SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(mark one)

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

 

or

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file No. 0-30066

 

 

SANDERS MORRIS HARRIS GROUP INC.

(Exact name of registrant as specified in its charter)

 

Texas		76-0583569
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

600 Travis, Suite 3100

Houston, Texas 77002

(Address of principal executive office)

 

(713) 993-4610

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.              YES  ý      NO  o

 

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   YES  ý      NO  o

 

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of October  26, 2004, was 17,641,259.

 

 

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

 

INDEX

 

PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheet as of September 30, 2004 (unaudited) and December 31, 2003
		Condensed Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2004 and 2003 (unaudited)
		Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2004 (unaudited)
		Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (unaudited)
		Notes to Condensed Consolidated Financial Statements (unaudited)
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 6.	Exhibits

 

1

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except share and per share amounts)

 

		September 30, 2004			December 31, 2003
		(unaudited)
ASSETS
Cash and cash equivalents		$	17,422		$	32,590
Receivables, net of allowance of $414 and $400, respectively
Broker-dealers		681			522
Customers		4,490			3,758
Related parties		8,935			6,100
Other		2,368			822
Deposits with clearing brokers		1,055			1,054
Securities owned		44,653			32,322
Securities available for sale		3,867			3,156
Furniture and equipment, net		7,591			4,227
Other assets		2,355			3,004
Goodwill, net		54,303			49,447
Total assets		$	147,720		$	137,002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities		$	12,945		$	16,597
Deferred tax liability		116			647
Securities sold, not yet purchased		3,189			255
Other liabilities		89			144
Total liabilities		16,339			17,643
Commitments and contingencies
Minority interests		6,033			4,506
Shareholders’ equity:
Preferred stock, $0.10 par value; 10,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized; 18,380,661 and 17,991,653 shares issued, respectively		184			180
Additional paid-in capital		118,510			113,781
Receivables for shares issued		(1,746		)	(1,117		)
Retained earnings		13,592			6,015
Accumulated other comprehensive loss		(109		)	(70		)
Unearned compensation		(1,602		)	(638		)
Treasury stock at cost, 739,402 and 724,003 shares, respectively		(3,481		)	(3,298		)
Total shareholders’ equity		125,348			114,853
Total liabilities and shareholders’ equity		$	147,720		$	137,002

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

2

 

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(in thousands, except share and per share amounts)

(unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Revenues:
Commissions		$	13,685		$	12,807		$	40,208		$	38,441
Principal transactions		2,016			4,444			5,459			10,393
Investment banking		5,772			2,966			23,133			13,167
Fiduciary, custodial and advisory fees		5,306			2,768			13,557			7,049
Interest and dividends		1,067			621			2,912			1,830
Other income		715			569			1,754			1,846
Total revenues		28,561			24,175			87,023			72,726
Expenses:
Employee compensation and benefits		15,990			14,340			50,965			43,806
Floor brokerage, exchange and clearance fees		1,546			1,268			4,071			4,169
Communications and data processing		1,839			1,398			5,301			4,135
Occupancy		1,838			1,347			5,241			4,228
Goodwill impairment charge		400			—			400			—
Other general and administrative		2,554			2,501			7,809			7,154
Total expenses		24,167			20,854			73,787			63,492
Income before equity in income of  limited partnerships, minority interests and income taxes		4,394			3,321			13,236			9,234
Equity in income of limited partnerships		776			338			3,606			3,191
		5,170			3,659			16,842			12,425
Minority interests in net income of consolidated companies		(741		)	(73		)	(2,126		)	(1,060		)
Income before income taxes		4,429			3,586			14,716			11,365
Provision for income taxes		(1,754		)	(1,283		)	(5,824		)	(4,478		)
Net income		$	2,675		$	2,303		$	8,892		$	6,887
Earnings per share:
Basic		$	0.15		$	0.13		$	0.51		$	0.40
Diluted		$	0.15		$	0.13		$	0.49		$	0.39
Weighted average common shares outstanding:
Basic		17,640,293			17,179,476			17,542,678			17,047,891
Diluted		18,212,456			17,669,969			18,131,012			17,575,860

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the nine months ended September 30, 2004

(in thousands, except shares)

(unaudited)

 

		Amounts							Shares
Common stock
Balance, beginning of period		$			180				17,991,653
Stock issued pursuant to employee benefit plan		4							389,008
Balance, end of period		184							18,380,661
Additional paid-in capital
Balance, beginning of period		$		113,781
Stock issued pursuant to employee benefit plan		4,729
Balance, end of period		118,510
Receivables for shares issued
Balance, beginning of period		($1,117				)
Issuance of restricted stock		(1,566				)
Amortization of notes receivable		937
Balance, end of period		(1,746				)
Retained earnings
Balance, beginning of period		$		6,015
Dividends		(1,315				)
Net income		8,892					8,892
Balance, end of period		13,592					8,892
Accumulated other comprehensive loss
Balance, beginning of period		$	(70			)
Net change in unrealized depreciation
on securities available for sale		(68				)	(68	)
Income tax benefit on change		29					29
Balance, end of period		(109				)	(39	)
Comprehensive income							8,853
Unearned compensation
Balance, beginning of period		$	(638			)
Net issuance of restricted stock		(1,690				)
Amortization of unearned compensation		726
Balance, end of period		(1,602				)
Treasury stock
Balance, beginning of period		$	(3,298			)			(724,003	)
Acquisition of treasury stock		(183				)			(15,399	)
Balance, end of period		(3,481				)			(739,402	)
Total shareholders’ equity and common shares outstanding		$	125,348						17,641,259

 

4

 

SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the nine months ended September 30, 2004 and 2003

(in thousands)

(unaudited)

 

 

		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	8,892		$	6,887
Adjustments to reconcile net income to net cash used in operating activities:
Realized gain on securities available for sale		(14		)	(8		)
Depreciation		1,416			869
Goodwill impairment change		400			—
Provision for bad debts		35			190
Compensation expense related to amortization of notes receivable and unearned compensation		1,663			1,240
Deferred income taxes		(503		)	202
Equity in income of limited partnerships		(3,606		)	(3,191		)
Minority interests in income of consolidated companies		2,126			1,060
Changes in operating assets and liabilities excluding effects of acquisition:
Increase in receivables		(4,509		)	(3,086		)
Increase in securities owned		(9,525		)	(3,510		)
Decrease (increase) in other assets		668			(940		)
Increase in securities sold, not yet purchased		2,935			365
Decrease in other liabilities		(55		)	(29		)
Decrease in accounts payable and accrued liabilities		(4,700		)	(2,877		)
Net cash used in operating activities		(4,777		)	(2,828		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(4,745		)	(955		)
Acquisitions, net of cash acquired of $478 and $142, respectively		(3,312		)	(1,608		)
Cash of business consolidated		49			—
Purchase of securities available for sale		(1,164		)	(1,173		)
Proceeds from sales and maturities of securities available for sale		400			1,352
Net cash used in investing activities		(8,772		)	(2,384		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(183		)	(168		)
Proceeds from shares issued		1,477			3,273
Investment by minority interest		67			38
Distributions to minority interests		(1,665		)	(432		)
Payment of cash dividends		(1,315		)	(1,036		)
Net cash (used in) provided by financing activities		(1,619		)	1,675
Net decrease in cash and cash equivalents		(15,168		)	(3,537		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		32,590			34,890
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	17,422		$	31,353
Supplemental cash flow information
Cash paid for income taxes		$	6,011		$	3,736
Noncash investing and financing activities:
Acquisition and consolidation:
Receivables		799			167
Fixed assets		34			30
Other assets		19			—
Securities owned		(800		)	—
Goodwill		800			—
Accounts payable and accrued liabilities		(1,049		)	(206		)
Minority interests		(997		)	—

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

Sanders Morris Harris Group Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

1.              BASIS OF PRESENTATION

 

Nature of Operations

 

Through its operating subsidiaries Sanders Morris Harris Inc. (“SMH”), Salient Capital Management (“Salient/PMT”), SMH Capital Advisors (“SMCA”) and Charlotte Capital, the Company provides a broad range of financial services, including institutional, prime and retail brokerage, principal trading, investment banking, merchant banking, financial advisory, trust related services, investment management and financial planning. The Company serves a diverse group of institutional, corporate and individual clients.

 

The Company merged with and acquired its operating subsidiaries in 1999 through 2004.  The acquisitions were accounted for using the purchase method.

 

Consolidation

 

The unaudited condensed consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

 

In management’s opinion, the unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of our consolidated financial position at September 30, 2004, our results of operations for the three and nine months ended September 30, 2004 and 2003, and our cash flows for the nine months ended September 30, 2004 and 2003.  All adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year.

 

These financial statements and notes should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2003.

 

Effects of Recently Issued Accounting Standards

 

In December 2003, the FASB issued FASB Interpretation No. 46R (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity.  FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003.  The Company was required to apply FIN 46R to variable interests in VIEs in its consolidated financial statements beginning with the quarter ended March 31, 2004.  For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change.  If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE.  The Company has identified one entity that requires consolidation under this Interpretation.  Consolidation of this entity increased the Company’s assets by approximately $14,000, liabilities by approximately $18,000 and had an insignificant effect on the other basic consolidated financial statements.

 

Stock-Based Compensation

 

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation an Interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

 

6

 

The following table illustrates the effect on net income as if the Company had applied the fair value recognition provisions of SFAS No. 123 as amended by SFAS No. 148:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(in thousands, except per share)						(in thousands, except per share)
Net income as reported		$	2,675		$	2,303		$	8,892		$	6,887
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(80		)	(121		)	(330		)	(354		)
Pro forma net income		$	2,595		$	2,182		$	8,562		$	6,533
Earnings per share
Basic-as reported		$	0.15		$	0.13		$	0.51		$	0.40
Basic-pro forma		$	0.15		$	0.13		$	0.49		$	0.38
Diluted-as reported		$	0.15		$	0.13		$	0.49		$	0.39
Diluted-pro forma		$	0.14		$	0.12		$	0.47		$	0.37

 

Reclassifications

 

Certain reclassifications have been made to the 2003 condensed consolidated financial statements to conform them with the 2004 presentation.  The reclassifications had no effect on retained earnings, results of operations or cash flows as previously reported.

 

2.              ACQUISITIONS

 

On April 1, 2004, the Company acquired a 69% interest in Charlotte Capital.  Employees of Charlotte Capital retained a 31% ownership interest in the firm.  Charlotte Capital, based in Charlotte, North Carolina, manages approximately $400 million in assets for institutional investors in small cap value and mid cap value styles.  SMHG paid $3.4 million in cash at closing, and is obligated to pay an additional amount in 18 months.  The base amount of the additional payment is $2.3 million; however, it may be adjusted up or down based on changes in the firm’s revenues and assets under management for the 18 month period beginning April 1, 2004.  Employees of Charlotte Capital can earn up to an additional 9% ownership interest by achieving specified revenue run rates during the 18-month period following closing.  The acquisition was accounted for as a purchase, and accordingly, the financial information of Charlotte Capital has been included in the Company’s consolidated financial statements from April 1, 2004.  The initial consideration of $3.4 million exceeded the fair market value of identifiable net tangible assets by approximately $4.5 million, which has been recorded as goodwill.

 

On May 2, 2003, the Company acquired a 50% ownership interest in the Salient companies.  Additionally, the Company acquired a 23.15% profits interest in the advisor to The Endowment Fund, a related entity.  The former owners of Salient and The Endowment Fund received cash payments totaling $1.75 million in May 2003.  In July 2004, the former owners of Salient and The Endowment Fund received cash payments of $250,000 upon the Company’s conversion of the 23.15% profits interest into a 23.15% ownership interest and may later receive up to 1,200,000 common shares of the Company based on profitability of Salient/PMT for the year ended December 31, 2004.  No additional consideration has been earned through September 30, 2004 as the calculation is based on the entire 2004 year; however, if the

 

7

 

additional consideration was based on the profitability of Salient/PMT for the nine months ended September 30, 2004, the former owners of Salient and The Endowment Fund would have earned approximately 200,000 common shares of the Company.  The Salient companies and Pinnacle Management & Trust Company subsequently renamed Pinnacle Trust Co., LTA (“PMT”) were contributed to Salient Capital Management, which entity’s Class A limited partner units are jointly owned by the Company and the former owners of Salient.  Additionally, the Company received Class B limited partner units of Salient/PMT which, in the event of a liquidation or sale of Salient/PMT, entitles the Company to first receive proceeds, if any, equal to the net asset value of PMT as of May 2, 2003, (approximately $4.4 million) with the remaining proceeds to be divided equally among the owners of the Class A units.  The Salient companies provide investment advisory services to individuals and institutions.  The Endowment Fund is a diversified fund of funds using hedge fund managers that specialize in a variety of investment approaches.  The acquisitions were accounted for as a purchase, and accordingly, the financial information of the Salient companies and the advisor to The Endowment Fund has been included in the Company’s consolidated financial statements from May 2, 2003.  The purchase price of approximately $1.8 million exceeded the fair market value of identifiable net assets by approximately $1.7 million, which has been recorded as goodwill.  The Company uses the consolidation method to account for its investment in Salient/PMT.

 

3.              SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

 

Securities owned and securities sold, not yet purchased as of September 30, 2004 were as follows:

 

		Owned			Sold, Not Yet Purchased
		(in thousands)
Marketable:
U.S. Government and agency		$	7,588		$	2,742
Corporate stocks		2,209			402
Corporate bonds and commercial paper		5,643			45
		15,440			3,189
Not readily marketable:
Partnerships		21,022			—
Corporate stocks and warrants		8,191			—
		$	44,653		$	3,189

 

Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions, or conditions applicable to the securities or to the Company.  Not readily marketable securities consist of investments in limited partnerships, equities, options and warrants.  The investments in limited partnerships are accounted for using the equity method, which approximates fair value, and principally consist of Environmental Opportunities Fund, L.P., Environmental Opportunities Fund II, L.P., Environmental Opportunities Fund II (Institutional), L.P., Corporate Opportunities Fund, L.P., Corporate Opportunities Fund (Institutional), L.P., Sanders Opportunity Fund, L.P., Sanders Opportunity Fund (Institutional), L.P., Tactical Opportunities High Yield Fund, L.P., Life Sciences Opportunity Fund, L.P., Life Sciences Opportunity Fund (Institutional), L.P., Life Sciences Opportunity Fund II, L.P., Life Sciences Opportunity Fund (Institutional) II, L.P. and 2003 Houston Energy Partners, L.P.

 

The Company has issued a letter of credit in the amount of $1.5 million to the owner of one of the offices that we lease to secure payment of our lease obligation for that facility.  The letter of credit is secured by securities owned in the amount of $1.5 million.

 

8

 

4.              SECURITIES AVAILABLE FOR SALE

 

Securities available for sale at September 30, 2004 were as follows:

 

		Amortized			Gross Unrealized						Estimated
		Cost			Gains			Losses			Fair Value
		(in thousands)
U.S. Government and agency obligations		$	1,041		$	6		$	(4	)	$	1,043
Marketable equity securities		1,952			92			(274		)	1,770
Corporate bonds		251			—			—			251
Partnerships		802			7			(6		)	803
Total		$	4,046		$	105		$	(284	)	$	3,867

 

The contractual maturities of debt securities available for sale at September 30, 2004, were as follows:

 

Due before 5 years		$	998
Due after 25 years through 30 years		$	296

 

Gross realized gains on sales of securities available for sale were $15,000 for the nine months ended September 30, 2004 and $36,000 for the nine months ended September 30, 2003.  Gross realized losses on securities available for sale were $1,000 for the nine months ended September 30, 2004 and $28,000 for the nine months ended September 30, 2003.

 

The Company has pledged securities valued at $250,000 to the bank commissioner of the state of Oklahoma to secure its performance of fiduciary duties for trust activities in that state.

 

5.              INCOME TAXES

 

                        The differences between the effective tax rate reflected in the income tax provision from operations and the statutory federal rate were as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(in thousands)						(in thousands)
Tax computed using the statutory rate		$	1,506		$	1,219		$	5,003		$	3,864
State income taxes and other		248			64			821			614
Total		$	1,754		$	1,283		$	5,824		$	4,478

 

6.              COMMITMENTS AND CONTINGENCIES

 

There were no firm underwriting commitments open at September 30, 2004.

 

The Company and its subsidiaries have obligations under operating leases that expire by 2014 with initial noncancelable terms in excess of one year.

 

The Company is a party to various legal proceedings that are of an ordinary or routine nature incidental to its operations.  The Company believes it has adequately reserved for such litigation matters and that they will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

9

 

The Company has uncommitted financing arrangements with clearing brokers who finance customer accounts, certain broker-dealer balances and firm trading positions.  Although these customer accounts and broker-dealer balances are not reflected on the consolidated balance sheet for financial accounting and reporting purposes, the Company has generally agreed to indemnify these clearing brokers for losses they may sustain in connection with the accounts, and therefore, retains risk on these accounts.  The Company is required to maintain certain cash or securities on deposit with its clearing brokers.

 

The Company has issued a letter of credit in the amount of $1.5 million to the owner of one of the offices that we lease to secure payment of our lease obligation for that facility.  The letter of credit is secured by securities owned in the amount of $1.5 million.

 

7.              EARNINGS PER COMMON SHARE

 

Basic and diluted earnings per-share computations for the periods indicated were as follows:

 

		Three Months Ended September 30,
		2004			2003
		(in thousands, except share and per share amounts)
Computation of basic and diluted income per common share for the three months ended September 30:
Net income		$	2,675		$	2,303
Weighted average number of common shares outstanding		17,640,293			17,179,476
Common shares issuable under stock option plan		1,059,027			1,056,694
Less shares assumed repurchased with proceeds		(486,864		)	(566,201		)
Weighted average common shares outstanding		18,212,456			17,669,969
Basic income per common share		$	0.15		$	0.13
Diluted income per common share		$	0.15		$	0.13
		Nine Months Ended September 30,
		2004			2003
		(in thousands, except share and per share amounts)
Computation of basic and diluted income per common share for the nine months ended September 30:
Net income		$	8,892		$	6,887
Weighted average number of common shares outstanding		17,542,678			17,047,891
Common shares issuable under stock option plan		1,059,027			1,051,693
Less shares assumed repurchased with proceeds		(470,693		)	(523,724		)
Weighted average common shares outstanding		18,131,012			17,575,860
Basic income per common share		$	0.51		$	0.40
Diluted income per common share		$	0.49		$	0.39

 

Outstanding stock options (45,000 for the three and nine months ended September 30, 2004; 50,000 for the three months ended September 30, 2003; and 55,000 for the nine months ended September 30, 2003) have not been included in diluted earnings per common share because to do so would have been antidilutive for the periods presented.

 

8.              IMPAIRMENT OF GOODWILL

 

During the three months ended September 30, 2004, the Company recognized a goodwill impairment charge of $400,000 related to its investment in Brava Therapeutics.  The principal factors contributing to our decision to record the impairment charge relate to the uncertainty and timing of a proposed joint venture between Brava and another entity that would create a more viable platform for further development of Brava’s products and expertise.  SMHG has remaining goodwill of $400,000 related to its investment in Brava.

 

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9.              BUSINESS SEGMENT INFORMATION

 

SMHG operates through six business segments: Retail Brokerage, Institutional Brokerage, Asset Management, Prime Brokerage, Investment Banking, and Corporate and Other. The business segments are based upon factors such as the services provided and distribution channels served. Certain services are provided to customers through more than one of our business segments.  Prior to April 2004, the Company aggregated the brokerage and investment banking businesses into one segment.

 

The Retail Brokerage segment distributes a range of financial products through its branch distribution network, including equity and fixed income securities, mutual funds and annuities. Retail revenues consist of commissions and principal credits earned on equity and fixed income transactions in customer brokerage accounts, distribution fees earned from mutual funds, fees earned from managed accounts, and net interest on customers’ margin loan and credit account balances. Additionally, retail revenues include sales credits from investment banking transactions such as the distribution of underwritings that we co-manage or in which we participate and private placements of securities in which we serve as placement agent.  The firm employs registered representatives and also licenses independent financial advisors.

 

The Institutional Brokerage segment distributes equity and fixed income products through its distribution network to its institutional clients. Institutional revenues consist of commissions and principal credits earned on transactions in customer brokerage accounts, a small amount of net interest on customers’ margin loan and credit account balances, and sales credits from the distribution of investment banking products.

 

The Asset Management segment provides investment advisory, wealth and investment management, financial planning, and trust services to institutional and individual clients. It earns an advisory fee based on such factors as the amount of assets under management and the type of services provided. The asset management segment may also earn commission revenues from the sale of equity, fixed income, mutual fund, and annuity products; and sales credits from the distribution of investment banking issues. In addition, performance fees may be earned for exceeding performance benchmarks for the investment portfolios in the limited partnerships that we manage.

 

The Prime Brokerage segment provides trade execution, clearing, custody and other back-office services to hedge funds and other professional traders. Prime broker revenues consist of commissions and principal credits earned on equity, and fixed income transactions; interest income from securities lending services to customers; and net interest on customers’ margin loan and credit account balances.

 

The Investment Banking segment provides corporate securities underwriting, private financings and financial advisory services. The Company participates in corporate securities distributions as a manager, co-manager or member of an underwriting syndicate or of a selling group in public offerings managed by other underwriters. Fees earned for our role as an advisor, manager, or underwriter are included in the investment banking segment. Sales credits associated with the distribution of investment banking products are reported in Retail Brokerage, Institutional Brokerage or Asset Management depending on the relevant distribution channel.

 

The Corporate and Other segment includes realized and unrealized gains and losses on the Company’s investment portfolios and interest and dividends earned on our cash and securities positions. Unallocated corporate revenues and expenses are included in Corporate and Other.

 

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The following summarizes certain financial information of each reportable business segment for the three and nine months ended September 30, 2004 and 2003, respectively.  SMHG does not analyze asset information in all business segments.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
		(in thousands)						(in thousands)
Revenues:
Retail brokerage		4,377			$	2,974		$	12,843		$	9,438
Institutional brokerage		6,756			8,262			23,062			23,692
Asset management		8,122			4,110			21,754			12,209
Prime brokerage		5,153			5,711			14,984			17,959
Investment banking		2,692			1,294			11,664			6,591
Corporate and other		1,461			1,824			2,716			2,837
Total		$	28,561		$	24,175		$	87,023		$	72,726
Income (loss) before equity in income of limited partnerships, income taxes and minority interests:
Retail brokerage		$	473		$	199		$	1,091		$	402
Institutional brokerage		1,210			1,541			3,996			4,224
Asset management		3,232			1,074			7,580			3,749
Prime brokerage		856			955			2,485			3,240
Investment banking		884			476			5,477			3,261
Corporate and other		(2,261		)	(924		)	(7,393		)	(5,642		)
Total		$	4,394		$	3,321		$	13,236		$	9,234
Equity in income of limited partnerships:
Retail brokerage		$	—		$	—		$	—		$	—
Institutional brokerage		—			—			—			—
Asset management		624			221			3,386			2,778
Prime brokerage		—			—			—			—
Investment banking		—			—			—			—
Corporate and other		152			117			220			413
Total		$	776		$	338		$	3,606		$	3,191
Minority interests in net (income) loss of  consolidated companies:
Retail brokerage		$	—		$	—		$	—		$	—
Institutional brokerage		—			—			—			—
Asset management		(747		)	(73		)	(2,146		)	(1,060		)
Prime brokerage		—			—			—			—
Investment banking		—			—			—			—
Corporate and other		6			—			20			—
Total		$	(741	)	$	(73	)	$	(2,126	)	$	(1,060	)
Income (loss) before income taxes:
Retail brokerage		$	473		$	199		$	1,091		$	402
Institutional brokerage		1,210			1,541			3,996			4,224
Asset management		3,109			1,222			8,820			5,467
Prime brokerage		856			955			2,485			3,240
Investment banking		884			476			5,477			3,261
Corporate and other		(2,103		)	(807		)	(7,153		)	(5,229		)
Total		$	4,429		$	3,586		$	14,716		$	11,365

 

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