SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002, OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-30066
Sanders Morris Harris Group Inc.
(Exact name of registrant as specified in its charter)
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Texas |
76-0583569 |
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(state or other jurisdiction of |
(I.R.S. Employer |
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600 Travis, Suite 3100 |
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Houston, Texas 77002 |
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(Address of principal executive office) |
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Registrant’s telephone number, including area code: (713) 993-4610 |
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
As of March 25, 2003, the registrant had 16,899,341 outstanding shares of Common Stock, par value $0.01 per share, and at such date, the aggregate market value of the shares of Common Stock held by nonaffiliates of the registrant was $102.2 million. For purposes of this computation, all executive officers, directors and 5% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s Notice of Annual Meeting of Shareholders and definitive Proxy Statement pertaining to the 2003 Annual Meeting of Shareholders (the “Proxy Statement”) and filed pursuant to Regulation 14A is incorporated herein by Reference into Part III of this report.
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Sanders Morris Harris Group Inc. (“SMHG”) provides a broad range of financial services through its wholly owned operating subsidiaries. Our financial services include institutional, prime and retail brokerage, investment banking, merchant banking, trust related services, asset management and financial planning. We serve a diverse group of institutional, corporate and individual clients.
On May 22, 2001, our shareholders voted to change our name from Pinnacle Global Group, Inc. to Sanders Morris Harris Group Inc. to present a more cohesive group identity to our clients and the investment community as a whole.
We are the successor issuer to TEI, Inc., (“TEI”), which is now a wholly owned subsidiary. In January 1999, TEI combined with Harris Webb & Garrison, Inc., a full service regional investment banking, brokerage and financial services firm serving the southwestern United States; Pinnacle Management & Trust Co., a Texas state chartered trust company and investment management firm; and Spires Financial, L.P., a regional institutional brokerage services and investment banking firm specializing in fixed-income securities and whole loan and loan servicing transactions. Pinnacle Global Group emerged as the new public holding company.
In January 2000, Harris Webb & Garrison was merged with Sanders Morris Mundy Inc., an investment banking and brokerage firm based in Houston, Texas. Sanders Morris Mundy survived the merger, was renamed “Sanders Morris Harris Inc.” and became our wholly owned subsidiary.
The operations of Spires Financial were discontinued in June 2000 due to departures of certain key employees and changes in the mortgage-backed securities market resulting in part from interest rate increases.
We acquired Blackford Securities Corporation in June 2000. Blackford, based in Garden City, New York, specializes in providing prime brokerage and execution services to investment partnerships and hedge funds. Blackford was merged into Sanders Morris Harris.
In October 2000, we acquired the Cummer/Moyers companies. Based in Ft. Worth, Texas, Cummer/Moyers specializes in providing investment advisory services with a focus on fixed income securities to institutional and individual clients. Cummer/Moyers was later renamed “SMH Capital Advisors”.
We acquired Kissinger Financial Services, a Baltimore, Maryland based financial planning firm in April 2001. Kissinger was merged into SMH Capital Advisors.
In January 2002, the former institutional equity unit of Sutro & Co. (the “New Institutional Group”) joined Sanders Morris Harris. The New Institutional Group complemented Sanders Morris Harris’ existing institutional division by increasing our customer base and by adding equity research coverage in areas that we did not previously serve.
In April 2002, the investment professionals of Douglas-Noyes joined the Company. Douglas-Noyes provides asset management services with a focus on portfolios having a concentration on large cap equities with a potential for growth.
The historical financial information contained in this document includes the results of operations and financial position of our current businesses from the dates of acquisition, except for our discontinued businesses.
Our business strategy is to (1) increase our asset management business; (2) increase our capital markets activities; (3) improve the profitability of our brokerage operations; (4) enhance the range of financial services we offer our clients; and (5) supplement internal growth with strategic acquisitions. We believe certain cross-selling opportunities exist among the financial services firms, and certain unquantified potential operating efficiencies will also be available. The principal elements of our business strategy are:
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• Increase Asset Management Business. We intend to grow through expansion of our asset management business, including prime brokerage and related services by improving the interface between our asset management operations and our brokerage subsidiaries, and by increasing the assets under our management through acquisitions and internal growth.
• Increase Capital Markets Activities. We intend to increase our investment banking and merchant banking business by committing greater resources to, and by carefully focusing our investment research coverage on companies, industries and geographic regions that management believes offer the greatest opportunities. We also believe that consolidation within the investment banking industry will offer greater opportunities for high caliber firms that maintain their local and industry-specific focus.
• Improve Profitability of Brokerage Operations. We intend to improve the profitability of our brokerage operations primarily by hiring additional experienced and productive investment executives and by providing our financial advisors with specialized training as well as the product offerings, information systems, support and access to the services of each of our financial services companies.
• Enhance Personalized, High-End Service. We seek to provide excellent investment advice suited to each client. To that end, our financial services subsidiaries have traditionally sought to attract and retain clients by offering a high level of personal service. We intend to increase that commitment by providing our clients with advanced account and investment information systems, flexibility in determining appropriate fee schedules for certain services based upon the level of client needs and by providing an array of investment and financial planning services.
• Supplement Growth with Strategic Acquisitions. We plan to actively pursue opportunities to acquire or combine with other firms with complementary businesses to strengthen or expand our geographic or product offering base. Our management believes that attractive acquisition opportunities exist, particularly among smaller, specialized regional financial firms that want to affiliate with a larger company while still retaining their identity and entrepreneurial culture. In addition, we believe that the consolidation trend in the financial services industry will allow us to hire proven financial professionals who prefer the ambience and opportunities inherent in a creative regional firm. Management believes that acquisitions may also allow us to realize cost benefits by leveraging our infrastructure.
We provide our financial services through our operating subsidiaries — Sanders Morris Harris, Pinnacle Management & Trust, and SMH Capital Advisors. The financial services offered by each of these entities are described below.
General. Sanders Morris Harris provides a range of financial services including institutional, prime and retail brokerage, investment research, investment banking, merchant banking and market making. Additionally, SMH has organized and holds an interest in a number of proprietary funds that invest primarily in small to medium capitalization companies in a number of industries.
Private Client. Our strategic plan in the private client business is to attract and retain experienced financial advisors, especially those able to utilize our sophisticated investment programs. Our private client business is focused on high net worth individuals with whom we have developed and maintained relationships over time. As a full service broker, we offer our private clients brokerage services relating to corporate debt and equity securities, including the securities of companies followed by our research analysts, underwritings that we co-manage or in which we participate, private placements of securities in which we serve as placement agent, mutual funds, 401(k) plans, wrap-fee programs, money market funds and insurance products. Commissions are charged on agency transactions in exchange-listed securities and securities quoted on the Nasdaq National Market or in the over-the-counter market. In addition to retail commissions, we generate fee revenue from asset-based advisory services and managed accounts where the charges are based on a percentage of the assets held in the client’s account in lieu of commissions on a transaction-by-transaction basis.
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We provide our private clients with a broad range of services delivered in a personalized, service-oriented manner. In addition to recommending and effecting transactions in securities, we provide other services to our retail clients that include portfolio strategy, investment research service, financial planning, assistance in the sale of restricted securities and tax, trust and estate advice. Clients can access their personal portfolio on-line and use our extensive research library.
At December 31, 2002, we employed 28 Series 7-licensed retail brokers who average over 15 years experience in the securities brokerage business. Another 33 Series 7-licensed retail brokers are affiliated with the Company through our Sanders Morris Harris Partners division. We generally do not hire inexperienced brokers or trainees to work as retail brokers. We believe we can attract and retain experienced brokers by providing them with a high level of support, a corporate culture that encourages performance, employee stock ownership, advanced technologies, competitive compensation packages and the opportunity for them and their clients to participate in private placements and public offerings of securities we manage or underwrite.
Institutional Brokerage. Our institutional stock brokerage strategy is to provide equity research coverage and trading services focused on companies with a presence in the United States. Our clients are a broad array of institutions throughout North America, Europe and Asia. Areas of concentration include the construction industry, financial services, biotechnology and healthcare, oil and gas exploration and production, oilfield services, pipelines, entertainment and media, retailing and technology. We provide our institutional clients with research and execution trading services in both exchange-listed equity securities and equity securities quoted on Nasdaq. We also distribute to institutional clients equity securities from offerings that we co-manage or underwrite. Our institutional clients include banks, retirement funds, mutual funds, endowments, investment advisors and insurance companies. At December 31, 2002, we had 31 professionals performing institutional brokerage services in Houston, New York, Los Angeles, San Francisco and Denver.
Investment Research. We use our proprietary equity research analysis to drive or assist a large portion of our business. This analysis is based on economic fundamentals, using tools such as price-to-earnings multiples, price-to-book value comparisons, both absolute and relative to historic norms, and our research department’s own earnings forecasts. We intend to rely primarily on our own research rather than on research products purchased from outside research organizations. We believe that the services provided by our research department have a significant impact on our revenue-generating activities, including retail and institutional brokerage.
Prime Brokerage. The brokerage industry has developed a service known as prime brokerage in which a customer maintains a cash or margin account with a prime broker to record transactions executed at one or more executing brokers. We provide trade execution, clearing, bookkeeping, reporting, custodial, borrowing, research and fund raising services for our prime brokerage customers. By providing these back office services to our customers, we allow them the opportunity to focus on managing assets and generating returns for their clients. At December 31, 2002, we had a total of 19 professionals performing prime brokerage services in New York.
Fixed Income Brokerage. Through our fixed income division, we provide brokerage services to institutional clients relating primarily to fixed-income securities, such as municipal securities, U.S. government and agency securities, mortgage-related securities, including those issued through Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corp., and corporate investment-grade and high-yield bonds. Commissions are charged on all institutional securities transactions based on rates formulated by SMH. At December 31, 2002, our fixed income division consisted of 13 professionals.
Rather than trading a wide variety of securities in direct competition with Wall Street firms, we have developed a niche strategy to trade certain fixed-income securities, including U.S. government securities, certain mortgage related securities and collateralized mortgage obligations. In our trading activities, we generally deal with institutional clients. We buy and sell round-lot and odd-lot positions, and act as market-maker in those positions. Many of our counterparties in these transactions are other broker-dealers.
We are also active as a secondary market broker for residential, consumer and commercial loans, and derive revenue from the placement of mortgage loans and servicing.
Investment Banking and Underwriting Activities. Our investment banking strategy is to build a balanced mix of corporate securities underwriting, private financings and financial advisory services. We believe the number and dollar amount of underwritings and private placements in which we participate will contribute significantly to increased public
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and industry awareness of our company, and will result in increased demand for our investment banking and corporate advisory services. At December 31, 2002, we had 19 professionals performing investment banking services in Houston and New York.
We regularly participate in corporate securities distributions as a member of an underwriting syndicate or of a selling group in public offerings managed by other underwriters, including national and regional firms. Our syndicate department coordinates the distribution of co-managed equity underwritings, accepts invitations to participate in underwritings managed by other investment banking firms and allocates our selling allotments to our various sales units.
We also serve as placement agent or financial advisor in private placements of securities under a variety of fee structures depending on the amount and type of capital raised, including cash and equity contingent fees, cash and equity non-contingent fees, adjustable cash and equity fees or a combination of two or more of the foregoing. Our officers and directors have in the past, and expect in the future, to invest in the securities involved in the private placement on the same basis as other investors, where suitable and permitted by applicable law and regulations. We believe these co-investments create an identity of interest with our investors, and thus benefit them.
Our financial advisory services include advising on mergers, acquisitions and divestitures, fairness opinions, and financing strategies. We also provide valuations, litigation support and financial consulting services. These financial advisory services are typically provided to emerging or middle market companies in the southwestern United States.
Proprietary Funds. Sanders Morris Harris has organized nine private equity funds, which have raised $192 million as of December 31, 2002. These funds are organized for the purpose of purchasing, selling and investing in securities, primarily in equity or equity-linked securities, interest-bearing debt securities and debt securities convertible into common stock. We invest primarily in small to medium capitalization companies, both public and private, that we believe are either significantly undervalued relative to their growth potential, or that have substantial prospects for capital growth. Companies in which we invest belong to a number of industries, including environmental, industrial services, healthcare, technology, medical, life sciences and others.
We hold an interest in these funds and also earn management fees ranging from 1% to 2% per annum of total commitments, net assets or capital contributions during the investment period of the fund. We also receive incentive compensation ranging from 10% to 20% of the limited partnership profit above specified hurdle rates. We have agreed to compensate the managers of these funds and employees designated by the managers from 35% to 40% of our 20% and 10% back-end interests in the profits of these limited partnership funds. Over time, certain of our funds are expected to receive additional client funds. We account for our interests in all of these funds using the equity method, which approximates fair value.
Other than the proprietary funds, our accounts are conducted on an individual client basis. In many cases, one of our registered broker employees holds a limited power of attorney permitting discretionary agency and certain other transactions on a client’s behalf. Our officers and directors have in the past, and expect in the future, to invest in the same securities as our retail and institutional clients, where suitable and as permitted by applicable law and regulations. We believe co-investment creates an identity of interest that is generally beneficial, particularly in investments we develop or where we play a major ongoing role.
Merchant Banking. Our merchant banking activities focus on providing private equity capital for middle-market growth companies. These middle-market companies comprise a broad range of industries, including business services, communications, computing, distribution, direct marketing of electronic financial services, energy, information technology, Internet, media entertainment, retail, specialty chemicals and biotechnology. These transactions may take a variety of forms, such as buyouts, growth buildups, expansion capital and venture capital financings.
Market Making and Principal Transactions. We make markets, buying and selling as principal, in securities quoted on Nasdaq or other over-the-counter markets. In lieu of commissions, we create revenue in return for the risk we assume based on the markup or markdown of each transaction. Principal transactions with clients are generally effected at a net price within or equal to the current interdealer price plus or minus a markup or markdown. The trading department’s objective is to facilitate sales to clients and to other dealers, not to generate profits based on trading for our own account.
Revenues from principal transactions depend on the general trend of prices and the level of activity in the securities market, employee skill in market-making activities and inventory size. Trading activities carried out as a principal
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require a commitment of capital, and create an opportunity for profit and risk of loss due to market fluctuations. At December 31, 2002, we made markets in the common stock or equity securities of 61 companies that were quoted on Nasdaq and in the over-the-counter market.
The level of positions carried in our trading accounts fluctuates significantly depending on the firm’s assessment of economic and market conditions, the allocation of capital among various stocks, client demand, underwriting commitments and market trading volume. The aggregate value of our inventories is limited by certain net capital requirements under the Exchange Act. At December 31, 2002, trading inventories at SMH totaled $764,000.
We have established procedures designed to reduce the systemic risks of our proprietary trading activities. Our trading inventory positions and profit and loss statements are reviewed daily by senior management of SMH and quarterly by its board of directors. However, these procedures may not prevent losses, which could have a material adverse effect on SMH’s business, financial condition, results of operations or cash flows.
Financial Planning. We provide specialized financial services and products to high net-worth individuals and institutions through our affiliation with a select group of independent registered representatives. The services provided by this division, which we call Sanders Morris Harris Partners (“SMHP”), include investment management, estate planning and retirement planning. The financial planners who affiliate with us are able to offer their clients a broad range of new investment opportunities through several exclusive investment programs offered by Sanders Morris Harris, Pinnacle Management & Trust, and SMH Capital Advisors.
Trust, Asset Management and Related Services. Through PMT, we provide a variety of trust services, including investment management, estate settlement, retirement planning, mineral interest management, real estate, retirement plan and other administrative services, such as custody of assets and record keeping. We meet with each client to develop asset management strategies that are consistent with the client’s needs and investment objectives. Consideration is given to the client’s financial and investment objectives, risk tolerance, investment restrictions and time horizon. We believe this total investment management approach provides clients with increased diversification, reduced risk and greater control over their portfolios.
We license trust accounting software that provides our clients with many additional benefits, including flexible statement packages and access to account information on the Internet through a link established between PMT’s “home page” and the licensor of the software’s database.
PMT’s revenues are derived mainly from asset management and fiduciary fees based on a percentage of assets under administration. At December 31, 2002, PMT had approximately $415 million of assets under administration. The management fee charged is based on a rate schedule that is changed from time to time. Rates vary depending on the services being provided and the amount of assets involved. We believe that this structure, as opposed to transactional commissioned-based arrangements, more closely aligns our interests with those of our clients and helps develop long-term client relationships.
Asset Management Services. Through SMCA, we provide investment management services to investors who prefer fixed-income securities as a major part of their investment portfolios. The portfolios are tailored to each client’s financial and investment objectives, with a risk tolerance profile that can range from maximum potential yield to maximum potential security. Through the Douglas-Noyes division of SMCA we provide asset management services with a focus on portfolios with a concentration on large cap equities with a potential for growth. Our revenues are derived primarily from asset management and fiduciary fees based on a percentage of assets under administration.
Financial Planning Services. Through the Kissinger division of SMCA, we provide financial planning and investment management services to individuals. When preparing a financial portfolio for a client, we first determine the client’s near term and long range goals and objectives. Then we prepare a thorough review of the person’s assets, liabilities, income, expenses, taxes and savings. We also assess the client’s insurance protection and estate planning. Finally, we develop an overall financial strategy and assist the client in its implementation. Our proprietary monitoring software enables us to produce regular financial updates for the client. The quarterly reports provide the client and us
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with periodic feedback on the progress towards realizing the client’s financial goals. Kissinger derives revenues from fees charged to the clients for the preparation of financial plans and for monitoring services. Additionally, Kissinger earns commissions from investment and insurance products sold to the clients.
For financial information with respect to our two business segments, see Note 19 to the Consolidated Financial Statements.
Clients of our broker-dealer subsidiary, SMH, vary according to the nature of the services provided. Our retail brokerage services are generally focused on high net worth individuals. SMH’s investment banking, underwriting, investment research and principal transaction activities are targeted at emerging and middle market companies throughout the United States. Our institutional and prime brokerage services are offered to institutions and hedge funds throughout the United States, Europe and Asia. These institutional clients consist mostly of pension funds, money managers, mutual and hedge funds, insurance companies, commercial banks and thrift companies.
Our trust subsidiary, PMT, provides trust services to clients consisting mainly of high net worth individuals and their estates and trusts, 401(k) and other employee-directed company sponsored retirement plans and charitable and other non-profit corporations.
Our investment advisory and financial planning subsidiary, SMCA, provides asset management and financial planning services to clients consisting mainly of mid to high net worth investors.
The marketing efforts of SMH are conducted throughout SMH’s 14 offices and through 36 independent registered representatives who affiliate with SMH through its SMHP division. SMH targets its client groups through mailings, telephone calls, in-person presentations and firm-sponsored workshops. Due to the nature of our business, our regional name recognition and the reputation of our management, business is obtained through referrals from other investment bankers or initiated directly by the client, as well as through senior level calling programs.
PMT conducts its marketing and business development efforts on a company-wide basis. All PMT employees are encouraged to be actively involved in business development efforts through maintenance of professional and personal relationships and active involvement in community events. PMT markets to specific client groups through mailings, telephone calls, multi-media client presentations and company-sponsored or co-sponsored workshops and seminars. Additionally, PMT has entered into strategic alliances with a major credit union, a regional accounting firm and a regional bank that provide for sharing of expenses and the payment of referral fees for new business.
SMCA conducts its marketing and business development efforts to specific client groups through mailings, telephone calls, multi-media client presentations, alliances with professional organizations and company-sponsored or co-sponsored workshops and seminars. The seminars are sponsored by the firm, local employers, government agencies, and local colleges and universities.
We believe cross-selling opportunities exist among our various subsidiaries based on the relationships developed by the individual companies.
Existing and potential clients can also gain a variety of information about our firm and services we provide through our websites at www.smhg.net; www.smhhou.com; www.pinnacletrust.com; www.cummermoyers.com and www.kissingernet.com.
Our broker-dealer subsidiary uses the services of clearing brokers. Currently, we clear transactions, and carry accounts for clients, primarily through the Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation, a Credit Suisse First Boston Company under a fully disclosed clearing arrangement. Pershing serves as clearing broker in most transactions; however, we also use other clearing brokers. These clearing brokers also provide us with information necessary to generate commission runs, transaction summaries and data feeds for various reports, including compliance
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and risk management, execution reports, trade confirmations, monthly account statements, cashiering functions and handling of margin accounts. We believe these arrangements produce clearing costs that are competitive within the industry.
We have uncommitted financing arrangements with our 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 our balance sheet for financial accounting reporting purposes, we have generally agreed to indemnify these clearing brokers for losses they may sustain in connection with the accounts. Therefore, we retain risk on these accounts. We are required to maintain certain cash or securities on deposit with our clearing broker.
Our financial service business is affected by general economic conditions. The downturn in the economy, as well as in the overall stock market has had a negative impact on our equity commission revenues and on underwriting fees derived from public offerings. The decline in overall stock prices and the reduction in interest rates have caused many investors to shift a portion of their investment portfolios into fixed-income securities. This reallocation has had a positive impact on that portion of our business that derives its income from fixed-income securities. Traditionally, the actions taken by the Federal Reserve to lower interest rates have worked to stimulate the economy. We believe that a stronger economy will be favorable to our equity business.
Our revenues relating to asset-based advisory services and managed accounts are typically from fees based on the market value of assets under management. Consequently, significant fluctuations in the values of securities, which can occur with changes in interest rates or changes in other economic factors, may materially affect the amount of assets under management, and thus, our revenues and profitability.
Our financial services business and the securities business in general are highly competitive. The principal competitive factors influencing our financial services business are:
• professional staff,
• reputation in the marketplace,
• existing client relationships, and
• ability to commit capital to client transactions and a mix of market capabilities.
We compete directly with national and regional full service broker-dealers and, to a lesser extent, with discount brokers, dealers, and other investment banking firms, investment advisors and commercial banks. We also compete for asset management and fiduciary services with commercial banks, private trust companies, mutual fund companies, insurance companies and others. The financial services industry has become considerably more concentrated as many securities firms have either ceased operations or been acquired by or merged into other firms. Many of these larger firms have significantly greater financial and other resources than we do and can offer their customers more product offerings, lower pricing, broader research capabilities, access to international markets and other products and services we do not offer, which may give these firms a competitive advantage over us.
The securities industry is one of the nation’s most extensively regulated industries. The SEC is responsible for carrying out the federal securities laws and serves as a supervisory body over all national securities exchanges and associations. The regulation of broker-dealers has to a large extent been delegated by the federal securities laws to Self Regulatory Organizations, called “SROs”. These SROs include, among others, all the national securities and commodities exchanges and the NASD. Subject to approval by the SEC and certain other regulatory authorities, SROs adopt rules that govern the industry and conduct periodic examinations of the operations of our broker-dealer subsidiary. Our broker-dealer subsidiary is also subject to regulation under the laws of the states, Puerto Rico and certain foreign countries in which it is registered to conduct securities, investment banking, insurance or commodities business.
As a registered broker-dealer, our brokerage subsidiary is subject to certain net capital requirements of Rule 15c3-1 under the Exchange Act. The net capital rules, which specify minimum net capital requirements for registered broker-
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dealers, are designed to measure the financial soundness and liquidity of broker-dealers. Failure to maintain the required net capital may subject a firm to suspension or revocation of registration by the SEC and suspension or expulsion by other regulatory bodies, and ultimately may require its liquidation. Further, a decline in a broker-dealer’s net capital below certain “early warning levels,” even though above minimum capital requirements, could cause material adverse consequences to the broker-dealer.
As a registered investment advisor under the Investment Advisers Act, SMCA is subject to the requirements of regulations under both the Investment Advisers Act and certain state securities laws and regulations. Such requirements relate to, among other things, (1) limitations on the ability of investment advisors to charge performance-based or non-refundable fees to clients, (2) record-keeping and reporting requirements, (3) disclosure requirements, (4) limitations on principal transactions between an advisor or its affiliates and advisory clients, and (5) general anti-fraud prohibitions.
Our trust subsidiary, PMT, operates in a highly regulated environment and is subject to extensive supervision and examination by Texas regulatory agencies. As a Texas chartered trust company, PMT is subject to the Texas Trust Company Act, the rules and regulations promulgated under the act and supervision by the Texas Banking Commissioner. These laws are intended primarily for the protection of PMT’s clients, rather than for the benefit of investors.
At December 31, 2002, we had 282 employees. Of these, 42 were engaged in retail brokerage, 43 in institutional sales and trading, 17 in fixed income sales, 24 in investment banking, 19 in securities analysis and research, 30 in prime brokerage, 13 in trust services, 20 in financial planning, 18 in asset management, five in systems development and 51 in accounting, administration and support operations. None of our employees are subject to collective bargaining agreements. We believe our relations with our employees generally are good.
As a financial and investment firm, our operating results are adversely affected by a number of factors, which include:
• the risk of losses resulting from the ownership or underwriting of securities;
• the risks of trading securities for ourselves (i.e., principal activities) and for our customers;
• reduced cash inflows from investors into our asset management businesses;
• counterparty failure to meet commitments;
• customer default and fraud;
• customer complaints;
• employee errors, misconduct and fraud (including unauthorized transactions by traders);
• failures in connection with the processing of securities transactions;
• litigation and arbitration;
• the risks of reduced revenues in periods of reduced demand for public offerings or reduced activity in the secondary markets; and
• the risk of reduced fees we receive for selling securities on behalf of our customers (i.e., underwriting spreads).
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We lease office facilities in Houston (two locations), Ft. Worth area (two locations), and Dallas, Texas; New York, New York; Morris Plains, New Jersey; Garden City, New York; Wilmington, Vermont; Hunt Valley, Maryland; Denver, Colorado; Jackson, Mississippi; Los Angeles and San Francisco, California aggregating approximately 110,000 square feet. One of our Houston leases expires in 2004, and the other in 2007. Our other leases expire between 2003 and 2012 including the Ft. Worth area, San Francisco and Denver leases in 2003, the Jackson lease in 2005, the Dallas and Hunt Valley leases in 2006, the Garden City lease in 2007 and the Los Angeles lease in 2012. The leases are on rental and other terms that we believe are commercially reasonable. We believe our existing facilities are well maintained and adequate for existing and planned operations.
We are a party to various legal proceedings that are of an ordinary or routine nature incidental to our operations. We believe we have adequately reserved for such litigation matters and that they will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
There were no matters submitted to our security holders during the fourth quarter ended December 31, 2002.
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Our common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol “SMHG.” The following table set forth the quarterly high and low sale prices for our common stock during 2002 and 2001 for the calendar quarters indicated, each as reported on the Nasdaq National Market: