Attached files
file | filename |
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EX-32.1 - EDELMAN FINANCIAL GROUP INC. | v192762_ex32-1.htm |
EX-31.2 - EDELMAN FINANCIAL GROUP INC. | v192762_ex31-2.htm |
EX-31.1 - EDELMAN FINANCIAL GROUP INC. | v192762_ex31-1.htm |
EX-32.2 - EDELMAN FINANCIAL GROUP INC. | v192762_ex32-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File No. 000-30066
SANDERS
MORRIS HARRIS GROUP INC.
(Exact
name of registrant as specified in its charter)
Texas
|
76-0583569
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
600
Travis, Suite 5800
|
|
Houston,
Texas
|
77002
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(713)
224-3100
(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.
x
Yes ¨
No
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
¨
Yes ¨
No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
¨
Yes x
No
As of August 6, 2010, the registrant
had 29,132,039 outstanding shares of common stock, par value $0.01 per
share.
SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
INDEX
Page
|
|||
PART
I. FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
2
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December
31, 2009
|
2
|
||
Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2010 and 2009 (unaudited)
|
3
|
||
Condensed
Consolidated Statement of Changes in Equity for the Six Months Ended June
30, 2010 (unaudited)
|
4
|
||
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (unaudited)
|
5
|
||
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6
|
||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36
|
|
Item
4.
|
Controls
and Procedures
|
36
|
|
PART
II. OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
37
|
|
Item
1A.
|
Risk
Factors
|
37
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
37
|
|
Item
4.
|
Submission
of Matters to Voting Security Holders
|
38
|
|
Item
5.
|
Other
Information
|
38
|
|
Item
6.
|
Exhibits
|
39
|
1
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
As
of June 30, 2010 and December 31, 2009
(in
thousands, except share and per share amounts)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 37,042 | $ | 41,926 | ||||
Receivables,
net
|
117,759 | 113,072 | ||||||
Deposits
with clearing organizations
|
1,973 | 2,527 | ||||||
Securities
owned
|
35,266 | 39,380 | ||||||
Furniture,
equipment, and leasehold improvements, net
|
14,239 | 14,617 | ||||||
Other
assets and prepaid expenses
|
3,271 | 2,863 | ||||||
Goodwill,
net
|
73,864 | 73,455 | ||||||
Other
intangible assets, net
|
32,263 | 32,198 | ||||||
Total
assets
|
$ | 315,677 | $ | 320,038 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Liabilities:
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 32,075 | $ | 35,357 | ||||
Borrowings
|
16,667 | 20,238 | ||||||
Deferred
tax liability, net
|
17,057 | 15,455 | ||||||
Securities
sold, not yet purchased
|
9,262 | 8,339 | ||||||
Payable
to broker-dealers and clearing organizations
|
- | 22 | ||||||
Total
liabilities
|
75,061 | 79,411 | ||||||
Commitments
and contingencies
|
||||||||
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; 30,034,592 and
29,882,238 shares issued, respectively
|
300 | 299 | ||||||
Additional
paid-in capital
|
242,224 | 240,450 | ||||||
Accumulated
deficit
|
(15,341 | ) | (16,555 | ) | ||||
Treasury
stock, at cost, 679,186 and 0 shares, respectively
|
(3,627 | ) | - | |||||
Total
Sanders Morris Harris Group Inc. shareholders' equity
|
223,556 | 224,194 | ||||||
Noncontrolling
interest
|
17,060 | 16,433 | ||||||
Total
equity
|
240,616 | 240,627 | ||||||
Total
liabilities and equity
|
$ | 315,677 | $ | 320,038 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue:
|
||||||||||||||||
Investment
advisory and related services
|
$ | 23,086 | $ | 17,280 | $ | 45,019 | $ | 31,465 | ||||||||
Commissions
|
12,293 | 11,168 | 23,655 | 21,572 | ||||||||||||
Investment
banking
|
914 | 635 | 2,411 | 915 | ||||||||||||
Principal
transactions
|
4,258 | 13,736 | 10,975 | 20,025 | ||||||||||||
Interest
and dividends
|
2,601 | 2,768 | 5,396 | 5,395 | ||||||||||||
Other
income
|
2,597 | 2,483 | 5,353 | 4,556 | ||||||||||||
Total
revenue
|
45,749 | 48,070 | 92,809 | 83,928 | ||||||||||||
Expenses:
|
||||||||||||||||
Employee
compensation and benefits
|
26,815 | 31,101 | 56,352 | 54,167 | ||||||||||||
Floor
brokerage, exchange, and clearance fees
|
1,669 | 1,555 | 2,917 | 3,254 | ||||||||||||
Communications
and data processing
|
3,004 | 2,466 | 6,052 | 4,761 | ||||||||||||
Occupancy
|
3,210 | 2,757 | 6,528 | 5,568 | ||||||||||||
Interest
|
463 | 640 | 923 | 820 | ||||||||||||
Goodwill
and other intangible assets impairment charges
|
- | - | - | 14,928 | ||||||||||||
Amortization
of other intangible assets
|
445 | 464 | 890 | 673 | ||||||||||||
Other
general and administrative
|
6,559 | 5,897 | 14,391 | 11,254 | ||||||||||||
Total
expenses
|
42,165 | 44,880 | 88,053 | 95,425 | ||||||||||||
Income
(loss) from continuing operations before equity in income of limited
partnerships and income taxes
|
3,584 | 3,190 | 4,756 | (11,497 | ) | |||||||||||
Equity
in income of limited partnerships
|
364 | 1,486 | 3,590 | 988 | ||||||||||||
Gain
on step acquisition
|
- | 3,000 | - | 3,000 | ||||||||||||
Income
(loss) from continuing operations before income taxes
|
3,948 | 7,676 | 8,346 | (7,509 | ) | |||||||||||
Provision
(benefit) for income taxes
|
1,096 | 2,598 | 2,336 | (3,153 | ) | |||||||||||
Income
(loss) from continuing operations, net of income taxes
|
2,852 | 5,078 | 6,010 | (4,356 | ) | |||||||||||
Loss
from discontinued operations, net of income taxes
|
(146 | ) | (736 | ) | (258 | ) | (3,094 | ) | ||||||||
Net
income (loss)
|
2,706 | 4,342 | 5,752 | (7,450 | ) | |||||||||||
Less: Net
income attributable to the noncontrolling interest
|
(1,158 | ) | (1,204 | ) | (2,369 | ) | (2,256 | ) | ||||||||
Net
income (loss) attributable to Sanders Morris Harris Group
Inc.
|
$ | 1,548 | $ | 3,138 | $ | 3,383 | $ | (9,706 | ) | |||||||
Basic
earnings (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.06 | $ | 0.14 | $ | 0.12 | $ | (0.24 | ) | |||||||
Discontinued
operations
|
(0.01 | ) | (0.03 | ) | (0.01 | ) | (0.11 | ) | ||||||||
Net
earnings (loss)
|
$ | 0.05 | $ | 0.11 | $ | 0.11 | $ | (0.35 | ) | |||||||
Diluted
earnings (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.06 | $ | 0.14 | $ | 0.12 | $ | (0.24 | ) | |||||||
Discontinued
operations
|
(0.01 | ) | (0.03 | ) | (0.01 | ) | (0.11 | ) | ||||||||
Net
earnings (loss)
|
$ | 0.05 | $ | 0.11 | $ | 0.11 | $ | (0.35 | ) | |||||||
Weighted
average common shares outstanding:
|
||||||||||||||||
Basic
|
29,564 | 27,733 | 29,705 | 27,619 | ||||||||||||
Diluted
|
29,584 | 28,338 | 29,711 | 27,619 | ||||||||||||
Amounts
attributable to Sanders Morris Harris Group Inc. common
shareholders:
|
||||||||||||||||
Income
(loss) from continuing operations, net of income taxes
|
$ | 1,694 | $ | 3,874 | $ | 3,641 | $ | (6,612 | ) | |||||||
Discontinued
operations, net of income taxes
|
(146 | ) | (736 | ) | (258 | ) | (3,094 | ) | ||||||||
Net
income (loss)
|
$ | 1,548 | $ | 3,138 | $ | 3,383 | $ | (9,706 | ) |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For
the six months ended June 30, 2010
(in
thousands, except share and per share amounts)
(unaudited)
Amounts
|
Shares
|
|||||||
Common
stock:
|
||||||||
Balance,
beginning of period
|
$ | 299 | 29,882,238 | |||||
Stock
issued pursuant to employee benefit plan
|
1 | 152,354 | ||||||
Balance,
end of period
|
300 | 30,034,592 | ||||||
Additional
paid-in capital:
|
||||||||
Balance,
beginning of period
|
240,450 | |||||||
Stock
issued pursuant to employee benefit plan; including tax
benefit
|
44 | |||||||
Cash
settlement of stock options
|
(140 | ) | ||||||
Tax
adjustment related to employee benefit plan
|
814 | |||||||
Stock-based
compensation expense
|
1,056 | |||||||
Balance,
end of period
|
242,224 | |||||||
Accumulated
deficit:
|
||||||||
Balance,
beginning of period
|
(16,555 | ) | ||||||
Cumulative
effect of adoption of a new accounting principle
|
483 | |||||||
Cash
dividends ($0.09 per share)
|
(2,652 | ) | ||||||
Net
income attributable to Sanders Morris Harris Group Inc.
|
3,383 | |||||||
Balance,
end of period
|
(15,341 | ) | ||||||
Treasury
stock:
|
||||||||
Balance,
beginning of period
|
- | - | ||||||
Acquisition
of treasury stock
|
(3,627 | ) | (679,186 | ) | ||||
Balance,
end of period
|
(3,627 | ) | (679,186 | ) | ||||
Noncontrolling
interest:
|
||||||||
Balance,
beginning of period
|
16,433 | |||||||
Cumulative
effect of adoption of a new accounting principle
|
(584 | ) | ||||||
Purchase
of membership interest
|
410 | |||||||
Contributions
|
- | |||||||
Distributions
|
(1,568 | ) | ||||||
Net
income attributable to the noncontrolling interest
|
2,369 | |||||||
Balance,
end of period
|
17,060 | |||||||
Total
equity and common shares outstanding
|
$ | 240,616 | 29,355,406 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
||||||
Net
income (loss)
|
$ | 5,752 | $ | (7,450 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Loss
on sales of assets
|
1 | 12 | ||||||
Depreciation
|
2,185 | 2,114 | ||||||
Provision
for bad debts
|
1,807 | 24 | ||||||
Stock-based
compensation expense
|
1,056 | 2,243 | ||||||
Goodwill
and other intangible assets impairment charges
|
- | 14,928 | ||||||
Amortization
of other intangible assets
|
890 | 673 | ||||||
Deferred
income taxes
|
1,602 | (1,945 | ) | |||||
Equity
in income of limited partnerships
|
(3,590 | ) | (988 | ) | ||||
Gain
on step acquisition
|
- | (3,000 | ) | |||||
Unrealized
and realized loss on not readily marketable securities owned,
net
|
90 | 586 | ||||||
Net
change in:
|
||||||||
Receivables
|
(6,337 | ) | (2,086 | ) | ||||
Deposits
with clearing organizations
|
554 | (532 | ) | |||||
Marketable
securities owned
|
5,671 | 7,454 | ||||||
Other
assets and prepaid expenses
|
(396 | ) | (486 | ) | ||||
Accounts
payable and accrued liabilities
|
(3,544 | ) | (3,129 | ) | ||||
Securities
sold, not yet purchased
|
923 | 9,097 | ||||||
Payable
to broker-dealers and clearing organizations
|
(22 | ) | (2,034 | ) | ||||
Net
cash provided by operating activities
|
6,642 | 15,481 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Capital
expenditures
|
(1,807 | ) | (768 | ) | ||||
Acquisitions,
net of cash acquired of $0 and $210, respectively
|
(750 | ) | (25,324 | ) | ||||
Cumulative
effect of adoption of a new accounting principle
|
344 | - | ||||||
Purchases
of not readily marketable securities owned
|
(148 | ) | (209 | ) | ||||
Proceeds
from sales of not readily marketable securities owned
|
1,478 | 3,769 | ||||||
Proceeds
from sales of assets
|
32 | 131 | ||||||
Net
cash used in investing activities
|
(851 | ) | (22,401 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Purchases
of treasury stock
|
(3,627 | ) | (28 | ) | ||||
Proceeds
from shares issued pursuant to employee benefit plan
|
42 | 48 | ||||||
Tax
benefit of stock options exercised
|
3 | 2 | ||||||
Tax
adjustment related to employee benefit plan
|
814 | (691 | ) | |||||
Cash
settlement of stock options
|
(140 | ) | - | |||||
Proceeds
from borrowings
|
- | 25,000 | ||||||
Repayment
of borrowings
|
(3,571 | ) | (1,191 | ) | ||||
Contributions
by noncontrolling interest
|
- | 20 | ||||||
Distributions
to noncontrolling interest
|
(1,568 | ) | (3,336 | ) | ||||
Payments
of cash dividends
|
(2,628 | ) | (2,538 | ) | ||||
Net
cash (used in) provided by financing activities
|
(10,675 | ) | 17,286 | |||||
Net
(decrease) increase in cash and cash equivalents
|
(4,884 | ) | 10,366 | |||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
41,926 | 30,224 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$ | 37,042 | $ | 40,590 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SANDERS
MORRIS HARRIS GROUP INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
|
BASIS
OF PRESENTATION
|
Nature
of Operations
Sanders
Morris Harris Group Inc. (“SMHG” or “the Company”) provides a broad range of
financial and other professional services, including wealth management
(including investment advice and management, financial planning, sports
representation and management), investment and merchant banking, and
institutional services (including institutional sales and trading, prime
brokerage services, and research). The Company’s operating
subsidiaries include Sanders Morris Harris Inc. (formerly SMH Capital Inc.)
(“SMH”), SMH Capital Advisors, Inc. (“SMH Capital Advisors”), The Edelman
Financial Center, LLC (“Edelman”), The Dickenson Group, LLC (“Dickenson”), The
Rikoon Group, LLC (“Rikoon”), Leonetti & Associates, LLC (“Leonetti”),
Miller-Green Financial Services, Inc. (“Miller-Green”), Kissinger Financial
Services, a division of SMH, (“Kissinger”), Investor Financial Solutions, LLC
(“IFS”) and Select Sports Group, Ltd. (“SSG”). The Company serves a
diverse group of institutional, corporate, and individual clients.
Principles
of Consolidation
The
unaudited condensed consolidated financial statements of the Company include the
accounts of its subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
In June
2009, the Financial Accounting Standards Board (“FASB”) amended its guidance on
accounting for variable interest entities (“VIEs”). The new accounting guidance
resulted in a change in our accounting policy effective January 1, 2010.
Among other things, the new guidance requires more qualitative than quantitative
analyses to determine the primary beneficiary of a VIE, requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE, and
amends certain guidance for determining whether an entity is a VIE. Under the
new guidance, a VIE must be consolidated if an enterprise has both (a) the
power to direct the activities of the VIE that most significantly impact the
entity's economic performance and (b) the obligation to absorb losses or
the right to receive benefits from the VIE that could potentially be significant
to the VIE. This new accounting guidance was effective for the Company on
January 1, 2010, and is being applied prospectively.
On
January 1, 2010, we deconsolidated an investment in one of the Company’s
limited partnerships as a result of this change in accounting policy. This
entity had previously been consolidated due to financial support provided by the
Company. The Company does not have the power to direct the activities of the VIE
that most significantly impact the VIE’s economic performance. Consequently,
subsequent to the change in accounting policy, the Company deconsolidated this
entity. The Company has accounted for this limited partnership
investment at fair value since January 1, 2010. This investment
will now be on the balance sheet within securities owned at fair value with the
change in fair value included in equity in income of limited partnerships on the
statements of operations. In prior periods, this entity’s results,
assets, and liabilities were reflected in each of the Company’s line items in
the statements of operations and balance sheet. The Company recorded
a $4.6 million cumulative adjustment to accumulated deficit that represents the
fair value of this limited partnership at January 1, 2010.
In
addition, the Company concluded that it was a primary beneficiary of two
variable interest entities at January 1, 2010. The Company has a 50%
direct ownership in one of these entities and a 65% direct ownership in the
other. These entities are professional sports agencies that assist
professional athletes with contract negotiation, marketing, and public
relations. The Company provided significant financial support, which
it was not contractually obligated to do, beginning on January 1, 2010, to
assist these entities to continue operating as a going concern and also became
significantly more involved with the day-to-day operations of managing the
businesses. The Company intends to provide additional financial
support when necessary in the future. These facts enabled the Company
to conclude that it has the power to direct the activities that significantly
impact these entities’ economic performance and has the obligation to absorb the
significant losses and receive benefits related to these entities due to its
increased support. The Company has provided $1.2 million in financial
support as of June 30, 2010, which has been eliminated in
consolidation. The results of these entities have been included in
the condensed consolidated statements of operations since January 1,
2010. The carrying amounts of the assets and liabilities consolidated
at January 1, 2010 are as follows:
6
Total
assets
|
$ | 733,000 | ||
Total
liabilities
|
34,000 | |||
Noncontrolling
interest
|
490,000 |
The
creditors and/or beneficial holders of the consolidated VIEs do not have
recourse to the general credit of the Company.
In
management's opinion, the unaudited condensed consolidated financial statements
include all adjustments necessary for a fair presentation of our consolidated
financial position at June 30, 2010 and December 31, 2009, our consolidated
results of operations for the three and six months ended June 30, 2010 and 2009,
our consolidated changes in equity for the six months ended June 30, 2010, and
our consolidated cash flows for the six months ended June 30, 2010 and
2009. All adjustments are of a normal and 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, 2009.
Management’s
Estimates
The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of consolidated assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the consolidated financial statements and the amounts of revenue and expenses
during the reporting periods. The most significant estimates used by
the Company relate to contingencies and the valuation of not readily marketable
securities, goodwill, and stock-based compensation awards. Actual
results could differ from those estimates.
Fair
Values of Financial Instruments
The fair
values of cash and cash equivalents, receivables, accounts payable and accrued
liabilities, and payables to broker-dealers approximate cost due to the short
period of time to maturity. Securities owned, and securities sold,
not yet purchased are carried at their fair values. The carrying
amount of our borrowings approximates fair value because the interest rate is
variable and, accordingly, approximates current market rates.
New
Authoritative Accounting Guidance
On July
1, 2009, the Accounting Standards Codification (“ASC”) became the FASB’s
officially recognized source of authoritative U.S. generally accepted accounting
principles (“GAAP”) applicable to all non-governmental entities in the
preparation of financial statements. Rules and interpretive releases
of the Securities and Exchange Commission (“SEC”) under the authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. All guidance contained in the ASC carries an equal level
of authority. All non-grandfathered, non-SEC accounting literature
not included in the ASC is superseded and deemed
non-authoritative. The switch to the ASC affects the way companies
refer to U.S. GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying
the unique numeric path to the content through the Topic, Subtopic, Section, and
Paragraph structure.
7
FASB ASC Topic 810,
Consolidation. New authoritative guidance under ASC Topic
810, Consolidation,
amended prior guidance to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Under ASC Topic 810, a noncontrolling interest in a
subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as a component of
equity in the consolidated financial statements. Among other requirements, ASC
Topic 810 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling
interest in subsidiaries. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest in subsidiaries.
The new authoritative accounting guidance under ASC Topic 810 was effective for
the Company on January 1, 2009. Shareholders’ equity changed due
to the application of the new authoritative accounting
guidance. Noncontrolling interest, formerly presented as minority
interests outside of shareholders’ equity, is now included in
equity.
Further
new authoritative accounting guidance under ASC Topic 810 amends prior guidance
to change how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. The new
authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. The new authoritative
accounting guidance under ASC Topic 810 was effective January 1,
2010.
Accounting
Standards Update (“ASU”) No. 2010-02, Consolidation (Topic 810) –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification, clarifies implementation issues relating to a decrease in
ownership of a subsidiary that is a business or not-profit
activity. This amendment affects entities that have previously
adopted FASB ASC Topic 810-10. This update was effective January 1,
2010 and did not have a material impact on the Company’s consolidated financial
statements.
ASU No.
2010-10, Consolidation (Topic
810) – Amendments for Certain Investment Funds, defers the effective date
of the amendments to the consolidation requirements to a company’s interest in
an entity (i) that has all of the attributes of an investment company, as
specified under ASC Topic 946, Financial Services – Investment
Companies, or (ii) for which it is industry practice to apply measurement
principles of financial reporting that are consistent with those in ASC Topic
946. As a result of the deferral, a company is not required to apply
the ASU 2009-17 amendments to the Subtopic 810-10 consolidation requirements to
its interest in an entity that meets the criteria to qualify for the
deferral. ASU 2010-10 also clarifies that any interest held by a
related party should be treated as though it is an entity’s own interest when
evaluating the criteria for determining whether such interest represents a
variable interest. In addition, ASU 2010-10 clarifies that a
quantitative calculation should not be the sole basis for evaluating whether a
decision maker’s or service provider’s fee is a variable
interest. The provisions of ASU 2010-10 were effective January 1,
2010. Adoption of the new guidance had a material impact on the
Company’s consolidated financial statements. See “Note 1 – Basis of
Presentation – Principles of
Consolidation.”
FASB ASC Topic 820, Fair Value
Measurements and Disclosures. New authoritative guidance under
ASC Topic 820 requires expanded disclosures related to fair value measurements
including (i) the amounts of significant transfers of assets or liabilities
between Levels 1 and 2 of the fair value hierarchy and the reasons for the
transfers, (ii) the reasons for transfers of assets or liabilities in or out of
Level 3 of the fair value hierarchy, with significant transfers disclosed
separately, (iii) the policy for determining when transfers between levels of
the fair value hierarchy are recognized, and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value hierarchy, a
gross presentation of information about purchases, sales, issuances, and
settlements. The guidance further clarifies that (i) fair value
measurement disclosures should be provided for each class of assets and
liabilities (rather than major category), which would generally be a subset of
assets or liabilities within a line item in the statement of financial position
and (ii) companies should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements for each class of assets and liabilities included in Levels 2 and 3
of the fair value hierarchy. The disclosures related to the gross
presentation of purchases, sales, issuances, and settlements of assets and
liabilities included in Level 3 of the fair value hierarchy will be required for
the Company beginning January 1, 2011. The remaining disclosure
requirements and clarifications became effective for the Company on January 1,
2010 and did not have a material impact on the Company’s consolidated financial
statements. See “Note 3 – Securities Owned and Securities Sold, Not
Yet Purchased.”
8
FASB ASC Topic 855, Subsequent
Events. In February 2010, the FASB issued ASU No. 2010-09,
Subsequent Events (Topic 855)
– Amendments to Certain Recognition and Disclosure
Requirements. ASU No. 2010-09 reiterates that SEC filers are
required to evaluate subsequent events through the date the financial statements
have been issued and eliminated the requirement that SEC filers disclose the
date through which subsequent events have been evaluated. ASU No.
2010-09 was effective upon issuance and did not have a material impact on the
Company’s consolidated financial statements.
FASB ASC Topic 860, Transfers and
Servicing. New authoritative accounting guidance under ASC
Topic 860, Transfers and
Servicing, amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial
assets. The new authoritative accounting guidance eliminates the
concept of a “qualifying special-purpose entity” and changes the requirements
for derecognizing financial assets. The new authoritative accounting
guidance also requires additional disclosures about all continuing involvements
with transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative
accounting guidance under ASC Topic 860 was effective January 1, 2010 and did
not have a material impact on the Company’s consolidated financial
statements.
2.
|
ACQUISITIONS
AND DISPOSITIONS
|
Acquisitions
On
January 1, 2010, the Company completed the acquisition of a 51% interest in
Investor Financial Solutions, LLC (“IFS”), a wealth management firm based in
Huntington Beach, California for cash consideration of $1.0 million, $750,000 of
which was payable at acquisition with the remainder, subject to adjustment based
on gross revenue of IFS during the three months ended June 30, 2011, payable in
July 2011. The additional purchase price is expected to be
between $0 and $250,000. The liability for the additional purchase
price was recorded at its January 1, 2010 fair value of $204,000. The
fair value of the consideration exceeded the fair market value of identifiable
net tangible assets by $954,000, $409,000 of which has been recorded as
goodwill, $955,000 of which has been recorded as other intangible assets, and
$410,000 of which has been recorded as noncontrolling interest. All
of the goodwill associated with the IFS acquisition is expected to be deductible
for tax purposes. The acquisition was conducted in an arm’s length
transaction to expand the Company’s high net worth business. As of
June 30, 2010, IFS had approximately $95.1 million in assets under
management.
On May
10, 2005, the Company acquired a 51% interest in Edelman, one of the leading
financial planning firms in the country. On May 12, 2008, the Company
purchased an additional 25% membership interest in Edelman. The
Company paid an amount determined based upon Edelman’s 2007 pretax income (the
“Second Tranche Consideration”). The Second Tranche Consideration of
$44.4 million, which was paid in a combination of cash and the Company’s common
stock, has been recorded as goodwill.
In
December 2006, Ric Edelman organized a new entity, Edelman Financial Advisors,
LLC (“EFA”), to expand the Edelman financial platform into additional markets
outside the Washington, D.C. metropolitan area, in which the company owned a 10%
membership interest. On April 1, 2009, the Company acquired an
additional 66% membership interest in EFA for an aggregate consideration of
$25.5 million in cash and a subordinated promissory note in the principal amount
of $10.0 million. The fair value of the Company’s previously-held
noncontrolling interest in EFA on April 1, 2009 was $3.0 million. The
consideration paid exceeded the fair market value of identifiable net tangible
assets by $36.3 million, $24.2 million of which has been recorded as goodwill,
$22.3 million of which has been recorded as other intangible assets, $7.2
million of which has been recorded as noncontrolling interest, and $3.0 million
of which has been recorded as a gain on step acquisition. All of the
goodwill associated with the EFA acquisition is expected to be deductible for
tax purposes. On August 24, 2009, EFA was merged with and into
another Edelman subsidiary, Edelman Financial Services, LLC
(“EFS”). As of June 30, 2010, Edelman, based in Fairfax, Virginia,
managed approximately $4.8 billion in assets.
9
The EFA
acquisition was accounted for using the acquisition method and, accordingly, the
financial information of EFA has been included in the Company’s Condensed
Consolidated Financial Statements from April 1, 2009. During the
measurement period, the Company must recognize adjustments to the provisional
amounts as if the accounting for the business combination had been completed at
the acquisition date. Thus, the Company must recognize all purchase
accounting transactions related to this acquisition as of the second quarter of
2009 for comparative financial statements. The gain on step acquisition of $3.0
million and other intangible assets amortization of $255,000 are included in the
three and six months ended June 30, 2009, in accordance with the business
combination standards to recognize these amounts as of the acquisition date,
April 1, 2009.
The pro
forma combined historical results as if the EFA acquisition had been included in
operations commencing January 1, 2009, are as follows:
Six Months Ended
|
||||
June 30, 2009
|
||||
(in
thousands, except per share amounts)
|
||||
Total
revenue
|
$ | 85,465 | ||
Net
income (loss) attributable to Sanders Morris Harris Group
Inc.
|
(10,526 | ) | ||
Earnings
(loss) per common share:
|
||||
Basic
|
$ | (0.38 | ) | |
Diluted
|
$ | (0.38 | ) |
The EFA Acquisition is included
in all other periods presented on the Condensed Consolidated Statements of
Operations.
Dispositions
In
January 2009, the Company and SMH entered into a Contribution Agreement with Pan
Asia China Commerce Corp. (“PAC3”), Madison Williams, and Madison Williams and
Company, LLC (“Madison Williams”), pursuant to which (a) PAC3 agreed to
subscribe for and purchase a 40% Class A membership interest in Madison
Williams in exchange for a cash payment and note and (b) SMH agreed to
contribute to New BD the Capital Markets business, including a specified amount
of working capital (as adjusted for any profits or losses incurred in the
Capital Markets business between January 1, 2009, and the date of closing)
less (i) the value of the accounts receivable contributed to Madison
Williams, (ii) the value of the certain assets in SMH’s New Orleans,
Louisiana office, (iii) the value of certain money security deposits and
any advance payments, and (iv) the value of certain securities to be
mutually agreed upon by the parties in exchange for a 20% Class A
membership interest in Madison Williams, cash, and a note issued by Madison
Williams to SMH. Members of management of the Capital Markets Business retained
the remaining 40% membership interest in Madison Williams.
On
November 9, 2009, the Company, SMH, PAC3, and Madison Williams entered into an
Amended and Restated Contribution Agreement with Fletcher Asset Management, Inc.
(“Fletcher”), with respect to the formation of the New BD. Pursuant to the
Amended and Restated Contribution Agreement, (a) PAC3’s membership interest in
Madison Williams was reduced to a 3.1% Class A membership interest and 28.0%
Class B membership interest, (b) SMH’s interest in Madison Williams was reduced
to a 17.5% Class A membership interest, (c) Fletcher agreed to subscribe for and
purchase a 40.5% Class A membership interest in Madison Williams in exchange for
a cash contribution, and (d) the interest of management of Madison Williams was
reduced to a 6.5% Class B membership interest. SMH’s membership
interest is subject to call for $4.0 million through December 31,
2010. The Class A membership interests have a distribution preference
over the Class B membership interests until a total of $8.5 million of
distributions to the Class A membership interests have been made, and no
distributions may be made to any class of Class B membership interests until the
SMH note for $8.0 million has been repaid. This transaction closed on
December 9, 2009. The Company expects to receive its share of profits
if and when distributions are made by Madison Williams.
10
3.
|
SECURITIES
OWNED AND SECURITIES SOLD, NOT YET
PURCHASED
|
Securities
owned and securities sold, not yet purchased as of June 30, 2010 and December
31, 2009 were as follows:
June 30, 2010
|
December 31, 2009
|
|||||||||||||||
Sold, Not Yet
|
Sold, Not Yet
|
|||||||||||||||
Owned
|
Purchased
|
Owned
|
Purchased
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Marketable:
|
||||||||||||||||
Corporate
stocks and options
|
$ | 10,539 | $ | 9,262 | $ | 12,695 | $ | 8,339 | ||||||||
Corporate
bond
|
1,044 | - | 3,861 | - | ||||||||||||
Total
marketable
|
11,583 | 9,262 | 16,556 | 8,339 | ||||||||||||
Not
readily marketable:
|
||||||||||||||||
Limited
partnerships
|
21,761 | - | 19,969 | - | ||||||||||||
Warrants
|
1,454 | - | 2,429 | - | ||||||||||||
Equities
and options
|
468 | - | 426 | - | ||||||||||||
Total
not readily marketable
|
23,683 | - | 22,824 | - | ||||||||||||
Total
|
$ | 35,266 | $ | 9,262 | $ | 39,380 | $ | 8,339 |
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 other applicable securities acts, or (c)
that cannot be offered or sold because of other arrangements, restrictions, or
conditions applicable to the securities or to the company. Not
readily marketable securities consist of investments in limited partnerships,
equities, options, and warrants. In accordance with FASB ASC Topic 323, Investments – Equity Method and
Joint Ventures, direct investments in limited partnerships are accounted
for using the equity method which approximates fair
value. Proprietary investments in limited partnerships held by the
Company’s broker-dealer subsidiary are accounted for at fair
value. The Company expects to receive its interests in the limited
partnerships over the remaining one to ten year life of the limited
partnerships.
FASB ASC
Topic 820 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the
fair value hierarchy are as follows:
Level
1
|
Unadjusted
quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or
liabilities;
|
Level
2
|
Quoted
prices in markets that are not considered to be active or financial
instruments for which all significant inputs are observable, either
directly or indirectly;
|
Level
3
|
Prices
or valuations that require inputs that are both significant to the fair
value measurement and
unobservable.
|
A
description of the valuation methodologies used for securities measured at fair
value, as well as the general classification of such securities pursuant to the
valuation hierarchy, is set forth below.
11
In
general, fair value is based upon quoted market prices, where
available. If such quoted market prices are not available, fair value
is based upon industry-standard pricing methodologies, models, or other
valuation methodologies that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that
securities are recorded at fair value. The Company’s valuation
methodologies may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values.
Level 1
consists of unrestricted publicly traded equity securities traded on an active
market whose values are based on quoted market prices.
Level 2
includes securities that are valued using industry-standard pricing
methodologies, models, or other valuation methodologies. Level 2
inputs are other than quoted market prices that are observable for the asset,
either directly or indirectly. Level 2 inputs include quoted prices
for similar assets or liabilities in active markets; quoted prices for identical
or similar assets or liabilities in markets that are not active; inputs other
than quoted market prices that are observable for the asset, such as interest
rates and yield curves observable at commonly quoted intervals, volatilities,
credit risks, prepayment speeds, loss severities, and default rates; and inputs
that are derived principally from observable market data by correlation or other
means. Securities in this category include restricted publicly traded
equity securities, publicly traded equity securities traded on an inactive
market, publicly traded debt securities, warrants whose underlying stock is
publicly traded on an active market, and options that are not publicly traded or
whose pricing is uncertain.
Level 3
includes securities whose fair value is estimated based on industry-standard
pricing methodologies and internally developed models utilizing significant
inputs not based on, nor corroborated by, readily available market
information. This category primarily consists of investments in
limited partnerships and equity securities that are not publicly
traded.
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.
The
following table sets forth by level within the fair value hierarchy securities
owned and securities sold, not yet purchased as of June 30, 2010:
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Securities
owned:
|
||||||||||||||||
Corporate
stocks and options
|
$ | 9,821 | $ | 718 | $ | 468 | $ | 11,007 | ||||||||
Corporate
bond
|
- | 1,044 | - | 1,044 | ||||||||||||
Limited
partnerships
|
- | - | 20,392 | 20,392 | ||||||||||||
Warrants
|
- | 1,437 | 17 | 1,454 | ||||||||||||
Total
securities owned
|
$ | 9,821 | $ | 3,199 | $ | 20,877 | $ | 33,897 | ||||||||
Securities
sold, not yet purchased:
|
||||||||||||||||
Corporate
stocks and options
|
$ | 9,040 | $ | 222 | $ | - | $ | 9,262 | ||||||||
Total
securities sold, not yet purchased
|
$ | 9,040 | $ | 222 | $ | - | $ | 9,262 |
The
following table sets forth a summary of changes in the fair value of the
Company’s Level 3 securities owned for the three months ended June 30,
2010:
12
Limited
|
Equities and
|
|||||||||||||||
Partnerships
|
Warrants
|
Options
|
Total
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Balance,
beginning of period
|
$ | 20,447 | $ | 15 | $ | 461 | $ | 20,923 | ||||||||
Realized
gains (losses)
|
- | - | - | - | ||||||||||||
Unrealized
gains (losses) relating to securities still held at the reporting
date
|
(105 | ) | 2 | 4 | (99 | ) | ||||||||||
Purchases,
issuances, and settlements
|
50 | - | 3 | 53 | ||||||||||||
Balance,
end of period
|
$ | 20,392 | $ | 17 | $ | 468 | $ | 20,877 |
The
following table sets forth a summary of changes in the fair value of the
Company’s Level 3 securities owned for the six months ended June 30,
2010:
|
Limited
|
Equities and
|
||||||||||||||
|
Partnerships
|
Warrants
|
Options
|
Total
|
||||||||||||
|
(in
thousands)
|
|||||||||||||||
|
||||||||||||||||
Balance,
beginning of period
|
$ | 13,253 | $ | 5 | $ | 426 | $ | 13,684 | ||||||||
Cumulative
effect of adoption of a new accounting principle
|
4,650 | - | - | 4,650 | ||||||||||||
Realized
gains
|
118 | - | - | 118 | ||||||||||||
Unrealized
gains relating to securities still held at the reporting
date
|
2,741 | 12 | 39 | 2,792 | ||||||||||||
Purchases,
issuances, and settlements
|
(370 | ) | - | 3 | (367 | ) | ||||||||||
Balance,
end of period
|
$ | 20,392 | $ | 17 | $ | 468 | $ | 20,877 |
Transfers
between levels of the fair value hierarchy are recognized on the actual date of
the event or circumstances that caused the transfer, which generally coincides
with the Company’s quarterly valuation process. There were no significant
transfers into or out of Level 1, Level 2, or Level 3 of the fair value
hierarchy during the three and six months ended June 30, 2010.
Net
unrealized gains (losses) for Level 3 securities owned are a component of
“Principal transactions” and “Equity in income of limited partnerships” in the
Condensed Consolidated Statements of Operations as follows:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30, 2010
|
June 30, 2010
|
|||||||||||||||
Equity in Income
|
Equity in Income
|
|||||||||||||||
Principal
|
of Limited
|
Principal
|
of Limited
|
|||||||||||||
Transactions
|
Partnerships
|
Transactions
|
Partnerships
|
|||||||||||||
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
Unrealized
gains (losses) relating to securities still held at the reporting
date
|
$ | (38 | ) | $ | (61 | ) | $ | (53 | ) | $ | 2,845 |
13
At June
30, 2010, the Company had $263,000 and $1.1 million in securities owned that are
valued using the equity method and at cost basis, respectively. The
fair value of these investments has not been estimated since there are no events
or changes in circumstances that may have a significant adverse effect on the
fair value, and it is not practicable to estimate the fair value of these
investments.
4.
|
RECEIVABLES
|
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Notes
Receivable:
|
||||||||
Nonaffiliates
|
$ | 6,019 | $ | 6,127 | ||||
Employees
and executives
|
2,272 | 2,670 | ||||||
Other
affiliates
|
9,655 | 8,556 | ||||||
Receivables
from affiliated limited partnerships
|
1,139 | 337 | ||||||
Receivables
from other affiliates
|
4,812 | 2,946 | ||||||
Receivable
from Endowment Advisers
|
63,454 | 65,398 | ||||||
Receivables
from broker-dealers
|
852 | 1,112 | ||||||
Receivables
from customers
|
22,998 | 22,569 | ||||||
Current
tax receivable
|
8,909 | 5,901 | ||||||
Allowances
for bad debts
|
(2,351 | ) | (2,544 | ) | ||||
Receivables,
net
|
$ | 117,759 | $ | 113,072 |
In August
2008, we entered into agreements with Salient Partners, L.P. and Endowment
Advisers, L.P. to repurchase the Company’s interests in such entities for a
total of $95.3 million. The terms of the agreements provide that
Endowment Advisers will pay the Company annually the greater of $12.0 million in
priority to other distributions, or 23.15% of total distributions, until the
Company has received a total of $86.0 million plus 6% per annum. The
Company received an additional $9.3 million note for its 50% interest in Salient
Partners, payable with interest over a five-year period. In May 2009,
the principal amount of the Salient Partners note was reduced by $2.25 million
to reflect an offset of certain liabilities that the Company agreed to pay under
the agreements. In connection with such transactions, the Company
recorded receivables in the amount of $76.7 million representing the net present
value of the expected receipts using a weighted average imputed interest rate of
11.8%. The Salient note is included in “Notes receivable:
Nonaffiliates” in the above table.
5.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS, NET
|
Changes
in the carrying amount of goodwill and other intangible assets were as
follows:
Six Months Ended June 30, 2010
|
||||||||||||||||||||||||
Amortizable Intangible Assets:
|
Total Other
|
|||||||||||||||||||||||
Covenants Not
|
Customer
|
Intangible
|
||||||||||||||||||||||
Goodwill
|
Trade Names
|
To Compete
|
Relationships
|
Subtotal
|
Assets
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Balance,
beginning of period
|
$ | 73,455 | $ | 18,422 | $ | 3,683 | $ | 10,093 | $ | 13,776 | $ | 32,198 | ||||||||||||
Acquisition
of IFS
|
409 | 166 | 22 | 767 | 789 | 955 | ||||||||||||||||||
Amortization
of other intangible assets
|
- | - | (435 | ) | (455 | ) | (890 | ) | (890 | ) | ||||||||||||||
Balance,
end of period
|
$ | 73,864 | $ | 18,588 | $ | 3,270 | $ | 10,405 | $ | 13,675 | $ | 32,263 |
All of
the Company’s goodwill and other intangible assets, net, are related to the
Wealth Management business segment.
14
The
goodwill impairment charges recognized in the period ended March 31, 2009,
reflect the market deterioration experienced in 2008 and during the first
quarter of 2009. The amount of the impairment losses was determined
based on the calculation process specified in FASB ASC Topic 350, Intangibles – Goodwill and
Other, which compared carrying value to the estimated fair value of
assets and liabilities. Factors considered in determining fair value
include, among other things, the Company’s market capitalization as determined
by quoted market prices for its common stock and the value of the Company’s
reporting units. The Company uses several methods to value its
reporting units, including discounted cash flows, comparisons with valuations of
public companies in the same industry, and multiples of assets under
management.
Other
intangible assets consist primarily of customer relationships and trade names
acquired in business combinations. Other intangible assets acquired
that have indefinite lives (trade names) are not amortized but are tested for
impairment annually, or if certain circumstances indicate a possible impairment
may exist. Certain other intangible assets acquired (customer
relationships and covenants not to compete) are amortized on a straight line
basis over their estimated useful lives and tested for impairment if certain
circumstances indicate an impairment may exist. Other intangible
assets are tested for impairment by comparing expected future cash flows to the
carrying amount of the intangible assets.
Goodwill
and other intangible assets, net, are classified as Level 3 within the fair
value hierarchy.
As of
June 30, 2010, the remaining weighted-average amortization period was 3.82 years
for covenants not to compete and 11.70 years for customer relationships included
in the table above.
6.
|
BORROWINGS
|
In May
2009, the Company borrowed $25.0 million under a credit agreement with a bank,
the proceeds of which were used to complete the EFA acquisition. The
credit agreement matures on October 31, 2012, and bears interest at the greater
of the prime rate or 5%. Principal of $595,000 plus interest is
payable quarterly. The credit agreement is secured by substantially
all of the assets of the Company. The credit agreement contains
various covenants customary for transactions of this type including the
requirement that the Company maintain minimum financial ratios, net worth,
liquid assets, and cash balances, as well as minimum assets under management,
and meet monthly, quarterly, and annual reporting requirements. The
credit agreement also contains covenants that restrict the ability of the
Company, among other things, to incur indebtedness, pay dividends or
distributions, make capital expenditures and other restricted payments,
including investments, and consummate asset sales. At June 30, 2010,
the Company was in compliance with all covenants.
7.
|
INCOME
TAXES
|
The
difference between the effective tax rate reflected in the income tax provision
(benefit) from continuing operations attributable to Sanders Morris Harris Group
Inc. and the statutory federal rate is analyzed as follows:
|
Three Months Ended
|
Six Months Ended
|
||||||||||||||
|
June 30,
|
June 30,
|
||||||||||||||
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(in
thousands)
|
(in
thousands)
|
||||||||||||||
|
||||||||||||||||
Expected
federal tax at statutory rate of 34%
|
$ | 949 | $ | 2,200 | $ | 2,032 | $ | (3,320 | ) | |||||||
State
and other income taxes
|
147 | 398 | 304 | 167 | ||||||||||||
Total
|
$ | 1,096 | $ | 2,598 | $ | 2,336 | $ | (3,153 | ) |
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible
differences.
15
The
Company files income tax returns in the U.S. federal
jurisdiction. The Company is no longer subject to U.S. federal income
tax examination by the taxing authorities for years before 2006. The
Company files in several state tax jurisdictions. The Company is no
longer subject to state income tax examination by the taxing authorities for
years before 2006.
8.
|
ACCOUNTING
FOR STOCK-BASED COMPENSATION PLANS
|
The
Company has two types of stock-based compensation awards: (1) stock
options and (2) restricted common stock.
The
following table sets forth pertinent information regarding stock option
transactions for the six months ended June 30, 2010:
Weighted
|
||||||||
Number
|
Average
|
|||||||
of Shares
|
Exercise Price
|
|||||||
Outstanding
at January 1, 2010
|
601,141 | $ | 9.95 | |||||
Granted
|
- | - | ||||||
Exercised
|
(9,000 | ) | 4.52 | |||||
Settled
|
(140,000 | ) | 4.44 | |||||
Cancelled/Forfeited
|
(58,334 | ) | 6.70 | |||||
Outstanding
at June 30, 2010
|
393,807 | 11.83 | ||||||
Options
exercisable at June 30, 2010
|
393,807 | 11.83 | ||||||
Incentive
award shares available for grant at June 30, 2010
|
2,580,512 |
During
the six months ended June 30, 2010 and 2009, 9,000 and 7,500 options were
exercised for which the Company received proceeds of $41,000 and $33,000,
respectively. The Company recognized pretax compensation expense of
$31,000, during the six months ended June 30, 2009, related to stock
options. No such expense was recognized during the six months ended
June 30, 2010. There was no unrecognized stock-based compensation
expense related to stock options at June 30, 2010.
16
The
following table summarizes certain information related to restricted common
stock grants at June 30, 2010.
Weighted
|
||||||||
Average
|
||||||||
Number of
|
Grant Date
|
|||||||
Shares
|
Fair Value
|
|||||||
Nonvested
at January 1, 2010
|
490,076 | $ | 8.17 | |||||
Nonvested
at June 30, 2010
|
379,735 | 7.68 | ||||||
For
the six months ended June 30, 2010:
|
||||||||
Granted
|
162,290 | 5.56 | ||||||
Vested
|
253,695 | 7.32 | ||||||
Forfeited
|
18,936 | 6.96 |
Employees
deferred compensation of $20,000 during the six months ended June 30, 2009, was
used to purchase restricted common stock. No such compensation was
deferred during the six months ended June 30, 2010. The Company
recognized pretax compensation expense of $1.0 million and $2.2 million during
the six months ended June 30, 2010 and 2009, respectively, related to its
restricted common stock plan. At June 30, 2010, total unrecognized
compensation cost, net of estimated forfeitures, related to nonvested restricted
stock was $1.9 million and is expected to be recognized over the next 4.75
years.
9.
|
TREASURY
STOCK
|
On
November 6, 2007, the Company’s board of directors approved a program to
repurchase up to 1,000,000 shares of the Company’s common stock. On May 27,
2010, the Company’s board of directors approved the repurchase of up to
another 1,000,000 shares of the Company’s common stock subject to approval of
our bank. Under the program, shares are repurchased in the open
market or privately negotiated transactions from time to time at prevailing
market prices. Such repurchases are accounted for using the cost
method. The Company repurchased 679,186 shares of its common stock at
an average price of $5.34 per share during the six months ended June 30, 2010,
related to this program.
17
10.
EARNINGS (LOSS) PER COMMON SHARE
Basic and
diluted earnings (loss) per common share computations for the periods indicated
were as follows:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(in thousands, except per share amounts)
|
(in thousands, except per share amounts)
|
|||||||||||||||
Income
(loss) from continuing operations, net of income taxes
|
$ | 1,694 | $ | 3,874 | $ | 3,641 | $ | (6,612 | ) | |||||||
Loss
from discontinued operations, net of income taxes
|
(146 | ) | (736 | ) | (258 | ) | (3,094 | ) | ||||||||
Net
income (loss) attributable to the Company
|
$ | 1,548 | $ | 3,138 | $ | 3,383 | $ | (9,706 | ) | |||||||
Basic
earnings (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.06 | $ | 0.14 | $ | 0.12 | $ | (0.24 | ) | |||||||
Discontinued
operations
|
(0.01 | ) | (0.03 | ) | (0.01 | ) | (0.11 | ) | ||||||||
Net
earnings (loss)
|
$ | 0.05 | $ | 0.11 | $ | 0.11 | $ | (0.35 | ) | |||||||
Diluted
earnings (loss) per common share:
|
||||||||||||||||
Continuing
operations
|
$ | 0.06 | $ | 0.14 | $ | 0.12 | $ | (0.24 | ) | |||||||
Discontinued
operations
|
(0.01 | ) | (0.03 | ) | (0.01 | ) | (0.11 | ) | ||||||||
Net
earnings (loss)
|
$ | 0.05 | $ | 0.11 | $ | 0.11 | $ | (0.35 | ) | |||||||
Weighted
average number of common shares outstanding:
|
||||||||||||||||
Basic
|
29,564 | 27,733 | 29,705 | 27,619 | ||||||||||||
Potential
dilutive effect of stock-based awards
|
20 | 605 | 6 | - | ||||||||||||
Diluted
|
29,584 | 28,338 | 29,711 | 27,619 |
Outstanding
stock options of 365,000 and 448,807 for the three months ended June 30, 2010
and 2009, respectively, and 365,000 and 458,807 for the six months ended June
30, 2010 and 2009, respectively, have not been included in diluted earnings per
common share because to do so would have been antidilutive for the periods
presented. Warrants outstanding at June 30, 2010, to purchase shares
of common stock in an aggregate value of up to $7.5 million at an exercise price
of $5.75 per common share have also not been included in diluted earnings per
common share for the six months ended June 30, 2010 because to do so would have
been antidilutive for the period. There were no warrants outstanding
at June 30, 2009.
11.
COMMITMENTS AND CONTINGENCIES
The
Company has issued letters of credit in the amounts of $250,000,
$245,000, $230,000, $230,000, and $48,000 to the owners of five of the offices
that we lease to secure payment of our lease obligations for those
facilities.
The
Company has uncommitted financing arrangements with clearing brokers that
finance our 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
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 our clearing
brokers.
In the
normal course of business, the Company enters into underwriting
commitments. There were no firm underwriting commitments open at June
30, 2010.
Many
aspects of our business involve substantial risks of liability. In the normal
course of business, we have been and in the future may be named as defendant or
co-defendant in lawsuits and arbitration proceedings involving primarily claims
for damages. We are also involved in a number of regulatory matters
arising out of the conduct of our business. There can be no assurance
that these matters will not have a material adverse effect on our results of
operations in any future period and a significant judgment could have a material
adverse impact on our consolidated financial position, results of operations,
and cash flows. In addition to claims for damages and monetary sanctions that
may be made against us, we incur substantial costs in investigating and
defending claims and regulatory matters.
18
In July
2008, the Dallas regional office of the Financial Industry Regulatory Authority
(“FINRA”) conducted a routine examination of SMH’s broker-dealer
activities. SMH received an examination report on December 31, 2008,
which identified a number of deficiencies in SMH’s operations. In
April 2009, SMH resolved half of the deficiencies noted through a compliance
conference procedure. The remaining deficiencies are subject to possible
enforcement action by FINRA. SMH has not received a Wells notice from FINRA with
respect to the deficiencies, which is a formal notice from FINRA that it intends
to take enforcement action. SMH is in communication with the FINRA staff to
resolve the matter. However, there is no assurance that a prompt
resolution can be reached or that the ultimate impact on SMH and the Company
will not be material.
In May
2005, SMH acted as placement agent for a private placement of $50.0 million in
convertible preferred stock of Ronco Corporation, a company involved in direct
response marketing. Subsequent to the offering, Ronco experienced financial
difficulties and ultimately filed a voluntary petition under Chapter 11 of the
Bankruptcy Code on June 14, 2007. The bankruptcy court approved the sale
of substantially all of Ronco’s assets in August 2007, and the case was
converted to a liquidation under Chapter 7.
In May
2007, two purchasers of Ronco convertible preferred stock filed a complaint
against SMH alleging common law fraud, statutory fraud in a stock transaction,
violations of the Texas Securities Act, and negligent misrepresentation in
connection with the plaintiffs’ purchase of $2.0 million in Ronco convertible
preferred stock. On March 17, 2009, a third purchaser of Ronco convertible
preferred stock filed a complaint against SMH. The claims are similar to the
above referenced case. The third purchaser invested $1.9 million in Ronco
convertible preferred stock. In addition, in July 2009, the
Bankruptcy Trustee filed a derivative action on behalf of the shareholders of
Ronco against two former directors of Ronco (who were employees of SMH) for
negligently authorizing the closing of the purchase of the assets of Ronco
Marketing Corp. in breach of their fiduciary duties of care and loyalty and
against SMH for negligent misrepresentation, breach of fiduciary duties, breach
of contract, and violation of the Texas Fraudulent Transfer Act. No amount of
damages is alleged. SMH believes it has valid defenses to all claims made by the
plaintiffs. However, there is no assurance that SMH will successfully
defend such claims. On April 23, 2010, following a two-week trial,
the jury returned a defense verdict in favor of SMH on all claims made by the
plaintiffs. The plaintiffs have filed a motion for new trial, which
we have opposed, and which is pending.
In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be. Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved. At June 30, 2010, the
Company had $1.2 million accrued for legal proceedings which is included in
“Accounts payable and accrued liabilities” in the Condensed Consolidated Balance
Sheet.
The
Company and its subsidiaries have obligations under operating leases that expire
through 2020 with initial noncancelable terms in excess of one
year.
12.
|
BUSINESS
SEGMENT INFORMATION
|
The
Company has two operating segments, Wealth Management and Institutional
Services, and one non-operating segment, Corporate Support 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.
19
In
December 2009, the Company completed the sale of its Capital Markets businesses
which consisted of our investment banking, and most of our New York
institutional trading, sales, and research businesses (excluding The Juda Group
and the Concept Capital division). As a result of this transaction,
management realigned its reportable segments to reflect its remaining operations
and the Capital Markets segment was renamed the Institutional Services
segment. Prior period amounts were reclassified to reflect the new
reportable segments.
The
Wealth Management segment provides investment advisory, wealth and investment
management, and financial planning 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 Wealth Management
segment may also earn commission revenue from the sale of equity, fixed income,
mutual fund, and annuity products; and sales credits from the distribution of
syndicate issues. In addition, performance fees may be earned for exceeding
performance benchmarks for the investment portfolios in the limited partnerships
that we manage. The Wealth Management segment also earns revenue from
net interest on customers’ margin loan and credit account balances and sales
credits from the distribution of syndicate products.
The
Institutional Services segment generally provides corporate financing services
to its institutional client base. These services are provided through
two divisions: (i) institutional brokerage and (ii) prime brokerage
services.
|
·
|
The
Institutional Brokerage division distributes equity and fixed income
products through its distribution network to its institutional clients.
Institutional revenue consists of commissions and principal credits earned
on transactions in customer brokerage accounts, net interest on customers’
margin loan and credit account balances, and sales credits from the
distribution syndicate products.
|
|
·
|
The
Prime Brokerage Services division provides trade execution, clearing and
custody services mainly through Goldman Sachs, and other back-office
services to hedge funds and other professional traders. Prime broker
revenue consists 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
Corporate Support 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 revenue and expenses
are included in Corporate Support and Other. Gains and losses from
sports representation and management services performed by SSG are included in
Corporate Support and Other.
20
The
following summarizes certain financial information of each reportable business
segment for the three and six months ended June 30, 2010 and 2009,
respectively. SMHG does not analyze asset information in all business
segments.
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
Revenue:
|
||||||||||||||||
Wealth
Management
|
$ | 30,393 | $ | 24,399 | $ | 61,037 | $ | 45,735 | ||||||||
Institutional
Services:
|
||||||||||||||||
Institutional
brokerage
|
1,284 | 1,272 | 2,307 | 2,584 | ||||||||||||
Prime
brokerage services
|
13,720 | 19,923 | 26,898 | 34,363 | ||||||||||||
Institutional
Services Total
|
15,004 | 21,195 | 29,205 | 36,947 | ||||||||||||
Corporate
Support and Other
|
352 | 2,476 | 2,567 | 1,246 | ||||||||||||
Total
|
$ | 45,749 | $ | 48,070 | $ | 92,809 | $ | 83,928 | ||||||||
Income
(loss) from continuing operations before equity in income (loss) of
limited partnerships and income taxes:
|
||||||||||||||||
Wealth
Management
|
$ | 8,474 | $ | 6,096 | $ | 16,982 | $ | 11,824 | ||||||||
Institutional
Services:
|
||||||||||||||||
Institutional
brokerage
|
(132 | ) | (261 | ) | (271 | ) | (501 | ) | ||||||||
Prime
brokerage services
|
(2 | ) | 450 | (632 | ) | 777 | ||||||||||
Institutional
Services Total
|
(134 | ) | 189 | (903 | ) | 276 | ||||||||||
Corporate
Support and Other
|
(4,756 | ) | (3,095 | ) | (11,323 | ) | (23,597 | ) | ||||||||
Total
|
$ | 3,584 | $ | 3,190 | $ | 4,756 | $ | (11,497 | ) | |||||||
Equity
in income (loss) of limited partnerships:
|
||||||||||||||||
Wealth
Management
|
$ | (178 | ) | $ | (407 | ) | $ | 543 | $ | (1,155 | ) | |||||
Institutional
Services:
|
||||||||||||||||
Institutional
brokerage
|
- | - | - | - | ||||||||||||
Prime
brokerage services
|
- | - | - | - | ||||||||||||
Institutional
Services Total
|
- | - | - | - | ||||||||||||
Corporate
Support and Other
|
542 | 1,893 | 3,047 | 2,143 | ||||||||||||
Total
|
$ | 364 | $ | 1,486 | $ | 3,590 | $ | 988 | ||||||||
Gain
on step acquisition:
|
||||||||||||||||
Wealth
Management
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Institutional
Services:
|
||||||||||||||||
Institutional
brokerage
|
- | - | - | - | ||||||||||||
Prime
brokerage services
|
- | - | - | - | ||||||||||||
Institutional
Services Total
|
- | - | - | - | ||||||||||||
Corporate
Support and Other
|
- | 3,000 | - | 3,000 | ||||||||||||
Total
|
$ | - | $ | 3,000 | $ | - | $ | 3,000 | ||||||||
Income
(loss) from continuing operations before income taxes:
|
||||||||||||||||
Wealth
Management
|
$ | 8,296 | $ | 5,689 | $ | 17,525 | $ | 10,669 | ||||||||
Institutional
Services:
|
||||||||||||||||
Institutional
brokerage
|
(132 | ) | (261 | ) | (271 | ) | (501 | ) | ||||||||
Prime
brokerage services
|
(2 | ) | 450 | (632 | ) | 777 | ||||||||||
Institutional
Services Total
|
(134 | ) | 189 | (903 | ) | 276 | ||||||||||
Corporate
Support and Other
|
(4,214 | ) | 1,798 | (8,276 | ) | (18,454 | ) | |||||||||
Total
|
$ | 3,948 | $ | 7,676 | $ | 8,346 | $ | (7,509 | ) | |||||||
Net
income attributable to the noncontrolling interest:
|
||||||||||||||||
Wealth
Management
|
$ | (1,158 | ) | $ | (1,204 | ) | $ | (2,369 | ) | $ | (2,256 | ) | ||||
Institutional
Services:
|
||||||||||||||||
Institutional
brokerage
|
- | - | - | - | ||||||||||||
Prime
brokerage services
|
- | - | - | - | ||||||||||||
Institutional
Services Total
|
- | - | - | - | ||||||||||||
Corporate
Support and Other
|
- | - | - | - | ||||||||||||
Total
|
$ | (1,158 | ) | $ | (1,204 | ) | $ | (2,369 | ) | $ | (2,256 | ) |
21
13.
SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Cash
payment (refund) for income taxes, net
|
$ | 2,443 | $ | (623 | ) | |||
Cash
paid for interest
|
453 | 618 | ||||||
Noncash
investing activities:
|
||||||||
Cumulative
effect of adoption of a new accounting principle
|
445 | - | ||||||
Acquisition:
|
||||||||
Goodwill
and other intangible assets, net
|
- | 10,000 | ||||||
Subordinated
promissory note
|
- | (10,000 | ) | |||||
Noncash
financing activities:
|
||||||||
Increase
(decrease) in dividends declared not yet paid
|
(24 | ) | 1 |
14.
RELATED PARTY TRANSACTIONS
The
Company had receivables from related parties totaling $17.9 million at June 30,
2010, primarily consisting of $2.7 million of advances to unconsolidated related
entities to fund operating expenses, $2.3 million of notes receivable from
employees and consultants representing loans made to induce the employees and
consultants to affiliate with the Company, and $1.1 million of management fees
receivable from the limited partnerships that the Company
manages. The June 30, 2010 balance also includes an $8.0 million note
issued by Madison Williams to the Company in connection with the Capital Markets
transaction and a $1.2 million note issued by Concept Capital Holdings, LLC to
the Company in connection with the planned separation of the Concept Capital
division.
15.
DISCONTINUED OPERATIONS
During
the first quarter of 2009, SMH closed three retail offices. This
decision was made due to the offices’ inability to achieve sufficient revenue to
offset their costs. The results of operations for these offices have
been reclassified as discontinued operations for all periods
presented.
During
the fourth quarter of 2009, SMH contributed to Madison Williams the Capital
Markets business in exchange for a 17.5% Class A membership interest in Madison
Williams, cash, and a note issued by Madison Williams to the
Company. The results of operations for the Capital Markets business
have been reclassified as discontinued operations for all periods
presented.
A summary
of selected financial information of discontinued operations is as follows for
the three and six months ended June 30, 2010 and 2009:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(in thousands)
|
(in thousands)
|
|||||||||||||||
Operating
activities:
|
||||||||||||||||
Revenue
|
$ | (15 | ) | $ | 7,019 | $ | 12 | $ | 12,642 | |||||||
Expenses
|
224 | 8,337 | 435 | 17,871 | ||||||||||||
Loss
from discontinued operations before noncontrolling interest and income
taxes
|
(239 | ) | (1,318 | ) | (423 | ) | (5,229 | ) | ||||||||
Noncontrolling
interest in net loss of consolidated companies
|
- | 112 | - | 112 | ||||||||||||
Loss
from discontinued operations before income taxes
|
(239 | ) | (1,206 | ) | (423 | ) | (5,117 | ) | ||||||||
Benefit
for income taxes
|
(93 | ) | (470 | ) | (165 | ) | (2,023 | ) | ||||||||
Loss
from discontinued operations, net of income taxes
|
$ | (146 | ) | $ | (736 | ) | $ | (258 | ) | $ | (3,094 | ) |
22
Major
classes of assets and liabilities of the offices and the Capital Markets
business accounted for as discontinued operations in the accompanying Condensed
Consolidated Balance Sheets at June 30, 2010 and December 31, 2009 were as
follows:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Furniture,
equipment, and leasehold improvements, net
|
$ | 132 | $ | 179 | ||||
Total
assets of discontinued operations
|
$ | 132 | $ | 179 | ||||
Total
liabilities of discontinued operations
|
$ | 67 | $ | 89 |
23
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Special
Cautionary Notice Regarding Forward-Looking Statements
This
quarterly report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. These
forward-looking statements may relate to such matters as anticipated financial
performance, future revenue or earnings, business prospects, projected ventures,
new products, anticipated market performance, and similar matters. We caution
you that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, include, but are not limited to (1) trading volume in the
securities markets; (2) volatility of the securities markets and interest rates;
(3) changes in regulatory requirements that could affect the demand for our
services or the cost of doing business; (4) general economic conditions, both
domestic and foreign, especially in the regions where we do business; (5)
changes in the rate of inflation and related impact on securities markets; (6)
competition from existing financial institutions and other new participants in
the securities markets; (7) legal developments affecting the litigation
experience of the securities industry; (8) successful implementation of
technology solutions; (9) changes in valuations of our trading and warrant
portfolios resulting from mark-to-market adjustments; (10) dependence on key
personnel; (11) demand for our services; and (12) litigation and securities law
liabilities. See “Risk Factors” in Part I, Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2009. The Company does not
undertake to publicly update or revise any forward-looking
statements.
The
following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and their related notes.
Overview
The
Company is a holding company that, through its subsidiaries and affiliates,
provides wealth management and institutional services to a large and diversified
group of clients and customers, including individuals, corporations, and
financial institutions. A summary of these services follows:
Our Wealth Management segment
provides investment advisory, wealth and investment management, and financial
planning services to high net worth and mass affluent individuals and
institutions, including investment strategies and alternatives, tax efficient
estate and financial planning, trusts, and agent/fiduciary investment management
services throughout their financial life cycle, as well as private client
brokerage services. In addition, we provide specialized wealth management
products and services in specific investment styles to individuals,
corporations, and institutions both through internal marketing efforts and
externally through formal sub-advisory relationships and other distribution
arrangements with third parties.
Our
Institutional Services segment provides institutional equity brokerage and prime
brokerage services to institutional clients, and third party management of a
portion of our assets.
Institutional Brokerage
provides institutional equity brokerage and hedge funds research to a broad
array of institutions, including banks, retirement funds, mutual funds,
endowments, investment advisors, and insurance companies.
Prime Brokerage Services
provides trade execution, clearing, bookkeeping, reporting, custodial,
securities borrowing, financing, research, and fund raising to hedge fund
clients. The Company maintains a small number of asset management
accounts on behalf of individual asset managers through this
division. The Washington Research Group provides research, sales, and
trading services to a broad range of institutional investors.
24
We are
exposed to volatility and trends in the general securities market and the
economy. Due to the downturn in the market and the economic recession
that began during the second half of 2008, client assets declined during the
last half of 2008 and into the first quarter of 2009. However, during
the second quarter of 2009, the market began to improve and client assets have
recovered resulting in, among other things, higher fee and commission
revenue. While many economists believe the recession ended some time
during the first quarter of fiscal 2010, unemployment and tight credit markets
continue to create an unstable economic environment, and there is no guarantee
that conditions will not worsen again. All of these factors have had
an impact on our operations. Client assets were as
follows:
Client Assets(1)
|
||||
(in millions)
|
||||
December
31, 2008
|
$ | 8,627 | ||
March
31, 2009
|
8,501 | |||
June
30, 2009
|
9,534 | |||
September
30, 2009
|
10,595 | |||
December
31, 2009
|
11,273 | |||
March
31, 2010
|
11,904 | |||
June 30, 2010
|
11,085 |
(1)Client
assets include the gross value of assets under management directly or via
outside managers and assets held in brokerage accounts for clients by outside
clearing firms.
Client
assets fell by $819.0 million in the second quarter of 2010, of
which $322.0 million reflects net outflows and $497.0 million was due to the
market decline. The Company’s 4.2% market-related decrease in
client assets compares with an 11.4% drop in the S&P 500 and a 5.6% decline
in a 60/40 portfolio.
Growth
Strategy
Our
expansion of Edelman offices continues on plan. A total of seven new
branches have been added in 2010 in metropolitan New York, greater Washington,
D.C., Chicago and Miami. Additional expansion offices are slated for
the Boston and Detroit areas with seven more planned for opening before the
end of the year. Although the expansion costs will impact earnings
over the short term, we believe this investment will add enormously to the
Company’s future results of operations.
In
addition, the Company plans to further build on this expansion success by
seeking to acquire other high-caliber practices and have set reserves in place
to fund this mission. Initiatives to attract new broker-dealers and
advisors who we feel add to the success and profitability of the Company are
also underway. The Company is also working to attract new clients and
assets to existing businesses and are preparing a significant
marketing initiative for this year.
The
recent economic turmoil and upheaval in the credit markets resulted in
significant dislocation in our industry. We believe this presents a
time of opportunity for us. The considerable changes and challenges
that many larger national firms are experiencing give us an advantage in hiring
highly qualified and experienced financial advisors who have either become
dislocated or disheartened with their current employer. Financial
advisors at these firms are faced with the challenge of convincing customers
that their parent firm is strong and financially stable despite negative media
coverage. These financial professionals now consider regional firms
like ours as serious alternatives for their business. Our pipeline of
new recruits and the quality of new recruits has increased significantly over
the past two years.
25
Having
divested the Company of the primary capital markets units that do not compliment
our concentration on wealth management, we are well aligned for
expansion. The sale of non-core businesses continues to provide
income that keeps the Company well capitalized and poised for
growth. Concept Capital, our prime brokerage and institutional
services unit, anticipates having its independent broker-deal application
approved during the third quarter of 2010. We will continue to own
43.75% of Concept Capital, which broke even in the latest quarter, but it will
be a passive investment, not an operating unit of the Company.
Business
Environment
Our
business is sensitive to financial market conditions, which have been very
volatile over the past twenty-four months. As of June 30, 2010,
equity market indices reflected an average increase from a year ago with the Dow
Jones Industrial Average (the “DJIA”), the Standard & Poor’s 500 Index
(“S&P 500”) and the NASDAQ Composite Index (“NASDAQ”) up. In
contrast, the average daily volume on the New York Stock Exchange declined
during the second quarter of 2010. Despite the rally in the markets
in the first quarter of 2010, the economic environment is challenging, with the
national unemployment rate at approximately 9.7% at the end of June 2010, a
decrease from the high of 10% at the end of December 2009. The
Federal Reserve Board (“FRB”) reduced the federal funds target rate to 0 – 0.25%
on December 16, 2008, and has not yet begun increasing rates. Most
economists do not expect the federal funds rate will increase significantly
during the fourth quarter of 2010.
Investors
initially responded to the volatile markets with a flight to quality which, in
turn, reduced yields on short-term U.S. treasury securities and produced a
dramatic reduction in commercial paper issuance. Investors are slowly
moving back to high yielding investments, but this has been a slow
progression.
The
disruptions and developments in the general economy and the credit markets over
the past twenty-four months have resulted in a range of actions by the
U.S. and foreign governments to attempt to bring liquidity and order to the
financial markets and to prevent a long recession in the world
economy. The Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Act”) was passed by Congress on July 15, 2010 and was signed into law
on July 21, 2010. The Act, among other things, established a
Financial Stability Oversight Council (“FSOC”) and a Consumer Financial
Protection Bureau (“CFPB”) whose duties will include the monitoring of domestic
and international financial regulatory proposals and developments, as well as
the protection of consumers. Many regulations will be issued to
implement the Act over the next twelve to twenty-four months. We are
currently reviewing the Act and are unable to determine the final impact that
the Act will have on our operations until these regulations have been
issued.
Components
of Revenue and Expenses
Revenue. Our revenue is
comprised primarily of (1) fees from asset-based advisory services, wealth
management, and financial planning services, (2) commission revenue from wealth
advisory, prime and institutional brokerage transactions, and (3) principal
transactions. We also earn interest on cash held and receive
dividends from the equity and fixed income securities held in our corporate
capital accounts, receive sales credits from third party placement agreements,
earn fees through the sale of insurance products, and have realized and
unrealized gains (or losses) on securities in our inventory
account.
Expenses. Our expenses
consist of (1) compensation and benefits, (2) floor brokerage, exchange, and
clearance fees, and (3) other expenses. Compensation and benefits have both a
variable component, based on revenue production, and a fixed component. The
variable component includes institutional and retail sales commissions, bonuses,
overrides, and other incentives. Wealth advisory and institutional commissions
are based on competitive commission schedules. The fixed component includes
administrative and executive salaries, payroll taxes, employee benefits, and
temporary employee costs. Compensation and benefits is our largest expense item
and includes wages, salaries, and benefits. During the second quarter of 2010,
compensation and benefits represented 63.6% of total expenses and 58.6% of total
revenue, compared to 69.3% of total expenses and 64.7% of total revenue during
the second quarter of 2009. The decrease in compensation and benefits
as a percentage of expenses, and the decrease in compensation and benefits as a
percentage of total revenue is principally due to a decrease in revenue in our
prime brokerage services division which has a higher payout than our other
business lines.
26
Floor
brokerage, exchange, and clearance fees include clearing and trade execution
costs associated with the retail, prime, and institutional brokerage business.
The Company clears its transactions through several clearing firms,
including Pershing, an affiliate of The Bank of New York Mellon, Goldman Sachs
Execution & Clearing, L.P., First Clearing Corporation, and J.P. Morgan
Clearing Corp.
Other
expenses include (1) communications and data processing expenses, such as
third-party systems, data, and software providers, (2) occupancy expenses, such
as rent and utility charges for facilities, (3) interest expense, (4) goodwill
and other intangible assets impairment charges, (5) amortization of other
intangible assets, and (6) other general and administrative
expenses.
Results
of Operations
Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009
Edelman
opened six new offices in September 2009, four new offices during the three
months ended March 31, 2010, and an additional three new offices during the
three months ended June 30, 2010.
Total
revenue was $45.7 million for the second quarter of 2010 compared to $48.1
million for the same quarter in 2009, a decrease of $2.4 million, or 4.8%,
reflecting increases of $5.8 million in investment advisory and related services
revenue, $279,000 in investment banking revenue, and $1.1 million in commission
revenue, and a decrease in principal transactions revenue of $9.5
million. Total expenses for the second quarter of 2010 decreased $2.7
million, or 6.0%, to $42.2 million from $44.9 million in the same quarter of the
previous year principally due to a decline in compensation expense related to
the decline in revenue. The decrease in compensation expense was
partially offset by increased occupancy, communications and data processing
costs, and other general and administrative expenses. Equity in
income of limited partnerships decreased to $364,000 for the second quarter of
2010 compared to $1.5 million for the second quarter of 2009, reflecting a
decline in the value of our partnership investment portfolios generally caused
by a weaker investment climate. Income (loss) from continuing
operations, net of income taxes, was $2.9 million, or $0.06 per diluted common
share, for the second quarter of 2010 compared to $5.1 million, or $0.14 per
diluted common share, for the second quarter of 2009.
Revenue
from investment advisory and related services increased to $23.1 million in the
second quarter of 2010 from $17.3 million in the same quarter of 2009 as a
result of an increase in client assets. Commission revenue increased
to $12.3 million in the second quarter of 2010 from $11.2 million for the same
period in 2009 as a result of an increase in trading volume in the Wealth
Management segment. Investment banking revenue increased to $914,000
during the second quarter of 2010 from $635,000 in the same period of 2009 due
to an increase in sales credits earned from syndicate
transactions. Principal transactions revenue decreased from $13.7
million for the second quarter of 2009 to $4.3 million for the second quarter of
2010 as the result of a decrease in fixed income trading at our Concept Capital
division. Other income increased from $2.5 million during the second
quarter of 2009 to $2.6 million during the same period in 2010 reflecting an
increase of $820,000 in hedge fund servicing revenue and third-party marketing
fees.
During
the three months ended June 30, 2010, employee compensation and benefits
decreased to $26.8 million from $31.1 million in the same period last year
principally due to lower commission expense related to reduced revenue from the
sale of fixed income products. During the three months ended June 30,
2010, floor brokerage, exchange, and clearance fees increased to $1.7 million
from $1.6 million in the same period last year due to a higher commission
revenue. Communications and data processing costs increased to $3.0
million in the second quarter of 2010 compared to $2.5 million in the same
period last year due to higher clearing firm service fees at our Concept Capital
division. Occupancy costs increased to $3.2 million in the second
quarter of 2010 compared to $2.8 million in the second quarter of 2009 due to
the Edelman expansion. Interest expense decreased to $463,000 for the
second quarter of 2010 compared to $640,000 in the second quarter of 2009 due to
a decline in our funded debt from $33.8 million at June 30, 2009 to $16.7
million at June 30, 2010. Other general and administrative expenses
increased to $6.6 million during the second quarter of 2010 from $5.9 million in
the second quarter of 2009 due to an increase in advertising and other expenses
related to the Edelman expansion.
27
Our
effective tax rate from continuing operations was 39.3% for the three months
ended June 30, 2010 compared to 40.1% for the three months ended June 30,
2009. The effective tax rate exceeds the federal statutory income tax
rate primarily as a result of state income taxes and certain nondeductible
expenses.
During
the first quarter of 2009, the Company closed three retail
offices. The decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs. During the fourth
quarter of 2009, the Company completed its sale of most of its capital markets
businesses. The Company recorded a net loss from discontinued
operations of $146,000 in the second quarter of 2010 compared to $736,000 in the
second quarter of 2009 related to the closed offices and the sale of the capital
markets business.
Results
by Segment
Wealth
Management
Three Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 30,393 | $ | 24,399 | ||||
Income
from continuing operations before income taxes
|
$ | 8,296 | $ | 5,689 |
Revenue
from wealth management increased to $30.4 million from $24.4 million and income
from continuing operations before income taxes increased to $8.3 million from
$5.7 million. Edelman opened six new offices in September 2009, four
new offices during the three months ended March 31, 2010, and an additional
three new offices during the three months ended June 30,
2010. Investment advisory and related services fees increased to
$22.8 million from $17.2 million reflecting an increase in the size of our
client portfolios primarily due to improvement in the general securities market
and the economy. Selling concessions increased to $629,000 from
$480,000 as a result of an increase in sales credits from syndicate
transactions. Total expenses increased to $22.0 million from $18.4
million due to higher employee compensation and occupancy costs associated with
the Edelman expansion, and the increase in revenue. Equity in loss of
limited partnerships decreased to $178,000 from $407,000. The improvement in
equity in loss of limited partnerships is attributable to a lesser
decline in the value of the limited partnerships we manage.
Institutional
Services
Institutional
Brokerage
Three Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 1,284 | $ | 1,272 | ||||
Loss
from continuing operations before income taxes
|
$ | (132 | ) | $ | (261 | ) |
Revenue
from Institutional Brokerage was $1.3 million for the three months ended June
30, 2010, and 2009. Loss from continuing operations before income
taxes decreased to $132,000 from $261,000. Total expenses remained
constant at $1.4 million.
28
Prime Brokerage
Services
Three Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 13,720 | $ | 19,923 | ||||
Income
(loss) from continuing operations before income taxes
|
$ | (2 | ) | $ | 450 |
Revenue
from prime brokerage services decreased to $13.7 million from $19.9 million and
income (loss) from continuing operations before income taxes decreased to a loss
of $2,000 from income of $450,000. Principal transactions revenue
decreased to $4.4 million from $11.8 million reflecting a decrease of $698,000
in proprietary trading revenue and a $6.7 million decrease in revenue earned
from the sale of fixed income products. The decline in principal
transactions was partially offset by a $266,000 increase in commissions revenue
mainly related to the addition of the Washington Research Group during the
second quarter of 2009. Total expenses decreased to $13.7 million
from $19.5 million due to the lower revenue.
Corporate
Support and Other
Three Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 352 | $ | 2,476 | ||||
|
||||||||
Income
(loss) from continuing operations before income
taxes
|
$ | (4,214 | ) | $ | 1,798 |
Revenue
from corporate support and other decreased to $352,000 from $2.5 million, and
income (loss) from continuing operations before income taxes decreased to a loss
of $4.2 million from income of $1.8 million. Revenue from principal
transactions, which consists of changes in the values of our investment
portfolios, decreased to a loss of $607,000 from $1.5 million. Total
expenses increased to $5.1 million from $5.7 million due to higher goodwill and
other intangible assets amortization expenses mainly related to the EFA
acquisition. The decline in the value of our partnership investments
resulted in the decrease of equity in income of limited partnerships from $1.9
million during the second quarter of 2009 to $542,000 in the second quarter of
2010. The Company recognized a $3.0 million gain on step acquisition
in 2009 related to its previously-held noncontrolling interest in
EFA.
29
Results
of Operations
Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009
Total
revenue was $92.8 million for the six months ended June 30, 2010 compared to
$83.9 million for the same period in 2009, an increase of $8.9 million, or
10.6%, reflecting increases of $13.6 million in investment advisory and related
services revenue, $1.5 million in investment banking revenue, and $2.1 million
in commission revenue partially offset by a decrease in principal transactions
revenue of $9.1 million. Total expenses for the six months ended June
30, 2010, decreased $7.4 million, or 7.7%, to $88.1 million from $95.4 million
in the same period of the previous year principally due to $14.9 million in
goodwill and other intangible assets impairment charges that were recognized in
the first quarter of 2009. The decrease in expenses related to the
2009 impairment charges was partially offset by increased employee compensation
and benefits, communications and data processing costs, and other general and
administrative expenses. Equity in income of limited partnerships
increased to $3.6 million for the six months ended June 30, 2010 compared to
$988,000 for the same period of 2009, reflecting an increase in the fair value
of our investment in PTC Houston Management due to a change in the ownership
structure. Income (loss) from continuing operations, net of income
taxes, was $6.0 million, or $0.12 per diluted common share, for the six months
ended June 30, 2010 compared to a loss of $4.4 million, or $(0.24) per diluted
common share, for the six months ended June 30, 2009.
Revenue
from investment advisory and related services increased to $45.0 million for the
six months ended June 30, 2010 from $31.5 million in the same period of 2009 as
a result of an increase in client assets. Commission revenue
increased to $23.7 million for the six months ended June 30, 2010, from $21.6
million for the same period in 2009 as a result of an increase in trading volume
in the Wealth Management segment. Investment banking revenue
increased to $2.4 million during the six months ended June 30, 2010 from
$915,000 in the same period of 2009 due to an increase in sales credits earned
from syndicate transactions. Principal transactions revenue decreased
from $20.0 million for the six months ended June 30, 2009, to $11.0 million for
the same period of 2010 as the result of an increase in the value of the
Company’s investments, partially offset by a decrease in the sale of fixed
income products. Other income increased from $4.6 million during the
six months ended June 30, 2009 to $5.4 million during the same period in 2010
reflecting an increase of $1.7 million in hedge fund servicing revenue and
third-party marketing fees partially offset by a decrease in insurance
commissions.
During
the six months ended June 30, 2010, employee compensation and benefits increased
to $56.4 million from $54.2 million in the same period last year principally due
to higher commission expense related to higher revenue and to additional
personnel related to the EFA acquisition and the Edelman
expansion. During the six months ended June 30, 2009, floor
brokerage, exchange, and clearance fees decreased from $3.3 million to $2.9
million in the same period in 2010 due to a decrease in clearance fees in the
institutional brokerage division due to lower trading
volume. Communications and data processing costs increased to $6.1
million for the six months ended June 30, 2010 compared to $4.8 million in the
same period last year due to higher clearing firm service fees resulting from
the increase in trading volume in the Wealth Management segment and additional
customer accounts related to the EFA acquisition and the Edelman
expansion. Occupancy costs increased to $6.5 million in the six
months ended June 30, 2010 compared to $5.6 million in the same period of 2009
due to the Edelman expansion. Interest expense increased to $923,000
during the six months ended June 30, 2010, from $820,000 in the same period of
2009 due to an increase in the average balance of our funded debt from the first
six months of 2009 to the first six months of 2010. Amortization of
other intangible assets increased to $890,000 for the six months ended June 30,
2010, compared to $673,000 for the same period of 2009 due to the acquisition of
the additional 66% membership interest in EFA and to the acquisition of
IFS. Other general and administrative expenses increased to $14.4
million during the six months ended June 30, 2010 from $11.3 million in the same
period of 2009 due to an increase in advertising and other expenses related to
the acquisition of EFA and to the Edelman expansion.
30
Our
effective tax rate from continuing operations was 39.1% for the six months ended
June 30, 2010, compared to 32.3% for the six months ended June 30,
2009. The effective tax rate exceeds the federal statutory income tax
rate primarily as a result of state income taxes and certain nondeductible
expenses.
During
the first quarter of 2009, the Company closed three retail
offices. The decision was made due to the offices’ inability to
achieve sufficient revenue to offset their costs. During the fourth
quarter of 2009, the Company completed its sale of most of its capital markets
businesses. The Company recorded a net loss from discontinued
operations of $258,000 in the six months ended June 30, 2010, compared to $3.1
million in the same period of 2009 related to the closed offices and
the sale of the capital markets business.
Results
by Segment
Wealth
Management
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 61,037 | $ | 45,735 | ||||
Income
from continuing operations before income taxes
|
$ | 17,525 | $ | 10,669 |
Revenue
from wealth management increased to $61.0 million from $45.7 million and income
from continuing operations before income taxes increased to $17.5 million from
$10.7 million. On April 1, 2009, the Company increased its ownership
of EFA from 10% to 76%, which required a change in our method of accounting for
EFA’s results to consolidation from the cost method. Edelman opened
six new offices in September 2009 and an additional seven new offices during the
six months ended June 30, 2010. Investment advisory and related
services fees increased to $44.5 million from $31.4 million reflecting an
increase in the size of our client portfolios primarily due to improvement in
the general securities market and the economy. Sales credits from
syndicate transactions increased to $2.4 million from $694,000 as a result of an
increase in syndicate transactions. Total expenses increased to $44.1
million from $33.9 million due to higher employee compensation and occupancy
costs associated with the EFA acquisition, the Edelman expansion, and the
increase in revenue. Equity in income (loss) of limited partnerships
increased to $543,000 from a loss of $1.2 million. The increase in equity in
income (loss) of limited partnerships is attributable to an increase in the
value of the limited partnerships we manage.
Institutional
Services
Institutional
Brokerage
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 2,307 | $ | 2,584 | ||||
Loss
from continuing operations before income taxes
|
$ | (271 | ) | $ | (501 | ) |
31
Revenue
from institutional services decreased to $2.3 million from $2.6 million.
Commission revenue decreased as a result of a decline in the number of shares
traded. Total expenses decreased to $2.6 million from $3.1 million
due to decreased employee compensation related to the lower
revenue. Loss from continuing operations before income taxes
decreased to $271,000 from $501,000.
Prime Brokerage
Services
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 26,898 | $ | 34,363 | ||||
Income
(loss) from continuing operations before income
taxes
|
$ | (632 | ) | $ | 777 |
Revenue
from prime brokerage services decreased to $26.9 million from $34.4 million and
income (loss) from continuing operations before income taxes decreased to a loss
of $632,000 from income of $777,000. Principal transactions revenue
decreased to $9.3 million from $19.3 million reflecting a decrease of $2.2
million in proprietary trading revenue and a decrease in revenue earned from the
sale of fixed income products. The decline in principal transactions
was partially offset by a $774,000 increase in commissions revenue mainly
related to the addition of the Washington Research Group during the second
quarter of 2009. Total expenses decreased to $27.5 million from $33.6
million due to the revenue decline.
Corporate
Support and Other
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 2,567 | $ | 1,246 | ||||
Loss
from continuing operations before income taxes
|
$ | (8,276 | ) | $ | (18,454 | ) |
Revenue
from corporate support and other increased to $2.6 million from $1.2 million and
loss from continuing operations before income taxes decreased to $8.3 million
from $18.5 million. Revenue from principal transactions, which
consists of changes in the values of our investment portfolios, increased to
income of $596,000 from a loss of $303,000. Total expenses decreased
to $13.9 million from $24.8 million due to $14.9 million of goodwill and other
intangible assets impairment charges recognized in 2009. This
decrease was partially offset by an increase in the provision for bad
debts. The deconsolidation of one of the investment partnerships that
we manage and the fair value measurement of that investment resulted in equity
in income of limited partnerships of $3.0 million for the six months ended June
30, 2010. Equity in income of limited partnerships totaled $2.1
million for the six months ended June 30, 2009, mainly due to an increase in the
value of the Company’s investment in high yield fixed income
products. The Company recognized a $3.0 million gain on step
acquisition in 2009 related to its previously-held noncontrolling interest in
EFA.
32
Liquidity
and Capital Resources
The
Company’s funding needs consist of (1) funds necessary to maintain current
operations, (2) capital expenditure requirements, including funds needed for the
Edelman expansion, (3) debt repayment, and (4) funds used for
acquisitions.
We intend
to satisfy our funding needs with our own capital resources, consisting largely
of internally generated earnings and liquid assets, and with borrowings from
outside parties. At June 30, 2010, we had $37.0 million in cash and
cash equivalents, which together with receivables from broker-dealers and
clearing organizations, deposits with clearing organizations, and marketable
securities owned represented 16.3% of our total assets at the end of our second
quarter.
Receivables
turnover, calculated as annualized revenue divided by average receivables, was
1.6 for the six months ended June 30, 2010, compared to 1.4 for the same period
in the prior year. The increase in the receivables turnover was the
result of an increase in investment advisory revenue that is typically collected
as earned. The allowance for doubtful accounts as a percentage of
receivables was 2.0% at June 30, 2010, compared to 2.2% at December 31,
2009.
For the
six months ended June 30, 2010, net cash provided by operations was $6.7 million
versus $15.5 million during the same period in 2009. Marketable
securities owned decreased by $5.7 million during the first six months of 2010,
securities sold, not yet purchased increased by $923,000 and payables to
broker-dealers and clearing organizations decreased by $22,000. The
change in marketable securities owned, securities sold, not yet purchased, and
payables to broker-dealers and clearing organizations reflects the Company’s
reduction of its net security positions. The Company’s portfolio
includes both long and short equity positions. Our asset managers
generally seek to generate profits based on trading spreads, rather than through
speculation on the direction of the market and employ hedging strategies
designed to insulate the net value of our portfolios from fluctuations in the
general level of interest rates and equity price variances. We
finance a portion of our positions through our clearing
broker-dealers.
Not
readily marketable securities owned, primarily investments in limited
partnerships, were $23.7 million at June 30, 2010, compared to $22.8 million at
December 31, 2009. This increase is the result of changes in the
values of our investment portfolios. These limited partnerships
typically have a ten-year life.
Capital
expenditures for the first six months of 2010 were $1.8 million, mainly for the
purchase of leasehold improvements, furniture, and computer equipment and
software necessary for the Edelman expansion.
SMH 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 (and the rule of the “applicable” exchange also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed 10 to 1). At June 30, 2010, SMH had net
capital, as defined, of $10.9 million, which was $10.3 million in excess of its
required net capital of $638,000.
In view
of the inherent difficulty of predicting the outcome of legal proceedings,
particularly where the plaintiffs seek substantial or indeterminate damages or
where novel legal theories or a large number of parties are involved, we cannot
state with confidence what the eventual outcome of currently pending matters
will be, what the timing of the ultimate resolution of these matters will be, or
what the eventual result in each pending matter will be. Based on
currently available information, we have established reserves for certain
litigation matters and our management does not believe that resolution of any
matter will have a material adverse effect on our liquidity or financial
position although, depending on our results for a particular period, an adverse
determination could have a material effect on quarterly or annual operating
results in the period in which it is resolved.
33
Critical
Accounting Policies/Estimates
Goodwill and Other Intangible
Assets. Goodwill represents the excess of the aggregate
purchase price over the fair value of the net assets acquired in a business
combination. Goodwill is reviewed for impairment at least annually in
accordance with the provisions of FASB ASC Topic 350, Intangibles – Goodwill and
Other. ASC Topic 350 requires that goodwill be tested for
impairment between annual test dates if an event or changing circumstances
indicate that it is more likely than not that the fair value of the reporting
unit is below its carrying amount. The goodwill impairment test is a
two-step test. Under the first step, the fair value of the reporting
unit is compared with its carrying value (including goodwill and other
intangible assets). If the fair value of the reporting unit is less
than its carrying value, an indication of goodwill impairment exists for the
reporting unit and the enterprise must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation, in accordance with FASB ASC Topic
805, Business
Combinations. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill.
Factors
considered in determining fair value include, among other things, the Company’s
market capitalization as determined by quoted market prices for its common stock
and the value of the Company’s reporting units. The Company uses
several methods to value its reporting units, including discounted cash flows,
comparisons with valuations of public companies in the same industry, and
multiples of assets under management. If the fair value of the
reporting unit exceeds its carrying value, step two does not need to be
performed.
In
performing the first step of the goodwill impairment test, the estimated fair
values of the reporting units were developed using the methods listed
above. When performing the discounted cash flow analysis, the Company
utilized observable market data to the extent available. Future cash
flow projections are based primarily on actual results and, at April 30, 2009,
included negative future cash flows for one reporting unit. This
reporting unit has no recorded goodwill. For the February 28, 2009,
and April 30, 2009, goodwill analyses, the cash flow estimates reflect zero
growth for all projected future periods.
The
Company performed an update of its April 30, 2008, review for goodwill
impairment as of February 28, 2009, due to deterioration in overall
macroeconomic conditions and the extended decline in the Company’s stock
price. This review was performed using the methodology described
above. Future cash flow projections were based primarily on actual
results with budgeted cash flow projections used for one reporting
unit. When performing the February 28, 2009, discounted cash flow
analysis, no future negative cash flows were projected. This
assessment resulted in the recognition of a goodwill impairment charge of $13.8
million at two reporting units: Edelman - $13.0 million and Kissinger
- $837,000.
For the
April 30, 2010, goodwill analyses, the cash flow estimates reflect 6% revenue
growth and 3% expense growth for all entities, other than Edelman entities,
which were based on historical growth rates and future
forecasts. Edelman reflected higher growth rates of 10% based on the
Edelman expansion plan to continue expansion by opening new offices throughout
the country. The discount rates utilized in the April 30, 2010,
analysis ranged from 13% to 15%. The Company also calculates
estimated fair values of the reporting units utilizing multiples of earnings,
book value, and assets under management of the reporting unit. The
estimated fair value using these techniques is compared with the carrying value
of the reporting unit to determine if there is an indication of
impairment. A sensitivity analysis was also performed, which did not
impact management’s conclusion that there is no indication of goodwill
impairment.
Management
also analyzed the estimated fair values of the reporting units in relation to
our market capitalization. The sum of the estimated fair values of
the Company’s reporting units was greater than the market value of the Company’s
common stock. Based upon an analysis of historical acquisitions of
financial services companies similar to ours, we believe the excess of
approximately 40% represents a reasonable control premium in a hypothetical
acquisition of the Company.
34
Remaining
amounts of goodwill at June 30, 2010, were as follows: Edelman -
$67.2 million, Kissinger - $2.4 million, Dickenson - $2.1 million, SMH Colorado
- $1.5 million, Leonetti - $225,000, and IFS $409,000. Future
goodwill impairment tests may result in a future charge to
earnings.
Other
intangible assets consist primarily of customer relationships and trade names
acquired in business combinations. Other intangible assets acquired
that have indefinite lives (trade names) are not amortized but are tested for
impairment annually, or if certain circumstances indicate a possible impairment
may exist. Certain other intangible assets acquired (customer
relationships and covenants not to compete) are amortized on a straight line
basis over their estimated useful lives and tested for impairment if certain
circumstances indicate an impairment may exist. Other intangible
assets are tested for impairment by comparing expected future cash flows to the
carrying amount of the intangible assets. The Company recognized a
trade name impairment of $1.1 million during the quarter ended March 31, 2009.
Other
intangible assets were tested for impairment as of April 30, 2010. Based on the
analyses performed, there was no indication of impairment of other intangible
assets.
35
Item
3. Quantitative and
Qualitative Disclosures About Market Risk
Market
Risk
During
the six months ended June 30, 2010, there have been no material changes to the
information contained in Part II, Item 7A of the Company’s Annual Report on Form
10-K for the year ended December 31, 2009.
Our
financial services business is affected by general economic
conditions. Our revenue relating to asset-based advisory services and
managed accounts are typically from fees based on the market value of assets
under management.
At June
30, 2010, securities owned by the Company were $35.3 million, including $11.6
million in marketable securities, $21.8 million representing the Company’s
investments in limited partnerships, and $1.9 million representing other not
readily marketable securities.
We do not
act as dealer, trader, or end-user of complex derivative contracts such as
swaps, collars, and caps. However, SMH does act as a dealer and
trader of mortgage-derivative securities, called collateralized mortgage
obligations (CMOs or REMICs). Mortgage-derivative securities
redistribute the risks associated with their underlying mortgage collateral by
redirecting cash flows according to specific formulas or algorithms to various
tranches or classes designed to meet specific investor objectives.
There are
market, credit and counterparty, and liquidity risks associated with our market
making, principal trading, merchant banking, arbitrage, and underlying
activities. We may experience significant losses if the value of our
marketable security positions deteriorates.
Item 4. Controls and
Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
has conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as
of the end of the fiscal period covered by this report. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in ensuring
that the information required to be disclosed in the reports we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission (“SEC”) and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. There have been no changes made in our internal controls
over financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
36
PART
II. OTHER INFORMATION
Item
1. Legal
Proceedings
Many
aspects of our business involve substantial risks of liability. In the normal
course of business, we have been and in the future may be named as defendant or
co-defendant in lawsuits and arbitration proceedings involving primarily claims
for damages. We are also involved in a number of regulatory matters arising out
of the conduct of our business. There can be no assurance that these matters
will not have a material adverse effect on our results of operations in any
future period and a significant judgment could have a material adverse impact on
our consolidated financial position, results of operations, and cash flows. In
addition to claims for damages and monetary sanctions that may be made against
us, we incur substantial costs in investigating and defending claims and
regulatory matters.
The
following information supplements and amends our discussion set forth under Part
I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009, and under Part 2, Item 1 “Legal Proceedings” in
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2010.
As
previously reported, in May 2007, two purchasers of Ronco convertible preferred
stock filed a complaint against SMH, US Special Opportunities
Trust PLC and Renaissance US Growth Investment Trust PLC vs. Sanders Morris
Harris Inc., in the 193rd Judicial District Court, Dallas County, Texas,
alleging common law fraud, statutory fraud in a stock transaction, violations of
the Texas Securities Act, and negligent misrepresentation in connection with
their purchase of $2.0 million in Ronco convertible preferred stock. On April
23, 2010, following a two-week trial, the jury returned a defense verdict in
favor of SMH on all claims made by the plaintiffs. The plaintiffs
have filed a motion for new trial, which we have opposed, and which is
pending.
Item
1A. Risk
Factors
There
have been no material changes in the Company’s risk factors from those disclosed
in the Annual Report on Form 10-K for the year ended December 31,
2009.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The
following table provides information about the Company’s share repurchase
activity for the three months ended June 30, 2010:
|
Total number of
|
|||||||||||||||
|
Total
|
shares purchased
|
Maximum number of
|
|||||||||||||
|
number of
|
Average
|
as part of publicly
|
shares that may yet
|
||||||||||||
|
shares
|
price paid
|
announced plans
|
be purchased under
|
||||||||||||
Period
|
purchased
|
per share
|
or programs (1)
|
the plans or programs
|
||||||||||||
April
1 to April 30, 2010
|
- | $ | - | - | - | |||||||||||
May
1 to May 31, 2010
|
76,275 | 5.48 | 76,275 | 239,444 | ||||||||||||
June
1 to June 30, 2010
|
235,113 | 5.62 | 235,113 | 4,331 | ||||||||||||
|
||||||||||||||||
Total
|
311,388 | $ | 5.59 | 311,388 | 4,331 |
(1)
|
The
Company announced a share repurchase program on November 7, 2007, to
purchase up to 1.0 million shares of the Company's shares of
common stock. On May 27, 2010, the board of directors approved
the repurchase of up to an additional 1.0 million shares of common
stock subject to approval of our
bank.
|
37
Item
4. Submission of Matters to Voting Security Holders
On May
27, 2010, the Company held its annual meeting of shareholders to elect nine
directors to the Company’s board of directors, each for a term of one
year.
At the
annual meeting, each nominee was elected and the results of the votes were as
follows:
Number of
|
Number of
|
Number of
|
Number of
|
|||||||||||||
Shares
|
Shares
|
Shares
|
Broker
|
|||||||||||||
Voted For
|
Voted Against
|
Withheld
|
Non-Votes
|
|||||||||||||
George
L. Ball
|
21,515,607 | 627,952 | 686 | 5,915,606 | ||||||||||||
Richard
E. Bean
|
21,881,431 | 270,114 | 2,700 | 5,915,606 | ||||||||||||
Charles
W. Duncan III
|
21,047,356 | 1,104,184 | 2,705 | 5,915,606 | ||||||||||||
Fredric
M. Edelman
|
21,838,373 | 315,212 | 660 | 5,915,606 | ||||||||||||
Scott
B. McClelland
|
21,047,356 | 1,104,184 | 2,705 | 5,915,606 | ||||||||||||
Ben
T. Morris
|
21,606,674 | 547,139 | 432 | 5,915,606 | ||||||||||||
Albert
W. Niemi, Jr., PH.D.
|
21,744,726 | 406,814 | 2,705 | 5,915,606 | ||||||||||||
Don
A. Sanders
|
21,825,931 | 327,628 | 686 | 5,915,606 | ||||||||||||
W.
Blair Waltrip
|
21,792,693 | 358,702 | 2,850 | 5,915,606 |
The
shareholders also approved the amendment and restatements of the Long-Term
Incentive Plan, and ratified the appointment of Grant Thornton LLP as the
Company’s independent registered accounting firm for the fiscal year
2010. The results of these votes were as follows:
Amendment
and Restatement of Long-Term Incentive Plan
Shares
For
|
13,307,794 | |||
Shares
Against
|
8,817,380 | |||
Shares
Abstain
|
19,071 | |||
Broker
Non-Votes
|
5,915,606 |
Ratification
of Grant Thornton, LLP
Shares
For
|
27,973,148 | |||
Shares
Against
|
89,614 | |||
Shares
Abstain
|
7,089 |
Item
5. Other
Information
None.
38
Item
6. Exhibits
INDEX
TO EXHIBITS
Exhibit
|
||
Number
|
Description
|
|
3.1
|
|
Articles
of Incorporation of the Company, as amended (Filed as Exhibit 3.1 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001
(File No. 000-30066), and incorporated herein by
reference).
|
3.2
|
Amended
and Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007
(File No. 000-30066), and incorporated herein by
reference).
|
|
†10.01
|
Sanders
Morris Harris Group Inc. 1998 Incentive Plan as amended (Filed as Appendix
A to the Definitive Proxy Statement on Schedule 14A of the Company dated
May 3, 2002 (File No. 000-30066), and incorporated herein by
reference).
|
|
†10.02
|
Sanders
Morris Harris Group Inc. Capital Incentive Program (Filed as Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 000-30066), and incorporated herein by
reference).
|
|
†10.03
|
Form
of Option Agreement pursuant to 1998 Incentive Plan (Filed as Exhibit
10.03 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005 (File No. 000-30066), and incorporated herein by
reference).
|
|
†10.04
|
Form
of Restricted Stock Agreement pursuant to 1998 Incentive Plan (Filed as
Exhibit 10.04 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005 (File No. 000-30066), and incorporated herein by
reference).
|
|
†10.05
|
Employment
Agreement dated as of May 10, 2005, between The Edelman Financial Center,
LLC and Fredric M. Edelman. (Filed as Exhibit 10.05 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 (File No. 000-30066), and incorporated herein by
reference).
|
|
†10.06
|
Sanders
Morris Harris Group Inc. 2009 Management Incentive
Program. (Filed as Exhibit 10.06 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2009 (File No. 000-30066),
and incorporated herein by reference).
|
|
†10.07
|
Sanders
Morris Harris Group Inc. 2009 Supplemental Bonus Plan. (Filed
as Exhibit 10.06 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.08
|
Office
Lease Agreement and related amendments dated September 25, 1996, between
Texas Tower Limited and Sanders Morris Mundy Inc. (Filed as Exhibit 10.3
to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.09
|
Eleventh
Amendment to Lease Agreement dated as of December 21, 2006, between Texas
Tower Limited and Sanders Morris Harris Inc. (Filed as Exhibit 10.06 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2007 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.10
|
Reorganization
and Purchase Agreement dated as of May 10, 2005, among Sanders Morris
Harris Group Inc., The Edelman Financial Center, Inc., The Edelman
Financial Center, LLC, and Fredric M. Edelman (Filed as Exhibit 2.1 to the
Company’s Current Report on Form 8-K dated May 10, 2005 (File No.
000-30066), and incorporated herein by reference).
|
|
10.11
|
Contribution
Agreement dated as of April 28, 2003, by and between Salient Partners,
L.P., a Texas limited partnership, Salient Advisors, L.P., a Texas limited
partnership, Salient Capital, L.P., a Texas limited partnership, Salient
Partners GP, LLC, a Texas limited liability company, John A. Blaisdell,
Andrew B. Linbeck, J. Matthew Newtown, Jeremy L. Radcliffe, A. Haag
Sherman, and Adam L. Thomas, and Sanders Morris Harris Group, Inc. (Filed
as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.12
|
Agreement
to Retire Partnership Interest and Second Amendment to the Limited
Partnership Agreement of Endowment Advisers, L.P. dated as of August 29,
2008, among Sanders Morris Harris Group Inc. and Endowment Advisers, L.P.,
The Endowment Fund GP, L.P., and The Endowment Fund Management, LLC, and
their respective partners and members (Filed as Exhibit 99.2 to the
Company’s Current Report on Form 8-K dated August 29, 2008 (File No.
000-30066), and incorporated herein by
reference).
|
39
10.13
|
Letter
agreement dated as of January 1, 2009, among Sanders Morris Harris Group,
Inc., Fredric M. Edelman, and Edward Moore (Filed as Exhibit
99.2 to the Company’s Current Report on Form 8-K dated January 29, 2009
(File No. 000-30066), and incorporated herein by
reference).
|
|
10.14
|
Credit
Agreement dated as of May 11, 2009, between Sanders Morris Harris Group
Inc. and Prosperity Bank. (Filed as Exhibit 10.08 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.15
|
First
Amendment to Credit Agreement dated as of June 23, 2009, between Sanders
Morris Harris Group Inc. and Prosperity Bank. (Filed as Exhibit
10.09 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2009 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.16
|
Second
Amendment to Credit Agreement dated as of July 15, 2009, between Sanders
Morris Harris Group Inc. and Prosperity Bank. (Filed as Exhibit
10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2009 (File No. 000-30066), and incorporated herein by
reference).
|
|
10.17
|
Third
Amendment to Credit Agreement dated as of September 15, 2009, between
Sanders Morris Harris Group Inc. and Prosperity Bank. (Filed as
Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009 (File No. 000-30066), and incorporated
herein by reference).
|
|
10.18
|
Fourth
Amendment to Credit Agreement dated as of September 30, 2009, between
Sanders Morris Harris Group Inc. and Prosperity Bank. (Filed as
Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009 (File No. 000-30066), and incorporated
herein by reference).
|
|
†10.19
|
2010
Executive Incentive Plan (Filed as Exhibit 10.19 to the Company’s Current
Report on Form 8-K filed on June 3, 2010 (File No. 000-30066), and
incorporated herein by reference).
|
|
†10.20
|
2010
Executive and Key Manager Restricted Stock Unit Sub-Plan (Filed as Exhibit
10.20 to the Company’s Current Report on Form 8-K filed on June 3, 2010
(File No. 000-30066), and incorporated herein by
reference).
|
|
†10.21
|
Long-term
Incentive Plan (Filed as Appendix A to the Definitive Proxy Statement on
Schedule 14A of the Company dated April 15, 2010 (File No. 000-30066), and
incorporated herein by reference).
|
|
*31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
|
*31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
|
*32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
*32.2
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
† Management
contract or compensation plan or arrangement.
40
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SANDERS
MORRIS HARRIS GROUP INC.
|
||
By:
|
/s/ GEORGE L. BALL
|
|
George
L. Ball
|
||
Chief
Executive Officer
|
||
By:
|
/s/ RICK BERRY
|
|
Rick
Berry
|
||
Chief
Financial Officer
|
Date: August
9, 2010
41