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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.

 
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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.

 
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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.

 
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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.

 
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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.

 
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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: