unless the Committee determines
otherwise, 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.
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
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Committee), the Committee will establish specific financial or non-financial
performance objectives, the number of performance units or performance shares
and their contingent values. The 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 (1) no consideration other than services actually rendered or to
be rendered (in the case of the issuance of shares) or (2) 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 grant date. 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 Internal Revenue Code. Such a
determination would subject the participant to a 20% excise tax on those
payments and deny PGG 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 Internal Revenue Code with respect to Incentive Awards is
subject to certain limitations set forth in the Incentive Plan. Those
limitations are generally intended to satisfy the requirements for "qualified
performance-based compensation," but PGG may not be able to satisfy these
requirements in all cases, and PGG may, in its sole discretion, determine in one
or more cases that it is best not to satisfy these requirements even if it can.
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 PGG (or its subsidiaries) is terminated other than due to his
death, Disability, Retirement or for Cause (each capitalized term being defined
in the Incentive Plan), his then exercisable Options will remain exercisable for
60 days after termination. If his termination is due to Disability or death, his
then exercisable Options will remain exercisable for one year following
termination. On retirement, his then exercisable Options will remain exercisable
for six months (except for ISOs, which will remain exercisable for three
months). On a termination for Cause, all his Options will expire at the opening
of business on the termination date.
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
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subject to any 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. PGG's board of directors may amend or terminate
the Incentive Plan at any time. However the Incentive Plan may not be amended,
without shareholder approval, if the amendment would (1) increase the number of
shares of common stock which may be issued under the Incentive Plan, except in
connection with a recapitalization of the PGG common stock, (2) amend the
eligibility requirements for employees to purchase PGG common stock under the
Incentive Plan, or (3) extend the term of the Incentive Plan. Without a
participant's consent, no termination or amendment of the Incentive Plan shall
adversely affect in any material way any outstanding Incentive Award previously
granted to him.
On the closing of the Transactions, PGG 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 before 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, Coelho and Benson.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the Agreement, TEI will lend $162,500 to Mr. Garrison and $237,500 to
Mr. Reckling. All proceeds of the loans will be used to exercise options to
purchase 6,500 shares, in the case of Mr. Garrison, and 9,500 shares, in the
case of Mr. Reckling, of PMT common stock, at an exercise price of $25 per
share. The loans will bear interest at a variable rate equally the monthly
applicable federal rate periodically published by the Internal Revenue Service
for obligations of comparable maturity (ten years). The December published rate
was 5.25%. The loans will be secured by pledges of all the PGG shares issued to
the borrowers in the Transactions in exchange for the shares of PMT common stock
they will receive on exercise of their respective options. The terms of these
loans did not result from arm's length negotiation. While the interest rate on
these loans may be considered below-market, the other provisions of the loans
are on commercially reasonable terms.
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., which provides fuels and lubricants to ERRI. During
fiscal year 1997, Culp supplied fuel and lubricants to ERRI costing
approximately $158,000. It is expected to supply TEI with fuels and lubricants
costing an estimated $185,000 during fiscal year 1998. TEI believes this
arrangement is on terms no less favorable to TEI than those that would result
from arm's length negotiations.
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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 through 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 and therefore that the needs of both investors and issuers for
high quality professional financial advice and services, such as those to be
offered by PGG, will grow.
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.
Their impact 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). 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
transfer 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 shows the growth in
supply of investment products. In the United States market, initial public
offerings grew from $1.4 billion in 1980, to $10.2 billion in 1990, to $43.9 in
1997 as the charts below illustrate. Common equity issued in the United States
public market grew from $12.8 billion in 1980, to $19.2 billion in 1990, to
$118.4 billion in 1997.
Underwritten IPOs in Billions
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1980................ $ 1.4
1990................ $12.2
1997................ $43.9
Common Equity Issued in Billions
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1980................ $ 12.8
1990................ $ 19.12
1997................ $118.4
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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 aided 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 NASD's Automated Quotation System. More
recently, the combined NYSE and NASD Automated Quotation System 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 before
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 compliance with federal and state regulations.
Municipalities use or contract with third parties to use 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:
o municipalities refusing to accept certain industrial wastewaters
due to limited treatment capabilities and a lack of the resources
needed to expand or modernize their POTWs;
o industrial and commercial businesses avoiding POTW surcharges by
using third parties to process and dispose of their wastewater;
o industrial and commercial businesses outsourcing their wastewater
treatment needs;
o continued industrial and commercial expansion; and
o increasingly strict regulations governing the disposal of
wastewater, and more stringent enforcement of those regulations.
BUSINESS STRATEGY
FINANCIAL SERVICES. When the Transactions close, PGG management intends to
implement a business strategy to (1) enhance the services PGG offers its
clients; (2) improve the profitability of its brokerage operations; (3) expand
its equity capital markets activities; (4) expand its fixed-income securities
trading activities; and (5) increase its money management and trust business.
Management also plans to supplement PGG's internal growth with strategic
acquisitions. The principal elements of PGG's business strategy relating to its
financial service business are:
o INCREASE ASSET MANAGEMENT BUSINESS. Management intends to grow PGG'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. PGG believes that the SFN technology developed by
Spires provides it with an opportunity to profitably expand its
fixed-income securities trading business. PGG believes the increased
capital and inventory purchasing power created by the Transactions is
critical to the successful implementation of this strategy.
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o EXPAND REGIONAL AND SPECIALTY EQUITY CAPITAL MARKETS ACTIVITIES. PPG
intends to continue to increase its investment banking business by
committing greater resources to, and by carefully focusing its
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 PGG. 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. PGG 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 PGG's entrepreneurial culture and strategy of providing a
high level of support for its investment executives. PGG also believes
certain cross-selling opportunities among the other combining
companies, and certain unquantified potential operating efficiencies,
will be available.
o ENHANCE PERSONALIZED, HIGH-END SERVICE. The other combining companies
have traditionally sought to attract and retain clients by offering a
high level of personal service responsive to client needs. PGG intends
to increase its commitment to service by providing its clients with
advanced account and investment information systems and flexibility in
determining appropriate fee schedules for certain services based upon
the level of client needs, and by providing an array of one-stop
investment and financial planning services.
o SUPPLEMENT GROWTH WITH STRATEGIC ACQUISITIONS. Management plans to
actively pursue opportunities to acquire other firms with
complementary businesses to strengthen or expand the 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, PGG 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 PGG to realize cost benefits by
leveraging its infrastructure.
LIQUID WASTE. PGG's growth strategy for PGG's liquid waste includes (1)
more fully using 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 PGG's business strategy relating to its liquid
waste business are:
o GEOGRAPHIC EXPANSION -- through expanding 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 -- by entering 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, by offering them integrated
services, like vacuum truck services and drum and solids disposal
services.
While PGG is continuing the operations of its liquid waste business and
implementing its strategy, the business remains unprofitable, and PGG will
evaluate alternatives for the business, including its possible sale.
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PRINCIPAL SHAREHOLDERS OF TEI
This table shows the beneficial ownership of TEI's common stock as of
September 30, 1998 by (1) each person known by TEI to be the beneficial owner of
more than 5% of TEI's common stock, (2) each of TEI's directors and executive
officers and (3) 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. Mr. and Mrs. Benson are separated
and in the process of a divorce proceeding.
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PRINCIPAL SHAREHOLDERS OF HWG
This table shows beneficial ownership of HWG's common stock as of September
30, 1998 by (1) each person who is the beneficial owner of more than 5% of HWG's
common stock, (2) each of HWG's directors and executive officers and (3) all HWG
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 before the
Transactions are completed.
(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
This table shows beneficial ownership of PMT's common stock as of September
30, 1998 by (1) each person who is the beneficial owner of more than 5% of PMT's
common stock, (2) each of PMT's directors and executive officers and (3) all PMT
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 before
the Transactions are completed.
(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
This table shows the percentage ownership of Spires as of September 30,
1998 by (1) each person who is the beneficial owner of more than 5% of Spires,
(2) each of the Spires general partners and executive officers and (3) 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. has investment and voting power with respect
to its ownership interest.
(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 its ownership interest.
(5) The board of directors of Interfin Commercial Funding Corporation has
investment and voting power with respect to its ownership interest.
(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
This table shows the beneficial ownership of PGG common stock immediately
after giving effect to the Transactions by (1) each person who is the beneficial
owner of more than 5% of PGG common stock (2) each of PGG's directors and
executive officers and (3) all PGG directors and executive officers 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(5)................... 332,906 4.7
Robert E. Garrison, II............... 305,488 4.3
Titus H. Harris, Jr.................. 165,056 2.3
Donald R. Campbell(6)................ 34,165 *
Stephen M. Reckling.................. 133,262 1.9
Richard W. Webb...................... 128,468 1.8
Sean Dobson(7)....................... 256,302 3.6
Richard J. Martin.................... -- *
T. G. Bogle(8)....................... 76,792 1.1
James H. Greer(9).................... 25,500 *
Tony Coelho(8)....................... 14,666 *
T. Craig Benson(10).................. 10,500 --
All directors and executive officers
as a group
(13 persons) (1-7)................. 1,851,397 25.8%
- ------------
* 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 256,302 shares held by Spires Financial P.B., Inc., an entity 100%
owned by Mr. Badger.
(6) Includes 15,000 shares issuable on exercise of stock options.
(7) Includes 256,302 shares held by Spires Financial S.D., Inc. an entity 100%
owned by Mr. Dobson.
(8) Includes 9,000 shares issuable on exercise of stock options.
(9) Includes 9,000 shares issuable on exercise of stock options and 15,000
shares owned by Mr. Greer's wife.
(10) Includes 9,000 shares issuable on exercise of stock options. Excludes
334,792 shares beneficially owned by Holly Waltrip Benson, Mr. Benson's
spouse. Mr. and Mrs. Benson are separated and in the process of a divorce
proceeding.
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DESCRIPTION OF PGG CAPITAL STOCK
PGG's amended Articles of Incorporation provide for authorized capital
stock of 110,000,000 shares, consisting of 100,000,000 shares of (or its
"charter") common stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, par value $.01 per share. The following summary description of
the capital stock of PGG is not complete and does not give effect to applicable
statutory or common law. The summary is subject to applicable provisions of
PGG's charter, a copy of which is attached to this document as Appendix F.
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 do not have
cumulative voting rights. Therefore, subject to the voting rights that may be
granted to holders of PGG preferred stock, pursuant to 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 when and if declared by PGG's board of
directors out of funds legally available for that purpose. 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
distributable 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 can issue up to 10,000,000 shares of PGG preferred stock in one or
more series and can determine, for any series of PGG preferred stock, the terms
and rights of the series, including:
o the number of shares, designation and stated value of the series,
o the rate and times at which dividends will be payable on the shares
of the series, and the status of dividends as cumulative or
non-cumulative and as participating or non-participating,
o the voting rights, if any, for shares of the series,
o any prices, times and terms at or upon which shares of the series
may be redeemed,
o any rights and preferences of shares of the series upon any
liquidation, dissolution or winding up of the affairs of PGG or any
distribution of its assets,
o any rights to convert such shares into, or exchange such shares
for, shares of any other class of stock of PGG,
o the terms any of retirement or sinking fund for shares of the
series,
o any limitations on the payment of dividends or making of
distributions on, or the acquisition of, PGG common stock or any
other junior class of stock,
o any conditions or restrictions on indebtedness of PGG or issuances
of any additional stock, and
o any other powers, preferences and relative, participating, optional
and other special rights and their limitations.
PGG has no current plans to issue any shares of PGG preferred stock. Any
issuance of PGG preferred stock may adversely affect the voting powers or rights
of the holders of PGG common stock.
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ANTI-TAKEOVER PROVISIONS
PGG's charter and bylaws contain provisions that could impede the
acquisition of PGG by a tender or exchange offer, a proxy contest or otherwise.
This summary of these provisions is subject to the pertinent sections of PGG's
charter and bylaws and the Texas Business Corporation Act.
PREFERRED STOCK. Although PPG's board does not now intend to do so, it
could issue a series of PGG preferred stock that could, depending on its terms,
impede the completion of a merger, tender offer or other takeover attempt. Any
board decision to issue such shares will be based on the board's judgment as to
the best interests of PGG and its shareholders. The PGG board could issue PGG
preferred stock having terms that could discourage an acquisition attempt
through which an acquiror could otherwise 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 its
then-market price.
REMOVAL OF DIRECTORS. PPG's charter says 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. PPG's charter says that its shareholders can act at
an annual or special meeting. The charter is silent as to shareholder action by
written consent in lieu of a meeting. Therefore, under the Texas Business
Corporation Act, shareholder action by unanimous consent is permitted. PPG's
charter and 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 which can 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 provisions requiring advance notice to PGG of any
business to be brought by a shareholder before an annual meeting of shareholders
and provisions establishing 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 (1) if the shareholder proposes to bring any business before an
annual meeting and (2) if the shareholder wants to nominate any person for
election to the PGG board of directors, in each case not less than 60 nor more
than 180 days before 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.
ANTI-TAKEOVER LEGISLATION. As a Texas corporation, PGG is subject to
Article 13 of the Texas Business Corporation Act. 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 the act defines that term) with a Texas corporation
for three years following the date such person became an interested stockholder
unless:
o before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which
the interested stockholder became interested or approved the
business combination;
o upon consummation of the transaction resulting in the interested
stockholder becoming interested, that 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
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o 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.
Article 13's restrictions 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 years or who became an interested stockholder with the approval
of the majority of the corporation's directors, if the 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. PPG's charter limits the liability of
its directors 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:
o for any breach of the member's duty of loyalty to PGG or its
shareholders,
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
o for unlawful payments of dividends or unlawful stock repurchases
or redemptions as specified in the Texas Business Corporation Act
or
o for any transaction from which the member derived an improper
personal benefit.
This PGG charter provision may discourage derivative litigation against
directors and discourage or deter shareholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though the
action, if successful, might otherwise have benefited PGG and its shareholders.
PPG's charter and 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 for
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 their rights will be governed by PGG's
charter and bylaws. Both PGG and TEI are incorporated in Texas. In the TEI
merger, PGG will adopt 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 whom 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 PGG's
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.
PGG's 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 a
shareholder before an annual meeting, nor any required procedures for
shareholders nominating directors. PGG's bylaws contain provisions as to both of
these matters. Generally, these provisions say that written notice must be given
to the secretary of PGG by a shareholder (1) if the shareholder proposes to
bring any business before an annual meeting, and (2) if the shareholder wants to
nominate any person for election to the PGG board of directors, in each case not
less than 60 nor more than 180 days before 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 their rights
will be governed by the PGG charter and bylaws. HWG and PMT are each
incorporated in Texas. This summary is not a complete statement of the rights of
holders of PGG, HWG, and PMT common stock under the Texas Business Corporation
Act, the Texas Trust Company Act or the charter or bylaws of any of the
companies.
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. The PGG charter grants specific authority to the
board of directors, without action by the shareholders, to issue preferred stock
with designations, preferences, and special rights and qualifications,
limitations, and restrictions designated by the board of directors. At November
6, 1998, 1,000 shares of PGG common stock were outstanding, and there were no
outstanding shares of PGG Preferred Stock. PGG's charter denies cumulative
voting and preemptive rights. PGG shareholders are entitled to dividends when
and if declared by the board of directors from funds legally available for
dividends. Upon liquidation common shareholders 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. At December 4, 1998, HWG's record
date, 25,555 shares were outstanding. The HWG articles of incorporation deny
cumulative voting and preemptive rights. The HWG shareholders are entitled to
dividends when and if declared by the HWG board of directors from funds legally
available for that purpose. Upon liquidation, HWG's common shareholders are
entitled to receive pro rata all assets of HWG available for distribution to
them 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 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 deny preemptive rights. The Texas Trust Company Act
denies cumulative voting rights, in the absence of a contrary provision in the
articles of organization. At December 4, 1998, PMT's record date, 152,551 common
shares were outstanding and there were no outstanding preferred shares. The PMT
shareholders are entitled to dividends when and if declared by the board of
directors from funds legally available for that purpose, and upon liquidation
are entitled to receive pro rata all assets of PMT available for distribution to
them in accordance with applicable statutes.
VOTING REQUIREMENTS AND QUORUMS OF SHAREHOLDER MEETINGS
PGG. PGG's bylaws provide that a quorum will 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 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 will 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 than a
matter for which the affirmative vote of the holders of a specified portion of
the shares entitled to vote is required by the Texas Business Corporation Act,
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 will 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 will be the act of the shareholders at the
meeting.
SHAREHOLDER PROPOSALS
PGG. PGG's bylaws 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 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 (1) if the shareholder proposes to bring any business before an
annual meeting and (2) if the shareholder wants 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.
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HWG. The HWG articles of incorporation and bylaws have no advance notice
requirement for business sought to be brought by a shareholder before an annual
meeting, nor any procedures to be followed by shareholders to nominate persons
to the board of directors.
PMT. The PMT articles of association and bylaws have no advance notice
requirement for business sought to be brought by a 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
denies cumulative voting by the shareholders.
HWG. The HWG articles of incorporation deny cumulative voting by the
shareholders.
PMT. The PMT bylaws say the board shall, within 30 days after the election
of a new board and before any new director takes 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 Texas
in the conduct of the business of PMT. The Texas Trust Company Act 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 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 because 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, but the board 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 because 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 at a special
meeting of the shareholders called for that 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 periodically increase or decrease the number
of directors within this range by a board resolution, but no decrease can
shorten the term of any incumbent director. 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, but no
decrease can shorten the term of any incumbent director. Directors 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 who 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
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meeting of the shareholders, or any adjournment thereof, or any special meeting
of the shareholders called for such purpose, or any adjournment thereof. A copy
of any such resolution adopted has to be filed with the Texas Banking
Commission. In addition, 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 the 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 size allowed by law. Directors serve from
the time they qualify until the next regular annual meeting of the shareholders,
and until their successors are 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 Texas Trust Company Act controls. It 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 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 the special meeting, or by the
affirmative vote of a majority of the full board of directors at any regular or
special meeting, if 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, or repealing the bylaws, 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, if 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 the 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.
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 the
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 can become effective until filed with and approved by
the Texas Banking Commissioner.
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ACTION BY WRITTEN CONSENT AND SPECIAL MEETINGS OF SHAREHOLDERS
PGG. The PGG charter and bylaws are silent as to shareholder action by
written consent in lieu of a meeting. Therefore, under the Texas Business
Corporation Act, shareholders can take action only by unanimous written consent
of shareholders. PGG's 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.
HWG. The HWG articles of incorporation provide that any action required by
the Texas Business Corporation Act to be taken at an annual or special meeting
of the shareholders, or 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, are signed by the holders of shares having no less
than the minimum number of votes that would be necessary to take the 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 the
meeting. Any such request must 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 its shareholders, or any action which may be taken
at any annual or special meeting of 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 have the same
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 not less than twenty-five percent of the outstanding stock
entitled to vote at such meeting. The only business that may be transacted at a
special meeting is the business stated or indicated in the notice of the
meeting.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
PGG. The PGG charter provides that the corporation shall indemnify persons
for whom indemnification is permitted by the Texas Business Corporation Act to
the fullest extent permissible under the act, and may purchase such
indemnification insurance as the board of directors determines. 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. PGG's 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: (1) a breach of the director's duty of loyalty
to the corporation or its shareholders, (2) 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,
(3) 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 (4) 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 (1) is or was a director, officer, employee or agent of the
corporation, or (2) is or was serving at the request of the corporation as a
director, officer, partner, venturer, proprietor, trustee, employee, agent,
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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 Texas Business Corporation Act and
any other applicable laws, provided, however, that Article 2.02-1 is modified in
the following respects: (1) 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; (2) a
determination that the person acted in accordance with the standards set forth
in (1) above constitutes authorization of indemnification under Section G of
Article 2.02-1 of the Texas Business Corporation Act, (3) the advancement of
expenses to a person who has satisfied the indemnification requirements set
forth above is mandatory rather than optional, and (4) the payment or
reimbursement of expenses to a person pursuant to Section N of Article 2.02-1 of
the Texas Business Corporation Act 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 corporation. 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
corporation. 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 corporation 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 under its 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 bylaws. Spires is a Delaware
limited partnership and is governed by the Delaware Limited Partnership Act. PGG
is a Texas corporation and is governed by the Texas Business Corporation Act.
Differences in the rights of Spires interest holders and PGG shareholders arise
from differences in the laws governing limited partnerships and laws governing
corporations. There are also differences between the terms of the Spires
partnership agreement, and PGG's charter and bylaws. This summary is not a
complete statement of the rights of Spires interest holders and PGG's common
shareholders under, and is qualified by reference to, the Texas Business
Corporation Act, the Delaware Limited Partnership Act, the Spires partnership
agreement, and PGG's charter and bylaws.
LIQUIDITY AND MARKETABILITY
PGG. PGG has applied for approval of 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 (1)
shares received by Spires owners who are determined to be "affiliates" (as
defined under the Securities Act) of Spires or PGG, (2) Spires owners who are
required to execute lock-up letters with PGG at closing of the Transactions,
under which such persons will agree not to sell or otherwise dispose for any PGG
common shares for a period of one year after the closing and (3) 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 these conditions:
o no limited partner can transfer his partnership 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),
o 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,
o reimbursement by the transferor or transferee for all costs and
expenses the partnership reasonably incurs in connection with the
transfer,
o 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,
o the transferor and transferee must furnish the transferee's
taxpayer identification number and sufficient information 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,
o 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,
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o 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
o 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 for
any filings or amendments that must be made with respect to the
transfer.
In addition, (1) 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 (2) 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:
o a transfer of Class A units to any other Class A limited partner,
o 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,
o 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
o 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: (1) a Class B limited partner is subject to a regulatory
revocation, (2) a Class B limited partner's employment agreement is terminated,
or (3) a Class B limited partner, in his or its capacity as a Principal,
breaches any of the covenants contained in the partnership agreement. Upon a
Termination Event, (1) the other principals can purchase the Class B partnership
interests, (2) if not purchased by the principals, the Class A limited partners
can purchase the Class B interests, and (3) if not purchased by the principals
or Class A limited partners, the Class B limited partners can purchase the
units. The purchase price under the buy-back provision is determined by a
formula in the partnership agreement.
ANTIDILUTION RIGHTS
PGG. The PGG common stock will not be subject to any antidilution,
preemptive or other similar rights.
SPIRES. If additional Class A or Class B partnership interests are offered
for sale, the current holders of Class A and Class B partnership interests can
purchase their pro rata share of the additional interests offered in accordance
with each limited partner's percentage interest.
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FINANCIAL REPORTING
PGG. PGG will be subject to the reporting requirements of the Exchange Act
and will file annual and quarterly reports under that act.
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 and a taxable entity under the Internal Revenue
Code. Accordingly it 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.
SPIRES. Spires, as a partnership, is not a taxable entity under the
Internal Revenue Code. However, holders of Spires partnership interests report
and pay taxes on their distributive share of partnership income, gains, losses
and deductions as set forth in Spires' partership agreement, whether or not any
cash distributions are actually made. Generally, distributions by a partnership
to a holder of a partnership interests are not taxable, except to the extent
they are made in cash and exceed the tax basis in the holder's partnership
interest. A reduction in a partner's "share of the liabilities of a
partnership" as determined under the Internal Revenue Code is treated as a cash
distribution. Income from the partnership is treated as passive income under the
Code. For individuals, trusts, estates, closely held C corporations and personal
service corporations which hold limited partnership interests, passive income
cannot be offset by losses or credits from a holder's other passive activities.
Any partnership losses can only be used to offset later 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 PGG's board of directors out of funds legally
available for dividends. Dividends 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 distributions, 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 the
partnership's assets.
LIQUIDATION RIGHTS
PGG. On the liquidation, dissolution, or winding-up of PGG, PGG common
shareholders are entitled to share ratably in all assets remaining after payment
to creditors and payments required to be made on any then outstanding PGG
preferred stock.
SPIRES. On the dissolution, liquidation, or winding-up of Spires, a full
account of its liabilities and property will be taken, the property will be
liquidated as promptly as is consistent with obtaining its fair market value,
and the proceeds will be applied and distributed to pay, in sequence: (1) all
partnership debts, except debts owed to the principals or managing general
manager; (2) any special distribution amount payable to the secondary general
partner and Class A limited partners; (3) the
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secondary general partner and Class A limited partners in amounts sufficient to
satisfy all accrued but unpaid preferred returns; (4) the secondary general
partner and Class A limited partners in an amount sufficient to reduce what the
partnership agreements calls the "Aggregate Equalization Balance" to zero; (5)
the principals and the managing general partner an amount sufficient to
discharge the partnership's debts to such persons; (6) the holders of
partnership units, 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 (7) the
balance, if any, to the partners, pro rata according to their percentage
interests 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 parternship agreement provides that the partnership
shall dissolve and begin 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.
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 Texas Business Corporation Act
providing for the dissolution of a Texas corporation, Texas law and the PGG
charter provide for perpetual existence for PGG.
SPIRES. Spires' partnership agreement provides for a ten-year period of
existence beginning January 20, 1995, or until the winding up and liquidation of
the partnership and its business is completed.
ISSUANCE OF SENIOR SECURITIES
PGG. PGG's 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. PGG's
charter 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.
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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 Delaware Limited Partnership Act, including: (1)
permission to engage in any business other than the business activities
permitted by the partnership agreement, (2) permission to demand return of a
capital contribution or to withdraw from the partnership, (3) permission for a
partner to lend money to the partnership, (4) resolution of a deadlock by the
board of directors of the managing general partner, (5) amendment of the
partnership agreement, (6) permission for the managing general partner to
transfer any or all of its interest in the partnership, (7) permission for the
secondary general partner to transfer any or all of its interest in the
partnership, (8) permission for any limited partner to transfer his or its
interest in the partnership, (9) admission of assignees as limited partners,
(10) 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, (11)
admission of a managing general partner, (12) removal of the managing general
partner, and (13) dissolution, winding-up, or liquidation of the partnership.
MEETINGS OF PARTNERS/SHAREHOLDERS
PGG. PGG is required, under the Texas Business Corporation Act and PGG's
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. PGG's charter and bylaws are silent as to shareholder action
by written consent in lieu of a meeting. Therefore, under the Texas Business
Corporation Act, shareholders can take action only by unanimous written consent
of shareholders.
PGG's bylaws also contain provisions requiring advance notice to PGG of any
business to be brought by a shareholder before an annual meeting of shareholders
and establishing procedures to be followed by shareholders in nominating persons
for election to the PGG board of directors. Generally, these provisions require
written notice to the secretary of PGG by a shareholder (1) if the shareholder
proposes to bring any business before an annual meeting and (2) 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.
SPIRES. 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 of partners, may be
taken without a meeting, without prior notice, and with a call or other action
by the managing general 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 the address of and the number
of shares held by each, shall be prepared by the secretary of the corporation
and be available for inspection by any shareholder during usual business hours
for a period of ten days prior to such meeting, and shall be produced at the
meeting and at all time during the meeting be available for inspection by any
shareholder.
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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 partnership's 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. 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 Texas Business Corporation Act, amendment of the articles
of incorporation of PGG requires (1) adoption of a resolution by the board of
directors setting forth the proposed amendment, and (2) an affirmative vote of
holders of two-thirds of the shares of capital stock entitled to vote. PGG's
bylaws provide that they 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, if
notice of the proposed amendment is contained in the notice of the meeting.
SPIRES. Amendments to the Spires 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 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 (1) the managing general
partner, and (2) a majority in interest of each class of limited partners. The
partnership agreement may not be amended without the consent of each partner
adversely affected if the amendment would: (1) convert a limited partner's
interest in the partnership into a general partner's interest, (2) modify the
limited liability of a limited partner, or (3) 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, but 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 the amendment
would: (1) change the form of the partnership to a general partnership, (2)
cause the partnership to be classified, for federal income tax purposes, as
other than a partnership, or (3) amend the section of the partnership agreement
which addresses amendments to the partnership agreement.
ANTI-TAKEOVER PROVISIONS
PGG. PGG is subject to Texas Business Corporation Act provisions which
prohibit business combinations with any affiliate or associate under certain
circumstances. In addition, PGG's charter contains 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
contest or otherwise. These provisions include the authorization of "blank
check" preferred stock, classification of the board of directors, limiting the
removal of a director only on approval of two-thirds of the
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outstanding voting stock and a restriction on shareholder 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 Delaware Limited Partnership Act requires
that a merger or consolidation be approved by all general partners and by each
class of limited partners by a majority vote.
CERTAIN LEGAL RIGHTS
PGG. The Texas Business Corporation Act 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 Delaware Limited Partnership Act 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 right 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 Texas Business Corporation Act 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 Transactions 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.
LIMITS ON DIRECTORS' AND MANAGEMENT'S LIABILITIES
PGG. PGG's charter provides that the corporation must indemnify persons
for whom indemnification is permitted by the Texas Business Corporation Act to
the fullest extent permissible under the act, and may purchase such
indemnification insurance as the board of directors determines. 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. PGG's 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 the 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 (1) the indemnified party, in good faith, reasonably believed
that such course of conduct was in the best interests of the partnership, and
(2) 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 of partners.
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Indemnification will be provided from the assets of the partnership only and to
the 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 other combining companies on 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 in this document and in the
Registration Statement have been audited by PricewaterhouseCoopers LLP,
independent public accountants, as indicated in their reports thereto, and are
included in reliance upon the authority of that 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 the
Registration Statement have been audited by Cheshier & Fuller, L.L.P.,
independent public accountants, as indicated in their report thereto, and are
included in reliance upon the authority of that 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 in
this document and in the Registration Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere in this document, and upon the authority of that 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 the
Registration Statement have been audited by Grant Thornton LLP, independent
public accountants, as indicated in their report thereto, and are included in
reliance upon the authority of that 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. If you have difficulty retrieving electronically filed
or other information on TEI, you should also search under its former
name -- "Tanknology Environmental, Inc."
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 its exhibits.
The SEC allows TEI to "incorporate by reference" information into this
Proxy Statement/Prospectus, which means that TEI can disclose important business
and financial 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 following
documents that TEI has previously filed with the SEC under its current name or
former name -- "Tanknology Environmental, Inc.". These documents contain
important information about TEI and its financial condition.
SEC FILINGS (FILE NO. 0-18899) PERIOD
- ------------------------------------- -----------------------------------------
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly reports on Form 10-Q Three months ended March 31, 1998,
six months ended June 30, 1998 and
nine months ended September 30, 1998
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.
5599 San Felipe, Suite 1212
Houston, Texas 77056
Attention: Donald R. Campbell
If you would like to request documents from TEI, please do so by December
24, 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 December __, 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 contrary implication.
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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 September 30, 1998
(unaudited).................... F-21
Condensed Consolidated Statement
of Operations for the nine
months ended
September 30, 1998 and 1997
(unaudited).................... F-22
Condensed Consolidated Statement
of Cash Flows for the nine
months ended
September 30, 1998 and 1997
(unaudited).................... F-23
Notes to Condensed Consolidated
Financial Statements
(unaudited).................... F-24
HARRIS WEBB & GARRISON, INC.
Independent Auditors' Report.... F-28
Statements of Financial
Condition as of December 31,
1997 and 1996.................. F-29
Statements of Income for the
three years ended December 31,
1997........................... F-30
Statements of Changes in
Stockholders' Equity for the
three years ended
December 31, 1997............. F-31
Statements of Cash Flows for the
three years ended December 31,
1997........................... F-32
Notes to Financial Statements... F-34
Condensed Statement of Financial
Condition as of September 30,
1998 (unaudited)............... F-41
Condensed Statements of Income
for the nine months ended
September 30, 1998 and 1997
(unaudited).................... F-42
Condensed Statements of Cash
Flows for the nine months ended
September 30, 1998
and 1997 (unaudited).......... F-43
Notes to Condensed Financial
Statements (unaudited)......... F-45
F-1
<PAGE>
PAGE
-----
PINNACLE MANAGEMENT & TRUST COMPANY
Independent Auditors' Report.... F-50
Report of Independent Certified
Public Accountants............. F-51
Balance Sheets as of December
31, 1997 and 1996.............. F-52
Statements of Operations for the
years ended December 31, 1997,
1996, and 1995................. F-53
Statements of Shareholders'
Equity for the years ended
December 31, 1997, 1996 and
1995........................... F-54
Statements of Cash Flows for the
years ended December 31, 1997,
1996, and 1995................. F-55
Notes to Financial Statements... F-56
Condensed Balance Sheet as of
September 30, 1998
(Unaudited).................... F-59
Condensed Statements of
Operations for the nine months
ended September 30, 1998 and
1997 (Unaudited)............... F-60
Condensed Statements of Cash
Flows for the nine months ended
September 30, 1998 and 1997
(Unaudited).................... F-61
Notes to Condensed Interim
Financial Statements
(Unaudited).................... F-62
SPIRES FINANCIAL, L.P.
Report of Independent
Accountants.................... F-63
Statements of Financial
Condition as of December 31,
1997 and 1996.................. F-64
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-65
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-66
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-67
Notes to Financial Statements... F-68
Condensed Statement of Financial
Condition as of September 30,
1998 (unaudited)............... F-73
Condensed Statements of Income
and Comprehensive Income for
the nine months ended September
30, 1998 and 1997
(unaudited).................... F-74
Condensed Statements of Cash
Flows for the nine months ended
September 30, 1998 and 1997
(unaudited).................... F-75
Notes to Condensed Interim
Financial Statements
(unaudited).................... F-76
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
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)
============ ============ ==============
</TABLE>
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>
$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
<CAPTION>
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
=========== =========== =========== ===========
<CAPTION>
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)
SEPTEMBER 30,
1998
--------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 15,173,306
Short-term investments.......... 13,617,153
Accounts receivable, net........ 675,887
Deferred tax asset.............. 561,133
Income tax receivable........... --
Other current assets............ 538,206
--------------
Total current assets....... 30,565,685
PROPERTY AND EQUIPMENT, NET.......... 5,008,344
INTANGIBLE ASSETS, LESS ACCUMULATED
AMORTIZATION....................... 2,133,683
DEFERRED TAX ASSET................... 287,296
NET ASSETS OF DISCONTINUED OPERATIONS
AND OTHER ASSETS................... 788,031
--------------
Total assets............... $ 38,783,039
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 408,746
Accrued liabilities............. 997,853
--------------
Total current
liabilities............... 1,406,599
--------------
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 shares issued...... 152,062
Additional paid-in capital...... 33,134,997
Retained earnings............... 8,308,252
Treasury stock at cost, 955,225
shares......................... (4,187,671)
--------------
Net unrealized loss in
investments available for sale,
net of deferred taxes of
$16,800........................ (31,200)
Total shareholders' equity...... 37,376,440
--------------
Total liabilities and
shareholders' equity........... $ 38,783,039
==============
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)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
-------------- --------------
REVENUES............................. $ 2,287,187 $ 2,066,366
COST OF SERVICES..................... 1,760,188 1,563,288
-------------- --------------
Gross profit.................... 526,999 503,078
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES........................... 1,932,017 2,020,264
-------------- --------------
Loss from operations............ (1,405,018) (1,517,186)
OTHER INCOME......................... 1,163,186 1,145,407
-------------- --------------
Income (loss) from continuing
operations before income
taxes.......................... (241,832) (371,779)
INCOME TAX EXPENSE (BENEFIT)......... (81,135) (48,786)
-------------- --------------
Income (loss) from continuing
operations..................... (160,697) (322,993)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX......................... (108,500) (990,000)
-------------- --------------
Net income (loss).......... $ (269,197) $ (1,312,993)
============== ==============
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
From continuing operations...... $ (0.01) $ (0.02)
From discontinued operations.... (0.01) (0.07)
-------------- --------------
Net earnings (loss) per share........ $ (0.02) $ (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)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ (269,197) $ (1,312,993)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Provision for disposition
of discontinued
operations.............. 167,000 1,500,000
ESI operating loss charged
to reserve for
discontinued
operations.............. -- (1,520,070)
Depreciation and
amortization............ 542,541 506,071
Net amortization of
premiums and discounts
on short-term
investments............. (620,047) (553,891)
(Gain) loss on disposal of
assets.................. (8,871) (63,664)
Deferred income taxes...... (139,635) (650,643)
Common stock issued to
directors............... 11,690 13,790
Change in assets and
liabilities:
Increase in accounts
and note
receivable, net.... 87,195 (802,904)
Decrease in earnings
in excess of
billings -- 138,600
Increase (decrease) in
income tax
receivable......... 1,512,115 (92,963)
Increase in other
current assets..... (109,707) (516,219)
Increase in other
noncurrent
assets............. (369,588) --
Decrease in accounts
payable and accrued
liabilities........ (313,473) (677,390)
--------------- ---------------
Total
adjustments... 759,220 (2,719,283)
--------------- ---------------
Net cash
provided by
(used in)
operating
activities.... 490,023 (4,032,276)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............ (613,811) (450,127)
Proceeds from the sale of
assets........................ 15,733 2,492,284
Purchase of short-term
investments................... (21,376,663) (25,267,818)
Proceeds from maturities of
short-term investments........ 23,847,924 29,839,253
--------------- ---------------
Net cash
provided by
investing
activities.... 1,873,183 6,613,592
--------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES......................... -- --
--------------- ---------------
Net increase in
cash and cash
equivalents... 2,363,206 2,581,316
CASH AND CASH EQUIVALENTS AT
BEGINNING
OF PERIOD.......................... 12,810,100 11,421,710
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 15,173,306 $ 14,003,026
=============== ===============
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 September 30, 1998, the
consolidated results of its operations for the three-month and nine-month
periods ended September 30, 1998 and 1997, and its consolidated cash flows for
the nine-month periods ended September 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.
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 antidilutive.
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 had no impact on the
Company's financial statements. Comprehensive income (loss) was $(300,397) and
$(1,312,993) for the nine months ended September 30, 1998 and 1997,
respectively.
2. RECENT EVENTS:
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 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 into 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.
F-24
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's wastewater treatment business is performing at levels below
expectations and, should the merger referred to above be consummated, would be
the only non-financial service business owned and operated by the Company. As a
result, management is considering alternatives including selling Energy Recovery
Resources, Inc. ("ERRI"), although no decision has been made. ERRI incurred an
operating loss of $356,000 for the three months ended September 30, 1998,
including noncash charges for depreciation and amortization of $184,000, and a
$47,000 pre-tax loss to write down waste oil inventory to its estimated market
value. Further inventory write-down could occur. In addition, if management is
unable to improve profitability of ERRI, the goodwill associated with that
business may be impaired. Should the Company elect to sell ERRI, the Company may
not recover all of its investment.
3. 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.
ESI's revenues and operating losses were $1,655,000 and $1,520,000,
respectively, for the nine months ended September 30, 1997. 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. The Company
continues to experience significant changes in these estimates and it is
reasonably possible that such changes could occur in the future resulting in
additional losses to the Company. The purchaser has notified the Company that
delays and installation problems on several contracts have significantly
increased estimated costs to complete those contracts. As a result, the Company
has recorded an additional charge to discontinued operations of $109,000 net of
tax to increase the liability for estimates to complete ESI projects.
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.
F-25
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
Additional information regarding certain balance sheet accounts at
September 30, 1998 and December 31, 1997 is presented below:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
Other current assets:
Interest receivable............. $ 12,913 $ 19,401
Prepaid insurance............... 194,700 190,484
Finished goods inventories...... 275,280 178,839
Other........................... 55,313 28,818
------------- ------------
Total other current
assets................. $ 538,206 $ 417,542
============= ============
Accrued liabilities:
Compensation.................... $ 112,195 $ 123,364
Claims reserves................. 829,435 829,435
Other taxes..................... 53,196 79,604
Other........................... 3,027 1,131
------------- ------------
Total accrued
liabilities............ $ 997,853 $1,033,534
============= ============
Net assets of discontinued operations
and other assets:
Capitalized merger costs........ $ 370,160 $ --
Net assets of discontinued
operations..................... 417,871 377,306
------------- ------------
Total net assets of
discontinued operations
and other assets....... $ 788,031 $ 377,306
============= ============
5. 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.
6. EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) per common share is computed as follows:
1998 1997
-------------- --------------
Computation of basic and diluted
earnings per common share for the
nine months ended September 30:
Net loss applicable to common
stock.......................... $ (269,197) $ (1,312,993)
============== ==============
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 loss per common
share............. $ (0.02) $ (0.09)
============== ==============
Stock options outstanding of 682,500 and 724,500 at September 30, 1998 and
1997, respectively, have not been included in diluted earnings per common share
because to do so would have been antidilutive for the periods presented.
F-26
<PAGE>
TEI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. 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 September 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-27
<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-28
<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 shares issued and 17,822
outstanding in 1997; 15,664
shares issued and outstanding
in 1996........................ 18,158 15,664
Additional paid-in capital...... 2,845,964 2,380,236
Treasury stock at par value, 336
shares......................... (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-29
<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
============
Weighted average shares outstanding..... 17,906
============
PRO FORMA (Note 16)
Historical income before taxes on income
(loss)................................ $ 442,304 $ (1,177,226) $ (459,903)
Pro forma taxes on income............... -- -- --
------------ -------------- ------------
Pro forma net income (loss)............. $ 442,304 $ (1,177,226) $ (459,903)
============ ============== ============
Pro forma basic and diluted earnings
(loss) per common share............... $ 24.70 $ (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-30
<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-31
<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........... 321,086 118,713 500
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......................... 388,057 (883,272) (696,701)
------------ -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............ (23,416) (35,790) (8,727)
------------ -------------- ------------
Net cash provided (used) by investing
activities......................... (23,416) (35,790) (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...... (37,500) --
Purchase of treasury stock...... (31,192)
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-32
<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 and related accrued interest of $25,101 were
converted to 2,102 shares of common stock in satisfaction of such obligations.
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 90 shares of common stock in satisfaction of such debt. 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-33
<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 owned are carried at market value and consist of both trading
and investment securities. Trading securities are carried at fair value as
determined by market quotes. Investment securities are carried at fair value as
estimated by management. Both realized and unrealized gains or losses are
credited or charged to operations. The cost of securities used to compute
realized gains and losses is determined by the specific identification method.
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-34
<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-35
<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 fully reimbursed. 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-36
<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-37
<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 Accounting Standards ("SFAS") 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-38
<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.
Pro forma information regarding net income is required by SFAS No. 123.
This information has been derived as if the Company had accounted for its
directors, officers and employee stock options under the fair value method in
accordance with SFAS No. 123. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).................... 300,804 286,236 (1,177,226) (1,191,794) (459,903) (473,673)
Earnings per share................... 16.80 15.99 (94.52) (95.69) (82.72) (85.19)
Weighted average shares O/S.......... 17,906 17,906 12,455 12,455 5,560 5,560
</TABLE>
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, money market mutual funds, receivables,
payables and accrued expenses approximate their fair values due to the
short-term nature of the items. Trading securities and securities sold but not
yet purchased are carried at fair value as determined by quoted market prices.
Investment securities are carried at fair value as determined by management.
Management's estimates are based on the Black-Scholes model and other market
factors. The carrying values of notes payable approximate their fair values due
to the floating interest rates asssociated with the debt instruments. The
carrying values of secured demand notes and subordinated liabilities approximate
fair values since their interest rates are approximately the same as those
available to the Company for subordinated debt with similar terms.
NOTE 16 -- PRO FORMA ADJUSTMENT
Beginning June 1, 1997, the Company has been treated as a C Corporation
pursuant to the Internal Revenue Code. Prior to June 1, 1997, the Company was
treated as an S Corporation. The objective of the pro forma financial
information is to show what the significant effects of the historical financial
information might have been had the Company not been treated as an S Corporation
for income tax purposes since that time.
No pro forma tax provision or benefit was recorded for all years presented
because the Company incurred net operating losses or had the benefit of loss
carryforwards. In addition, a full valuation allowance was provided against the
resulting deferred tax asset as it was not more likely than not that the asset
would be realized.
F-39
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30,
1998
-------------
ASSETS
Cash................................. $ 1,226,579
Money market mutual funds............ 312,052
Receivable from correspondent brokers
and dealers........................ 141,800
Securities owned at market value..... 244,202
Notes and accounts receivable from
related parties.................... 160,566
Prepaid expenses, deposits and other
assets............................. 45,198
Property and equipment, net of
accumulated depreciation of
$20,591............................ 96,845
Federal income tax receivable........ 118,500
Deferred federal income taxes........ 45,000
-------------
TOTAL ASSETS.................... $ 2,390,742
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 42,035
Accrued expenses..................... 207,236
Deferred federal income taxes........ 23,000
-------------
TOTAL LIABILITIES............... 272,271
-------------
Stockholders' equity --
Common stock, at stated
value -- $1 par value, 50,000
shares authorized;
25,891 shares issued and
25,555 shares outstanding...... 25,891
Additional paid in capital...... 3,942,702
Treasury stock at par value,
336 shares..................... (336)
Unearned compensation........... (67,971)
Retained earnings (deficit)..... (1,781,815)
-------------
TOTAL STOCKHOLDERS' EQUITY...... 2,118,471
-------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........... $ 2,390,742
=============
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
Revenue:
Commissions........................ $ 2,838,763 $ 3,249,712
Investment banking................. 1,437,433 863,818
Account management fees............ 254,262 199,283
Margin interest.................... 98,890 38,536
Other.............................. 6,377 73,910
------------ ------------
4,635,725 4,425,259
------------ ------------
Expenses:
Employee compensation.............. 3,199,384 3,276,114
Clearing charges and exchange
fees.............................. 412,795 415,912
Communications..................... 112,269 86,392
Occupancy and equipment............ 247,554 270,069
Promotions......................... 35,395 18,441
Interest........................... 9,327 28,372
Losses in error accounts and bad
debts............................. 15,228 --
Regulatory fees.................... 31,677 23,722
Professional fees.................. 91,241 20,590
Other.............................. 182,182 200,655
------------ ------------
4,337,052 4,340,267
------------ ------------
Net income before income taxes.......... 298,673 84,992
Provision for income taxes.... 102,000 --
------------ ------------
NET INCOME (LOSS)....................... $ 196,673 $ 84,992
============ ============
Basic and diluted earnings (loss) per
common share.......................... $ 8.06
============
Weighted average shares outstanding..... 24,403
============
PRO FORMA (Note 12)
Historical income before taxes on
income............................ $ 84,992
Pro forma taxes on income.......... --
---------
Pro forma net income............... $ 84,992
=========
Pro forma basic and diluted
earnings (loss) per common
share............................. $ 7.05
=========
Weighted average shares
outstanding....................... 12,063
=========
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................... $ 196,673 $ 84,993
Adjustments to reconcile net
income to net cash provided
(used) by
Depreciation and
amortization............ 9,886 8,633
Unrealized gain on
investment securities... (55,824) (380,716)
Deferred Federal income
taxes................... 102,000 --
Recognition of compensation
for stock awards........ 22,656 --
Change in Assets and
Liabilities:
Receivable from brokers and
dealers................. 300,758 48,742
Other receivables.......... 62,960 (197,926)
Securities owned........... (44,054) 243,189
Accounts payable and
accrued liabilities..... (91,660) 224,775
Payable to brokers and
dealers................. (25,888) (92,808)
Other assets............... (17,194) --
Securities sold not yet
purchased............... (26,245) --
State and federal income
taxes receivable........ (118,500) --
State and federal income
tax payable............. (238,960) --
------------ ------------
Net cash provided (used) by operating
activities......................... 76,608 (61,118)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............ (46,811) (9,544)
Receivable from related
parties........................ (153,496) 209,181
------------ ------------
Net cash provided (used) by investing
activities......................... (200,307) 199,637
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock.......................... 1,013,844 40,924
Repayment of short-term loans... -- (99,191)
Purchase of treasury stock...... -- (150)
------------ ------------
Net cash provided (used) by financing
activities......................... 1,013,844 (58,417)
------------ ------------
Net increase (decrease) in cash...... 890,145 80,102
Beginning cash balance............... 648,486 118,488
------------ ------------
Ending cash balance.................. $ 1,538,631 $ 198,590
============ ============
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
HARRIS WEBB & GARRISON, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1998 1997
---------- ----------
Cash paid for:
Interest........................ $ 1,057 $ 28,372
========== ==========
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 nine months ended September 30, 1998 related to stock awards
made in 1997.
The accompanying notes are an integral part of these financial statements.
F-43
<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 owned are carried at market value and consist of both trading
and investment securities. Trading securities are carried at fair value as
determined by market quotes. Investment securities are carried at fair value as
estimated by management. Both realized and unrealized gains or losses are
credited or charged to operations. The cost of securities used to compute
realized gains and losses is determined by the specific identification method.
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 September 30, 1998 no borrowings were outstanding under these lines.
F-44
<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 $158,036 for office space and $79,633 for equipment
for the nine months ended September 30, 1998. Future minimum lease payments are
as follows:
PERIODS ENDING OFFICE
DECEMBER 31, SPACE
---------------- ----------
1998............................... $ 55,172
1999............................... 372,055
2000............................... 379,500
2001............................... 379,500
2002............................... 379,500
2003 and later..................... 474,375
----------
$2,040,102
==========
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 September 30, 1998 and the procedures
followed in making the periodic computations required. At September 30, 1998,
the Company had net capital of approximately $1,525,772 and net capital
requirements of $100,000. The ratio of aggregate indebtedness to net capital was
.18 to 1 at September 30, 1998. The Securities 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
$79,489 in management fees. Pinnacle also paid $28,820 to the Company for rent.
The Company paid St. James Place Corp. ("St. James"), an affiliate
providing furniture and equipment, $55,652 for lease payments. The Company also
earned insurance commissions of $179,193 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 $103,824 for the benefit of Bio during the
F-45
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
nine months ended September 30, 1998. The Company received $91,157 of
reimbursements from Bio during the nine months ended September 30, 1998.
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 nine
months ended 1998.
NOTE 8 -- STOCKHOLDERS' EQUITY
The Company sold 5,830 shares of its common stock for $166.67 a share
during the nine months ended September 30, 1998. Additionally, 1,903 shares of
common stock related to stock awards were issued to employees of which 1,495
shares are vested as of September 30, 1998. Stockholders also contributed
capital of $39,760 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 September 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 $11,826. 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 nine months ended September 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 September 30, 1998.... 2,070 $166.67
==========
Exercisable at September 30, 1998.... 2,070 $166.67
==========
F-46
<PAGE>
HARRIS WEBB & GARRISON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of options outstanding as of September 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.
The weighted-average grant-date fair value of options during the period is
$39.99.
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, money market mutual funds, receivables,
payables and accrued expenses approximate their fair values due to the
short-term nature of the items. Trading securities are carried at fair value as
determined by quoted market prices. Investment securities are carried at fair
value as determined by management. Management's estimates are based on the
Black-Scholes model and other market factors.
NOTE 11 -- REORGANIZATION
During April, 1998 the Company entered into letters of intent with
affiliates, Spires Financial, L.P. ("Spires") and Pinnacle Management & Trust
Co. ("PMT") with 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.
NOTE 12 -- PRO FORMA ADJUSTMENT
Beginning June 1, 1997, the Company has been treated as a C Corporation
pursuant to the Internal Revenue Code. Prior to June 1, 1997, the Company was
treated as an S Corporation. The objective of the pro forma financial
information is to show what the significant effects the historical financial
information might have been had the Company not been treated as an S Corporation
for income tax purposes since that time.
F-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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> <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-55
<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-56
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
CONDENSED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
1998
--------------
ASSETS
Cash and cash equivalents............ $1,722,935
Marketable securities................ 1,377,477
Accounts receivable.................. 48,350
Furniture and equipment, net of
accumulated depreciation of
$72,171............................ 115,228
Prepaid expenses and other assets.... 186,794
--------------
Total assets............... $3,450,784
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other
liabilities........................ $ 54,838
--------------
Shareholders' equity:
Common stock, par value $1 per
share; 1,000,000 shares
authorized; issued and
outstanding 152,551............ 152,551
Preferred stock, par value $.01
per share; 1,000,000 shares
authorized..................... --
Additional paid-in capital...... 3,649,224
Accumulated deficit............. (303,754)
Unrealized loss on marketable
securities..................... (102,075)
--------------
Total shareholders'
equity.................... 3,395,946
--------------
Total liabilities and
shareholders' equity...... $3,450,784
==============
See accompanying notes to condensed interim financial statements.
F-57
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
------------ -----------
Revenues:
Fiduciary and custodial fees.... $ 1,078,604 $ 764,384
Investment advisory fees........ -- 4,820
Interest, dividends and other... 78,165 78,786
Gain on sale of securities...... 293,456 139,615
------------ -----------
Total revenues............. 1,450,225 987,605
------------ -----------
Costs and expenses:
Salaries and employee
benefits....................... 565,315 443,619
General and administrative...... 321,021 249,529
Depreciation and amortization... 23,470 16,180
------------ -----------
Total costs and expenses... 909,806 709,328
------------ -----------
Net income................. $ 540,419 $ 278,277
============ ===========
See accompanying notes to condensed interim financial statements.
F-58
<PAGE>
PINNACLE MANAGEMENT & TRUST COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------
1998 1997
------------ --------------
Cash flows from operating activities:
Net income...................... $ 540,419 $ 278,277
Adjustments to reconcile net
income to net cash provided by
operating activities:.........
Depreciation and
amortization............ 23,470 16,180
Gain on sale of
securities.............. (293,456) (139,615)
Changes in assets and
liabilities:
(Increase) decrease in
accounts
receivable......... (29,023) 27,618
Increase in prepaid
expenses and other
assets............. (166,767) (16,793)
Increase (decrease) in
accounts payable
and other
liabilities........ 32,425 (36,419)
------------ --------------
Net cash
provided by
operating
activities.... 107,068 129,248
------------ --------------
Cash flows from investing activities:
Purchase of furniture and
equipment..................... (122,272) (40,824)
Purchase of securities.......... (2,933,007) (3,405,764)
Proceeds from sale of
securities.................... 3,522,923 2,126,465
------------ --------------
Net cash
provided by
(used in)
investing
activities.... 467,644 (1,320,123)
------------ --------------
Cash flows from financing activities:
Issuance of common stock........ 686,575 1,457,700
Decrease in payable to
shareholders.................. (146,750) --
------------ --------------
Net cash
provided by
financing
activities.... 539,825 1,457,700
------------ --------------
Net increase in cash and cash
equivalents........................ 1,114,537 266,825
Cash and cash equivalents, beginning
of period.......................... 536,832 90,815
------------ --------------
Cash and cash equivalents, end of
period............................. $ 1,651,369 $ 357,640
============ ==============
See accompanying notes to condensed interim financial statements.
F-59
<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 September 30, 1998 and for each of
the nine month periods ended September 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 nine months
ended September 30, 1997 and 1998 was $324,850 (unaudited) and $421,091
(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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<PAGE>
SPIRES FINANCIAL, L.P.
CONDENSED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30, 1998
------------------
ASSETS
Cash and cash equivalents............ $ 1,450,302
Deposits held by clearing brokers and
dealers, at market, restricted..... 1,113,837
Commissions receivable from clearing
broker and dealer.................. 607,016
Securities purchased under agreements
to resell.......................... 2,189,970
Inventory of marketable securities,
at market.......................... 13,225,840
Receivables from employees........... 30,758
Furniture and equipment, at cost,
net................................ 359,864
Other assets......................... 560,807
------------------
Total assets.................... $ 19,538,394
==================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued
liabilities........................ $ 110,907
Securities sold under agreements to
repurchase......................... 12,883,113
Securities sold, not yet purchased,
at market.......................... 2,173,750
Commissions payable to brokers....... 360,075
Payable to Secondary General
Partner.............................. 11,752
------------------
Total liabilities............... 15,539,597
Commitments and contingencies
Total partners' capital.............. 3,998,797
------------------
Total liabilities and partners'
capital......................... $ 19,538,394
==================
The accompanying notes are an integral part of the condensed interim financial
statements.
F-71
<PAGE>
SPIRES FINANCIAL, L.P.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
Revenues:
Brokerage commissions.............. $ 5,511,909 $ 4,699,713
Revenue from securities traded..... 675,565 549,851
Unrealized loss.................... (215,477) (156,662)
Interest income.................... 843,966 552,162
------------ ------------
Total revenues................ 6,815,963 5,645,064
------------ ------------
Expenses:
Broker commissions................. 2,345,712 1,660,156
Administrative employee
compensation and benefits......... 629,713 615,865
Data services...................... 468,525 339,490
Professional fees.................. 203,136 100,655
Occupancy expense.................. 126,186 120,438
Clearing charges................... 222,604 169,793
Interest expense................... 882,895 452,736
Other.............................. 773,505 674,478
------------ ------------
Total expenses................ 5,652,276 4,133,611
------------ ------------
Net income.................... $ 1,163,687 $ 1,511,453
============ ============
The accompanying notes are an integral part of the condensed interim financial
statements.
F-72
<PAGE>
SPIRES FINANCIAL, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
--------------- --------------
Cash flows from operating activities:
Net income $ 1,163,687 $ 1,511,453
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation............... 71,371 64,933
Unrealized losses on
inventory of marketable
securities.............. 215,477 156,662
Decrease (increase) in
commissions
receivable.............. 158,964 (97,567)
Decrease (increase) in
securities purchased
under agreements to
resell.................. 9,973,357 (7,767,111)
Decrease (increase) in
inventory of marketable
securities.............. 4,614,352 (8,884,240)
Decrease (increase) in
receivables from
employees............... 11,453 (19,955)
Increase in other assets... (12,440) (656,506)
Increase in accounts
payable and accrued
liabilities............. 999 67,838
Increase in securities sold
under agreements to
repurchase.............. 8,753,542 13,640,618
(Decrease) increase in
securities sold, not yet
purchased............... (9,919,691) 7,645,873
Decrease in due to clearing
broker and dealer....... (13,463,685) (4,176,967)
(Decrease) increase in
commissions payable to
brokers................. (256,665) 90,335
Decrease in payable to
Secondary General
Partner................. (8,845) (17,874)
--------------- --------------
Total adjustments..... 138,189 46,039
--------------- --------------
Net cash provided by
operating
activities......... 1,301,876 1,557,492
--------------- --------------
Cash flows from investing activities:
Decrease in deposits held by
clearing brokers and
dealers....................... 132,022 84,154
Purchases of furniture and
equipment..................... (100,414) (59,978)
--------------- --------------
Net cash provided by
financing
activities......... 31,608 24,176
--------------- --------------
Cash flows from financing activities:
Distribution to partners........ (1,954,882) (2,306,588)
--------------- --------------
Net cash used in
financing
activities......... (1,954,882) (2,306,588)
--------------- --------------
Net decrease in cash and cash
equivalents........................ (621,398) (724,920)
Cash and cash equivalents, beginning
of period.......................... 2,071,700 2,042,762
--------------- --------------
Cash and cash equivalents, end of
period............................. $ 1,450,302 $ 1,317,842
=============== ==============
The accompanying notes are an integral part of the condensed interim financial
statements.
F-73
<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 September 30, 1998, the results of its operations and cash flows
for the nine months ended September 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-74
<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
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<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.
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<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.
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<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
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<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.
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<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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<PAGE>
"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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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.
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
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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.
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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
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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.
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(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.
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<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]
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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
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
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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
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
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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.
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<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
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<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.
D-4
<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.
D-5
<PAGE>
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-7
<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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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
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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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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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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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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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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
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<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
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<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).
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<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 February 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 T. Craig Benson 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.
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*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
September 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).
- ------------
* Previously filed.
** Filed herewith.
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
II-4
<PAGE>
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 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 AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON DECEMBER 7, 1998.
PINNACLE GLOBAL GROUP, INC.
By: /s/ DONALD R. CAMPBELL
DONALD R. CAMPBELL
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 2 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
INDICATED CAPACITIES AND ON DECEMBER 7, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
/s/DONALD R. CAMPBELL Sole Director, President (Principal Executive and
DONALD R. CAMPBELL Principal Financial Officer)
</TABLE>
II-6
EXHIBIT 8.1
December 7, 1998
TEI, Inc.
5599 San Felipe
Houston, Texas 77056
Ladies and Gentlemen:
We have acted as counsel to TEI, Inc. ("TEI"), in connection with the
transactions described in the Amended and Restated Agreement and Plan of
Reorganization (the "Agreement") dated October 2, 1998, among TEI, Pinnacle
Global Group, Inc. ("PGG"), TEI Combination Corp., a wholly-owned subsidiary of
PGG (the "TEI Merger Subsidiary"), HWG Combination Corp., PMT Combination Corp.,
Harris, Webb & Garrison, Inc. ("HWG"), and the shareholders of HWG; Pinnacle
Management & Trust Company ("PMT"), and the shareholders of PMT; and Spires
Financial, L.P. ("Spires"), the limited partners of Spires (the "Spires Limited
Partners"), and the shareholders (collectively, the "Spires GP Shareholders") of
Spires Financial GP, Inc. and Capital Financial Partner, Inc. (collectively, the
"Spires General Partners").
We have been engaged by TEI to render our opinion with respect to the
material federal income tax consequences to TEI and the holders of TEI's common
stock at the Effective Time of the TEI Merger (the "TEI Shareholders") of (i)
the merger of TEI Merger Subsidiary into TEI (the "TEI Merger") pursuant to the
Plan of Merger (the "Plan of Merger") dated October 2, 1998 between PGG, TEI,
and TEI Merger Subsidiary wherein the shareholders of TEI will receive PGG
Common Stock in exchange for their TEI Common Stock, and (ii) the transfer of
stock in TEI, HWG, PMT, and the Spires General Partners and the limited
partnership interests in Spires (collectively, the "Transferred Property") to
PGG in exchange for PGG Common Stock (the "Transfer") pursuant to a prearranged
plan in accordance with the Agreement. In the Transfer, the Transferred Property
is being transferred to PGG by the shareholders of TEI, HWG, PMT, the Spires
Limited Partners and the Spires GP Shareholders (collectively, the
"Transferors"). All capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Agreement.
<PAGE>
TEI, Inc.
December 7, 1998
Page 2
In connection with rendering this opinion, we have assumed (without any
independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and
there has been (or will be by the Effective Time) due execution and
delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof.
2. Any statement made in any of the documents referred to herein, "to
the best of the knowledge" of any person or party is correct without
such qualification.
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true
and correct in all material respects and no actions have been (or
will be) taken which are inconsistent with such representations.
In rendering our opinion, we have examined and relied upon the accuracy
and completeness of the facts, information, covenants, statements and
representations contained in originals or copies, certified or otherwise
identified to our satisfaction of (i) the Form S-4 Registration Statement of
PGG, (ii) the Agreement, (iii) the factual representations contained in the
Officer's Certificate of TEI, Inc. and Pinnacle Global Group, Inc. dated
December 7, 1998, and (iv) such other documents as we have deemed necessary or
appropriate (collectively, the "Operative Documents"). We have assumed that the
facts and information contained in all the Operative Documents are true, correct
and complete in all material respects as of December 7, 1998, as well as at the
Effective Time.
Our opinion is conditioned on, among other things, (i) the initial and
continuing accuracy of the facts, information, covenants, statements and
representations set forth in the documents referred to above and (ii) the
consummation of the TEI Merger and the Transfer in accordance with the terms of
the Agreement and other Operative Documents, including the substantially
contemporaneous consummation of the Transfer.
<PAGE>
TEI, Inc.
December 7, 1998
Page 3
Based solely on the foregoing, we are of the opinion that the federal
income tax consequences of the TEI Merger and the Transfer to TEI and the TEI
Shareholders will be as follows:
1. The TEI Merger will qualify either (or both) as (i) a
"reorganization" within the meaning of section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), provided the
TEI Merger qualifies as a statutory merger under applicable Texas
statutes, or (ii) a "tax free" exchange under Section 351 of the
Code.
2. No gain or loss will be recognized by PGG on the conversion of the
stock of TEI Merger Subsidiary into TEI Common Stock.
3. No gain or loss will be recognized by TEI Merger Subsidiary with
respect to the TEI Merger.
4. No gain or loss will be recognized by the TEI Shareholders upon the
conversion of their TEI Common Stock into PGG Common Stock pursuant
to the Merger.
5. No gain or loss will be recognized to TEI with respect to the TEI
Merger.
6. The basis of the PGG Common Stock received by the TEI Shareholders
will be the same as the basis of the TEI Common Stock in the hands
of such TEI Shareholders immediately prior to the TEI Merger.
7. The basis of the TEI Common Stock received by PGG will be the same
as the basis of the TEI Merger Subsidiary held by PGG immediately
prior to the TEI Merger.
8. The holding period of the PGG Common Stock to be received by the TEI
Shareholders will include the holding period of the TEI Common Stock
exchanged therefor, provided that the TEI Common Stock is held as a
capital asset on the date of the exchange.
<PAGE>
TEI, Inc.
December 7, 1998
Page 4
9. The receipt of cash in lieu of a fractional share of PGG Common
Stock by a TEI Shareholder will result in gain or loss measured by
the difference between the basis of the fractional share interest
and the proceeds of the sale. Provided that TEI Common Stock is a
capital asset in the hands of the TEI Shareholder, the gain or loss
will be capital gain subject to the provisions and limitations of
Subchapter P of Chapter 1 of the Code.
10. No gain or loss will be recognized by the holders of compensatory
options to purchase TEI Common Stock upon the receipt of
compensatory options to purchase PGG Common Stock due to the
conversion of their TEI options. Such holders will recognize
ordinary compensation income upon the exercise of the PGG options
equal to the difference between the aggregate fair market value of
the PGG Common Stock received at the time of exercise and the
exercise price paid, if any. The basis of the PGG Common Stock
received by the holder on exercise of a PGG option will equal the
exercise price paid, if any, plus the amount recognized by such
holder as ordinary compensation income as a result of such exercise.
This opinion does not discuss all aspects of federal income taxation that
may be relevant to a Transferor in light of his or her particular circumstances,
or to certain types of Transferors that are subject to special treatment under
federal income tax laws (including persons who hold Transferred Property as part
of a straddle or hedge, dealers in securities, insurance companies, tax exempt
organizations, financial institutions, broker-dealers, foreign corporations, and
persons who are not citizens or residents of the United States). Further, we
provide no opinion with respect to any Transferor's basis in the Transferred
Property or the value of boot, if any, received in the TEI Merger or the
Transfer (including expense reimbursement amounts), nor the tax consequences of
any transactions undertaken by a Transferor prior to the Effective Date.
We note that the opinion of counsel has no binding effect or official
status of any kind with the Internal Revenue Service or the courts. Further, no
private letter ruling has been sought from the Internal Revenue Service on any
of the matters discussed. Without impairing the nature of the opinion given, if
there were ultimately an adverse determination as to any of the United States
tax issues discussed herein, TEI could sustain different tax consequences than
are described herein. Further, our opinion is based upon the Internal Revenue
Code of 1986, regulations promulgated or proposed thereunder and interpretations
thereof by the Internal Revenue Service and the courts, all as of the date
hereof. All of such rules could change with retroactive effect, and our opinion
could be adversely affected or rendered obsolete by any such change. We have no
duty, and do not intend,
<PAGE>
TEI, Inc.
December 7, 1998
Page 5
to update or modify this opinion for changes in the applicable law, regulations
or interpretations occurring after this date. Similarly, any change in the facts
and assumptions stated above, upon which this opinion is based, could modify our
conclusions.
This opinion is furnished solely for the benefit of TEI and the TEI
Shareholders, and is not to be used, circulated, quoted or otherwise referred to
for any purpose without our prior written consent. Except as set forth above, we
express no opinion to any party as to the tax consequences, whether United
States federal, state, local or foreign, of the TEI Merger or the Transfer.
Further we express no opinion to any person as to the state, local or foreign
tax consequences of the TEI Merger or the Transfer. We disclaim any undertaking
to advise you of any subsequent changes of the facts stated or assumed herein or
any subsequent changes in applicable law.
We do consent to the use of this opinion and the reference to our firm
in the Proxy Statement/Prospectus.
Very truly yours,
/s/ PORTER & HEDGES, L.L.P.
PORTER & HEDGES, L.L.P.
EXHIBIT 8.2
11/20/98
Mr. Peter Badger
Spires Financial, L.P.
5847 Sam Felipe, Suite 4545
Houston, Texas 77057
Dear Mr. Badger:
Pursuant to your request, we are providing our opinion in connection with
certain U.S. Federal income tax consequences of the transaction described below
in which a newly formed corporation "Pinnacle Global Group", ("PGG"), a Texas
corporation, was created. PGG has several subsidiaries. The subsidiaries consist
of the former entities of TEI, Inc. ("TEI"), a Texas corporation; Spires
Financial, L.P. ("Spires"), a Delaware limited partnership; Harris, Webb &
Garrison, Inc. ("HWG"); and Pinnacle Management & Trust, Inc., ("PMT").
In connection with this opinion, we have examined and are familiar with copies
of the following documents:
(i) The Harris Webb & Garrison, Inc., Pinnacle Management & Trust, Inc.,
Spires Financial, L.P., and TEI document titled "Merger Analysis"
dated March 4, 1998;
(ii) The document titled "Deal Points" dated April 7, 1998;
(iii) The "Draft" of the Letter of Intent, dated April 27, 1998;
(iv) The "Draft" of the Letter of Intent, dated April 28, 1998;
(v) The "Agreement and Plan of Organization" dated August 5, 1998;
(vi) Such other documents as we have deemed necessary or appropriate in
order to enable us to render the opinion below.
In our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies.
This opinion letter is being rendered pursuant to your request. Specifically,
you have requested our opinion regarding the U.S. federal income tax
consequences of the transactions discussed herein. This letter does not address
any foreign or state tax implications to the parties regarding the transactions
discussed below. In rendering the opinion set forth below, we have relied upon
the representation given by the client. If any of the representations are
incorrect in whole or in part such inaccuracies may have a material effect upon
our opinion expressed in this letter.
Our opinion is based on the relevant provisions of the Internal Revenue Code of
1986, as amended (the "IRC"), the regulations thereunder, and the judicial and
administrative interpretations thereof. There are no assurances that the
conclusions reached herein will be accepted by the Internal Revenue Service
("IRS") or judicial authorities if challenged. Any legislative, regulatory,
administrative, or judicial decisions subsequent to the date of this opinion may
have an impact on the validity of our conclusions. Unless you specifically
request otherwise, we will not update our opinion for changes to the law,
regulations, or the judicial and administrative interpretations thereof.
Our understanding of the transaction is as follows:
1. TEI established a new corporation, Pinnacle Global Group, Inc. ("PGG"), under
the laws of the state of Texas.
2. PGG formed five (5) new subsidiaries (TEI Combination Corp., HWG Combination
Corp., PMT Combination Corp., Spires G.P. Combination Corp., Spires L.P.
Combination Corp.), all Texas corporations. These subsidiaries are transitory
corporations organized solely to participate in the transaction.
3. Pursuant to an integrated plan, in exchange for PGG common stock,
a. TEI Combination Corp merged with and into TEI, with TEI as the
surviving corporation. The shareholders of TEI received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
b. HWG Combination Corp merged with and into HWG, with HWG as the
surviving corporation. The shareholders of HWG received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
c. PMT Combination Corp merged with and into PMT, with PMT as the
surviving corporation. The shareholders of PMT received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
4. In a transaction simultaneous with the transaction described immediately
above,
a. The shareholders of Spires Financial GP, Inc. contributed
their respective shares of Spires Financial GP, Inc. to PGG in
exchange for PGG Common Stock in amount proportional to their
interest in Spires Financial LP. PGG immediately contributed
the Spires Financial GP shares to the Spires GP Subsidiary.
b. The shareholders of Spires Financial LP, Inc. contributed
their respective shares of Spires Financial LP, Inc. to PGG in
exchange for PGG Common Stock in amount proportional to their
interest in Spires Financial LP. PGG immediately contributed
the Spires Financial LP shares to the Spires LP Subsidiary
It is also our understanding that the management of all the parties had agreed
to combine their enterprises. For good business reasons, the entities are to be
kept separate and will be held by a single holding company.
We also understand that the TEI shareholders own 50 % of the interest in PGG.
The remaining 50% of PGG were divided equally between the other three former
entities (i.e., Spires, HWG, and PMT). The former shareholders of Spires were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in Spires. The former shareholders of HWG were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in HWG. The former shareholders of PMT were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in PMT.
This transaction was structured to qualify as transfer of property in which no
gain or loss would be recognized under the provisions of Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code"). [All references to the
"Code" refer to the Internal Revenue Code of 1986, as amended, unless otherwise
stated].
DISCUSSION AND CONCLUSION
As a consequence of the above-described transactions, it is our opinion that the
transaction in which PGG was created by the transfer of property by the parties
qualifies under IRC Section 351, that no gain or loss should be recognized by
the former shareholders of Spires Financial, L.P. in this transaction. NOTE WE
ARE OPINING ONLY WITH RESPECT TO TRANSACTION WHICH CREATED PGG.
NON-RECOGNITION OF GAIN OR LOSS
IRC SECTION 351
Section 351(a) of the Internal Revenue Code provides, in general, for the
nonrecognition of gain or loss on the transfer by one or more persons of
property to a corporation solely in exchange for stock in such corporation if,
immediately after the exchange, such person or persons are in control of the
corporation to which the property was transferred.
Section 351(c) of the Code provides that, for purposes of determining control
under section 351, the fact that any corporate transferor distributes part or
all of the stock that it receives in the exchange to its shareholders will not
be taken into account.
Section 351(b) of the Code provides, in part, that if section 351(a) would apply
to an exchange but or the fact that money is received in addition to the stock
received, then any gain recognized will not exceed the amount of money received.
Section 368(c) of the Code provides that the term "control" means ownership of
stock possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total number of
shares of each of the other classes of stock of the corporation.
Section 368(a)(1)(B) of the Code provides that the term "reorganization" means
the acquisition by one corporation, in exchange solely for shares of its voting
stock, of the outstanding stock of another corporation if, immediately after the
transaction, the acquiring corporation has control of such other corporation.
The Treasury Regulations ("Treas. Regs.") provide the phrase "one or more
persons" includes individuals, trusts, estates, partnerships, associations,
companies, or corporations. Treas. Reg. ss. 1.351-1(a)(1). Immediately after
the transaction, such persons must be in control of the transferee
corporation. Such persons must own at least 80 percent of total combined
voting power of all classes of stock entitled to vote and at least 80 percent
of the total number of shares. Treas. Reg. ss. 1.351-1(a)(1).
The parties have each transferred property to PGG solely in exchange for PGG
stock. Immediately after the transfer, the parties owned at least 80 percent
of the total combined voting power of all classes of stock and they own at
least 80 percent of the total number of shares of all other classes of stock
of PGG. See Treas. Reg. ss. 1.351-1(a)(2) example 1.
In Revenue Ruling 68-357, 1968-2 C.B. 144, as part of an overall plan to
consolidate the operations of five businesses, an individual and three
corporations transferred property to a corporation that they controlled
immediately after the transfers within the meaning of section 368(c) of the
Code, even though the transfers of property by corporation are reorganizations
within the meaning of section 368(a)(1)(C).
It is our understanding that the transfers by Spires, HWG, PMT, and TEI, were
part of the overall plan to consolidate the operations of the businesses.
Immediately after the transfer of the property to PGG, they controlled PGG
within the meaning of section 368(c).
In Revenue Ruling 84-111, 1984-2 C.B. 88, three situations were described in
which partnership assets and liabilities were transferred to a corporation in
exchange for all of the stock of the corporation. In SITUATION 3, the partners
of the partnership transferred their partnership interests to a newly-formed
corporation in exchange for all the outstanding stock of the new corporation.
The transfers were part of a plan and were for valid business reasons and not as
a device to avoid or evade recognition of gain.
In a transaction similar to that described in SITUATION 3, it is our
understanding that the partners of Spires Financial, L.P. transferred their
partnership interests, along with the transfers of the other parties, to a
newly-formed corporation, PGG, in exchange for all the outstanding stock of PGG.
The transfer was part of an overall plan and was for valid business purposes.
The transfer was not a device to avoid or evade recognition of gain.
In Revenue Ruling 76-123, 1976-1 CB 94, under a plan to combine two businesses
but preserve separate corporate existence of each, the stock of each was
transferred by the shareholders to a newly formed corporation in exchange for
the outstanding stock of the new corporation. The transaction qualified for
nonrecognition of gain or loss under section 351 of the Code as well as a
reorganization under section 368.
The fact that the merger of TEI Combination Corp with and into TEI, HWG
Combination Corp with and into HWG, and PMT Combination Corp with and into PMT,
solely in exchange for PGG common stock, separately qualifies as either a "B"
reorganization or as a Reverse Subsidiary Merger under section 368(a)(2)(E)
should not prevent the three simultaneous reverse mergers, along with the
transfer of the interests in Spires Financial L.P. by the shareholders in
exchange for PGG common stock, from qualifying as a section 351 transaction so
long as the mergers were interdependent.
The simultaneous transfers to PGG of TEI, HWG, Pinnacle, and Spires shares
should qualify as a section 351 transaction since the former shareholders, as a
group, are in control of PGG within the meaning of section 368(c) immediately
thereafter.
Therefore, receiving only PGG common shares, the former shareholders of TEI,
HWG, Pinnacle, and Spires recognize no gain (or loss) under IRC section 351(a).
We consent to the use of our opinion and the reference to our firm in the Proxy
Statement/Prospectus.
Very Truly Yours,
/s/ PRICEWATERHOUSECOOPERS LLP
<PAGE>
11/20/98
Stephen M. Reckling
Pinnacle Management & Trust Co.
5599 San Felipe, Suite 300
Houston, TX 77056
Dear Mr. Reckling:
Pursuant to your request, we are providing our opinion in connection with
certain U.S. Federal income tax consequences of the transaction described below
in which a newly formed corporation "Pinnacle Global Group", ("PGG"), a Texas
corporation, was created. PGG has several subsidiaries. The subsidiaries consist
of the former entities of TEI, Inc. ("TEI"), a Texas corporation; Spires
Financial, L.P. ("Spires"), a Delaware limited partnership; Harris, Webb &
Garrison, Inc. ("HWG"); and Pinnacle Management & Trust, Inc., ("PMT").
In connection with this opinion, we have examined and are familiar with copies
of the following documents:
(i) The Harris Webb & Garrison, Inc., Pinnacle Management & Trust, Inc.,
Spires Financial, L.P., and TEI document titled "Merger Analysis"
dated March 4, 1998;
(ii) The document titled "Deal Points" dated April 7, 1998;
(iii) The "Draft" of the Letter of Intent, dated April 27, 1998;
(iv) The "Draft" of the Letter of Intent, dated April 28, 1998;
(v) The "Agreement and Plan of Organization" dated August 5, 1998;
(vi) Such other documents as we have deemed necessary or appropriate in
order to enable us to render the opinion below.
In our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies.
This opinion letter is being rendered pursuant to your request. Specifically,
you have requested our opinion regarding the U.S. federal income tax
consequences of the transactions discussed herein. This letter does not address
any foreign or state tax implications to the parties regarding the transactions
discussed below. In rendering the opinion set forth below, we have relied upon
the representation given by the client. If any of the representations are
incorrect in whole or in part such inaccuracies may have a material effect upon
our opinion expressed in this letter.
Our opinion is based on the relevant provisions of the Internal Revenue Code of
1986, as amended (the "IRC"), the regulations thereunder, and the judicial and
administrative interpretations thereof. There are no assurances that the
conclusions reached herein will be accepted by the Internal Revenue Service
("IRS") or judicial authorities if challenged. Any legislative, regulatory,
administrative, or judicial decisions subsequent to the date of this opinion may
have an impact on the validity of our conclusions. Unless you specifically
request otherwise, we will not update our opinion for changes to the law,
regulations, or the judicial and administrative interpretations thereof.
Our understanding of the transaction is as follows:
1. TEI established a new corporation, Pinnacle Global Group, Inc. ("PGG"), under
the laws of the state of Texas.
2. PGG formed five (5) new subsidiaries (TEI Combination Corp., HWG Combination
Corp., PMT Combination Corp., Spires G.P. Combination Corp., Spires L.P.
Combination Corp.), all Texas corporations. These subsidiaries are transitory
corporations organized solely to participate in the transaction.
3. Pursuant to an integrated plan, in exchange for PGG common stock,
a. TEI Combination Corp merged with and into TEI, with TEI as the
surviving corporation. The shareholders of TEI received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
b. HWG Combination Corp merged with and into HWG, with HWG as the
surviving corporation. The shareholders of HWG received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
c. PMT Combination Corp merged with and into PMT, with PMT as the
surviving corporation. The shareholders of PMT received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
4. In a transaction simultaneous with the transaction described immediately
above,
a. The shareholders of Spires Financial GP, Inc. contributed
their respective shares of Spires Financial GP, Inc. to PGG in
exchange for PGG Common Stock in amount proportional to their
interest in Spires Financial LP. PGG immediately contributed
the Spires Financial GP shares to the Spires GP Subsidiary.
b. The shareholders of Spires Financial LP, Inc. contributed
their respective shares of Spires Financial LP, Inc. to PGG in
exchange for PGG Common Stock in amount proportional to their
interest in Spires Financial LP. PGG immediately contributed
the Spires Financial LP shares to the Spires LP Subsidiary
It is also our understanding that the management of all the parties had agreed
to combine their enterprises. For good business reasons, the entities are to be
kept separate and will be held by a single holding company.
We also understand that the TEI shareholders own 50 % of the interest in PGG.
The remaining 50% of PGG were divided equally between the other three former
entities (i.e., Spires, HWG, and PMT). The former shareholders of Spires were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in Spires. The former shareholders of HWG were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in HWG. The former shareholders of PMT were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in PMT.
The transaction in which PMT Combination Corp merged with and into PMT was
structured to qualify as a reorganization under the provisions of Section
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). [All
references to the "Code" refer to the Internal Revenue Code of 1986, as amended,
unless otherwise stated].
DISCUSSION AND CONCLUSION
As a consequence of the above-described transactions, it is our opinion that the
transaction in which PMT Combination Corp. merged with and into PMT, with PMT as
the survivor qualifies as a reorganization under IRC Section 368(a)(2)(E). NOTE
WE ARE OPINING ONLY WITH RESPECT TO TRANSACTION THAT MERGED PMT COMBINATION CORP
INTO AND WITH PMT.
Section 368(a)(2)(E) of the Code provides, in part, that a transaction
otherwise qualifying as a statutory merger under section 368(a)(1)(A) shall
not be disqualified by reason of the fact that stock of a corporation which
before the merger was in control of the merged corporation is used in the
transaction if, after the transaction, the corporation surviving the merger
holds substantially all of its properties and the properties of the merged
corporation, and in the transaction, former shareholders of the surviving
corporation exchanged, for an amount of voting stock of the controlling
corporation, an amount of stock in the surviving corporation that constitutes
control of such corporation. See also Treas. Reg. ss. 1.368-2(j)(3).
The controlling corporation must control the surviving corporation immediately
after the transaction. Control is defined in section 368(c). Section 368(c) of
the Code provides that the term "control" means ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of each
of the other classes of stock of the corporation. The amount of stock
constituting control is measured immediately before the transaction. Treas. Reg.
ss. 1.368-2(j)(3).
Treas. Reg. ss. 1.368-2(j)(3)(iii) states that after the transaction, the
surviving corporation must hold substantially all of its own properties and
substantially all of the properties of the merged corporation (other than stock
of the controlling corporation distributed in the transaction). The term
"substantially all" has the same meaning as in section 368(a)(1)(C). The
"substantially all" test applies separately to the merged corporation and to the
surviving corporation. In applying the "substantially all" test to the surviving
corporation, consideration furnished in the transaction by the surviving
corporation in exchange for its stock is property of the surviving corporation
which it does not hold after the transaction. In applying the "substantially
all" test to the merged corporation, assets transferred from the controlling
corporation to the merged corporation in pursuance of the plan of reorganization
are not taken into account. Thus, for example, money transferred from the
controlling corporation to the merged corporation to be used for the following
purposes is not taken into account for purposes of the "substantially all" test:
(A) To pay additional consideration to shareholders of the surviving
corporation;
(B) To pay dissenting shareholders of the surviving corporation;
(C) To pay creditors of the surviving corporation;
(D) To pay reorganization expenses; or
(E) To enable the merged corporation to satisfy state minimum
capitalization requirements (where the money is returned to the controlling
corporation as part of the transaction).
In order to qualify as a reorganization under section 368(a)(1)(A) the
transaction must be a merger or consolidation effected pursuant to the
corporation laws of the United States or a State or Territory or the District of
Columbia
PMT and PMT Combination Corp effected the merger pursuant to the corporation
laws of the State of Texas.
The shareholders of PMT received PGG Common Stock solely in exchange for their
controlling interest in PMT. Immediately after the transfer, the surviving
corporation, PMT, held substantially all the properties of PMT and substantially
all the properties of the merged corporation, PMT Combination Corp. PGG was in
control of PMT immediately after the transaction.
It is our understanding that the transfers by Spires, HWG, PMT, and TEI, were
part of the overall plan to consolidate the operations of the businesses.
Immediately after the transfer of the property to PGG, the former shareholders,
as a group controlled PGG within the meaning of section 368(c).
We consent to the use of our opinion and the reference to our firm in the Proxy
Statement/Prospectus.
Very Truly Yours,
/s/ PRICEWATERHOUSECOOPERS LLP
<PAGE>
11/20/98
Robert E. Garrison II
Harris, Webb & Garrison, Inc.
5599 San Felipe, Suite 301
Houston, TX 77056
Dear Mr. Garrison:
Pursuant to your request, we are providing our opinion in connection with
certain U.S. Federal income tax consequences of the transaction described below
in which a newly formed corporation "Pinnacle Global Group", ("PGG"), a Texas
corporation, was created. PGG has several subsidiaries. The subsidiaries consist
of the former entities of TEI, Inc. ("TEI"), a Texas corporation; Spires
Financial, L.P. ("Spires"), a Delaware limited partnership; Harris, Webb &
Garrison, Inc. ("HWG"); and Pinnacle Management & Trust, Inc., ("PMT").
In connection with this opinion, we have examined and are familiar with copies
of the following documents:
(i) The Harris Webb & Garrison, Inc., Pinnacle Management & Trust, Inc.,
Spires Financial, L.P., and TEI document titled "Merger Analysis"
dated March 4, 1998;
(ii) The document titled "Deal Points" dated April 7, 1998;
(iii) The "Draft" of the Letter of Intent, dated April 27, 1998;
(iv) The "Draft" of the Letter of Intent, dated April 28, 1998;
(v) The "Agreement and Plan of Organization" dated August 5, 1998;
(vi) Such other documents as we have deemed necessary or appropriate in
order to enable us to render the opinion below.
In our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies.
This opinion letter is being rendered pursuant to your request. Specifically,
you have requested our opinion regarding the U.S. federal income tax
consequences of the transactions discussed herein. This letter does not address
any foreign or state tax implications to the parties regarding the transactions
discussed below. In rendering the opinion set forth below, we have relied upon
the representation given by the client. If any of the representations are
incorrect in whole or in part such inaccuracies may have a material effect upon
our opinion expressed in this letter.
Our opinion is based on the relevant provisions of the Internal Revenue Code of
1986, as amended (the "IRC"), the regulations thereunder, and the judicial and
administrative interpretations thereof. There are no assurances that the
conclusions reached herein will be accepted by the Internal Revenue Service
("IRS") or judicial authorities if challenged. Any legislative, regulatory,
administrative, or judicial decisions subsequent to the date of this opinion may
have an impact on the validity of our conclusions. Unless you specifically
request otherwise, we will not update our opinion for changes to the law,
regulations, or the judicial and administrative interpretations thereof.
Our understanding of the transaction is as follows:
1. TEI established a new corporation, Pinnacle Global Group, Inc. ("PGG"), under
the laws of the state of Texas.
2. PGG formed five (5) new subsidiaries (TEI Combination Corp., HWG Combination
Corp., PMT Combination Corp., Spires G.P. Combination Corp., Spires L.P.
Combination Corp.), all Texas corporations. These subsidiaries are transitory
corporations organized solely to participate in the transaction.
3. Pursuant to an integrated plan, in exchange for PGG common stock,
a. TEI Combination Corp merged with and into TEI, with TEI as the
surviving corporation. The shareholders of TEI received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
b. HWG Combination Corp merged with and into HWG, with HWG as the
surviving corporation. The shareholders of HWG received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
c. PMT Combination Corp merged with and into PMT, with PMT as the
surviving corporation. The shareholders of PMT received PGG
Common Stock in amount set forth in the "Agreement and Plan of
Organization".
4. In a transaction simultaneous with the transaction described immediately
above,
a. The shareholders of Spires Financial GP, Inc. contributed
their respective shares of Spires Financial GP, Inc. to PGG in
exchange for PGG Common Stock in amount proportional to their
interest in Spires Financial LP. PGG immediately contributed
the Spires Financial GP shares to the Spires GP Subsidiary.
b. The shareholders of Spires Financial LP, Inc. contributed
their respective shares of Spires Financial LP, Inc. to PGG in
exchange for PGG Common Stock in amount proportional to their
interest in Spires Financial LP. PGG immediately contributed
the Spires Financial LP shares to the Spires LP Subsidiary
It is also our understanding that the management of all the parties had agreed
to combine their enterprises. For good business reasons, the entities are to be
kept separate and will be held by a single holding company.
We also understand that the TEI shareholders own 50 % of the interest in PGG.
The remaining 50% of PGG were divided equally between the other three former
entities (i.e., Spires, HWG, and PMT). The former shareholders of Spires were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in Spires. The former shareholders of HWG were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in HWG. The former shareholders of PMT were
distributed 1/6 of the outstanding PGG Common Stock in proportion to their
former respective interest in PMT.
The transaction in which HWG Combination Corp merged with and into HWG was
structured to qualify as a reorganization under the provisions of Section
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). [All
references to the "Code" refer to the Internal Revenue Code of 1986, as amended,
unless otherwise stated].
DISCUSSION AND CONCLUSION
As a consequence of the above-described transactions, it is our opinion that the
transaction in which HWG Combination Corp. merged with and into HWG, with HWG as
the survivor qualifies as a reorganization under IRC Section 368(a)(2)(E). NOTE
WE ARE OPINING ONLY WITH RESPECT TO TRANSACTION THAT MERGED HWG COMBINATION CORP
INTO AND WITH HWG.
Section 368(a)(2)(E) of the Code provides, in part, that a transaction
otherwise qualifying as a statutory merger under section 368(a)(1)(A) shall
not be disqualified by reason of the fact that stock of a corporation which
before the merger was in control of the merged corporation is used in the
transaction if, after the transaction, the corporation surviving the merger
holds substantially all of its properties and the properties of the merged
corporation, and in the transaction, former shareholders of the surviving
corporation exchanged, for an amount of voting stock of the controlling
corporation, an amount of stock in the surviving corporation that constitutes
control of such corporation. See also Treas. Reg. ss. 1.368-2(j)(3).
The controlling corporation must control the surviving corporation immediately
after the transaction. Control is defined in section 368(c). Section 368(c) of
the Code provides that the term "control" means ownership of stock possessing at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of each
of the other classes of stock of the corporation. The amount of stock
constituting control is measured immediately before the transaction. Treas. Reg.
ss. 1.368-2(j)(3).
Treas. Reg. ss. 1.368-2(j)(3)(iii) states that after the transaction, the
surviving corporation must hold substantially all of its own properties and
substantially all of the properties of the merged corporation (other than stock
of the controlling corporation distributed in the transaction). The term
"substantially all" has the same meaning as in section 368(a)(1)(C). The
"substantially all" test applies separately to the merged corporation and to the
surviving corporation. In applying the "substantially all" test to the surviving
corporation, consideration furnished in the transaction by the surviving
corporation in exchange for its stock is property of the surviving corporation
which it does not hold after the transaction. In applying the "substantially
all" test to the merged corporation, assets transferred from the controlling
corporation to the merged corporation in pursuance of the plan of reorganization
are not taken into account. Thus, for example, money transferred from the
controlling corporation to the merged corporation to be used for the following
purposes is not taken into account for purposes of the "substantially all" test:
(A) To pay additional consideration to shareholders of the surviving
corporation;
(B) To pay dissenting shareholders of the surviving corporation;
(C) To pay creditors of the surviving corporation;
(D) To pay reorganization expenses; or
(E) To enable the merged corporation to satisfy state minimum
capitalization requirements (where the money is returned to the controlling
corporation as part of the transaction).
In order to qualify as a reorganization under section 368(a)(1)(A) the
transaction must be a merger or consolidation effected pursuant to the
corporation laws of the United States or a State or Territory or the District of
Columbia
HWG and HWG Combination Corp effected the merger pursuant to the corporation
laws of the State of Texas.
The shareholders of HWG received PGG Common Stock solely in exchange for their
controlling interest in HWG. Immediately after the transfer, the surviving
corporation, HWG, held substantially all the properties of HWG and substantially
all the properties of the merged corporation, HWG Combination Corp. PGG was in
control of HWG immediately after the transaction.
It is our understanding that the transfers by Spires, HWG, PMT, and TEI, were
part of the overall plan to consolidate the operations of the businesses.
Immediately after the transfer of the property to PGG, the former shareholders,
as a group controlled PGG within the meaning of section 368(c).
We consent to the use of our opinion and the reference to our firm in the Proxy
Statement/Prospectus.
Very Truly Yours,
/s/ PRICEWATERHOUSECOOPERS LLP
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 caption "Experts."
PricewaterhouseCoopers LLP
Houston, Texas
December 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
December 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
December 7, 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
December 7, 1998
EXHIBIT 23.7
CONSENT OF J.P. MORGAN SECURITIES INC.
We hereby consent to (i) the use of our opinion letter to the Board of
Directors of TEI, Inc. (the "Company") included in Appendix E to the Proxy
Statement/Prospectus which forms a part of the Registration Statement on Form
S-4 relating to the proposed combination of the Company with Harris, Webb &
Garrison, Inc., Pinnacle Management & Trust Company, and Spires Financial, L.P.,
and (ii) the references to such opinion in such Proxy Statement/Prospectus. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we hereby admit that we are experts with respect to any part
of such Registration Statement within the meaning of the term "experts" as
used in the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission thereunder.
/s/ J.P. MORGAN SECURITIES INC.
J.P. MORGAN SECURITIES INC.
December 7, 1998
EXHIBIT 23.9
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.
December 7, 1998
/s/ T. CRAIG BENSON
T. Craig Benson
EXHIBIT 99.1
TEI, INC.
5599 SAN FELIPE, SUITE 1212
PROXY HOUSTON, TEXAS 77056
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE TEI SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 31, 1998
The undersigned shareholder of TEI, Inc. ("TEI") hereby appoints each of
Donald R. Campbell and Lori H. Dyer attorneys and proxies of the undersigned,
with full power of substitution, to vote on behalf of the undersigned at the
Special Meeting of Shareholders of TEI to be held at The Houstonian Hotel, The
Elm Room, 111 North Post Oak, Houston, Texas 77024, on December 31, 1998, at
9:00 a.m., central time, and at any adjournments of the meeting, all of the
shares of TEI common stock which the undersigned may be entitled to vote.
1. Approval of the merger of TEI with a wholly owned subsidiary of Pinnacle
Global Group Inc., the proposed newly created public holding company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the issuance of 3,562,500 shares of PGG common stock in the
combination with Harris Webb & Garrison, Inc., Pinnacle Management & Trust
Company and Spires Financial, L.P.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
CONTINUED ON OTHER SIDE
CONTINUED FROM OTHER SIDE
3. In their discretion, upon other matters as may properly come before the
meeting: hereby revoking any proxy or proxies regarding such matters
heretofore given by the undersigned.
The board of directors recommends a vote FOR each proposal above and if no
specification is made, the shares will be voted FOR approval of the TEI Merger
and FOR approval of the share issuance. The undersigned hereby acknowledges
receipt of the Notice of Special Meeting of TEI shareholders and the Proxy
Statement/Prospectus furnished herewith.
Dated __________________, 1998
______________________________
Shareholder's Signature
______________________________
Shareholder's Signature
Signature should agree with name printed hereon. If Stock is held in the name of
more than one person, EACH joint owner should sign. Executors, administrators,
trustees, guardians, and attorneys should indicate the capacity in which they
sign. Attorneys should submit powers of attorney.
PLEASE SIGN AND RETURN IN THE ENVELOPE ENCLOSED
