**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(markone)**

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

 

**or**

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

 

**Commissionfile No. 0-30066**

 

**SANDERS MORRIS HARRIS GROUP INC.**

(Exact name of registrantas specified in its charter)

 

| **Texas**                                                       |   | **76-0583569**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **600 Travis, Suite 3000  Houston, Texas 77002**                |
| (Address of principal  executive office)                        |
|                                                            |   |                                  |
| **(713) 993-4610**                                              |
| (Registrant’s telephone number, including area code)       |

 

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

 

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

 

The number of shares ofthe registrant’s Common Stock, par value $0.01 per share, outstanding as ofAugust 2, 2004, was 17,640,140.

 

----

 

**SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**

 

# **INDEX**

# ** **

| **PART I.  FINANCIAL INFORMATION** |   |
|-----------------------------------------|--------|
|                                    |   |   |   |
| Item 1.                                 |   | Financial Statements |   |
|                                    |   |   |   |
|                                    |   | Condensed  Consolidated Balance Sheet as of June 30, 2004 (unaudited) and December 31,  2003 |   |
|                                    |   |   |   |
|                                    |   | Condensed  Consolidated Statement of Income for the Three and Six Months Ended June 30,  2004 and 2003 (unaudited) |   |
|                                    |   |   |   |
|                                    |   | Condensed  Consolidated Statement of Shareholders’ Equity for the Six Months Ended June  30, 2004 (unaudited) |   |
|                                    |   |   |   |
|                                    |   | Condensed  Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2004  and 2003 (unaudited) |   |
|                                    |   |   |   |
|                                    |   | Notes to  Condensed Consolidated Financial Statements (unaudited) |   |
|                                    |   |   |   |
| Item  2.                                |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                    |   |   |   |
| Item  3.                                |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                    |   |   |   |
| Item  4.                                |   | Controls  and Procedures |   |
|                                    |   |   |   |
| **PART II.  OTHER INFORMATION**    |   |
|                                    |   |   |   |
| Item 1.                                 |   | Legal Proceedings |   |
|                                    |   |   |   |
| Item  4.                                |   | Submission  of Matters to a Vote of Security Holders |   |
|                                    |   |   |   |
| Item 5.                                 |   | Other Information |   |
|                                    |   |   |   |
| Item 6.                                 |   | Exhibits and  Reports on Form 8-K |   |

 

1

----

 

**PART I.  FINANCIAL INFORMATION**

 

**Item 1.  *Financial Statements***

 

**SANDERSMORRIS HARRIS GROUP INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEET**

(in thousands,except share and per share amounts)

 
|                                                                                                                  |   | **June 30,  2004** |    | **December  31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                  |   | **(unaudited)**    |    |                    |   |
| **ASSETS**                                                                                                            |   |               |    |                    |   |
| Cash and cash  equivalents                                                                                            |   | $                  | 20,683  |                    | $      | 32,590 |   |
| Receivables, net  of allowance of $445 and $400, respectively                                                         |   |               |    |                    |   |
| Broker-dealers                                                                                                        |   | 871                |    | 522                     |   |
| Customers                                                                                                             |   | 6,190              |    | 3,758                   |   |
| Related parties                                                                                                       |   | 10,012             |    | 6,100                   |   |
| Other                                                                                                                 |   | 868                |    | 822                     |   |
| Deposits with  clearing brokers                                                                                       |   | 1,054              |    | 1,054                   |   |
| Securities owned                                                                                                      |   | 33,965             |    | 32,322                  |   |
| Securities  available for sale                                                                                        |   | 3,978              |    | 3,156                   |   |
| Furniture and  equipment, net                                                                                         |   | 7,521              |    | 4,227                   |   |
| Other assets                                                                                                          |   | 2,600              |    | 3,004                   |   |
| Goodwill                                                                                                              |   | 54,703             |    | 49,447                  |   |
| Total assets                                                                                                          |   | $                  | 142,445 |                    | $      | 137,002 |   |
|                                                                                                                  |   |               |    |                    |   |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**                                                                             |   |               |    |                    |   |
|                                                                                                                  |   |               |    |                    |   |
| Liabilities:                                                                                                          |   |               |    |                    |   |
| Accounts payable  and accrued liabilities                                                                             |   | $                  | 13,505  |                    | $      | 16,597 |   |
| Deferred tax  liability                                                                                               |   | 82                 |    | 647                     |   |
| Securities sold,  not yet purchased                                                                                   |   | 246                |    | 255                     |   |
| Other  liabilities                                                                                                    |   | 107                |    | 144                     |   |
| Total  liabilities                                                                                                    |   | 13,940             |    | 17,643                  |   |
|                                                                                                                  |   |               |    |                    |   |
| Commitments and  contingencies                                                                                        |   |               |    |                    |   |
|                                                                                                                  |   |               |    |                    |   |
| Minority  interests                                                                                                   |   | 5,714              |    | 4,506                   |   |
|                                                                                                                  |   |               |    |                    |   |
| Shareholders'  equity:                                                                                                |   |               |    |                    |   |
| Preferred stock,  $0.10 par value; 10,000,000 shares authorized; no shares issued and  outstanding                    |   | —             |    | —                  |   |
| Common stock,  $0.01 par value; 100,000,000 shares authorized; 18,379,542 and 17,991,653  shares issued, respectively |   | 184                |    | 180                     |   |
| Additional  paid-in capital                                                                                           |   | 118,506            |    | 113,781                 |   |
| Receivables for  shares issued                                                                                        |   | (2,057             | )       | (1,117                  | )      |
| Retained  earnings                                                                                                    |   | 11,579             |    | 6,015                   |   |
| Accumulated  other comprehensive loss                                                                                 |   | (77                | )       | (70                     | )      |
| Unearned  compensation                                                                                                |   | (1,863             | )       | (638                    | )      |
| Treasury stock  at cost, 739,402 and 724,003 shares, respectively                                                     |   | (3,481             | )       | (3,298                  | )      |
| Total  shareholders' equity                                                                                           |   | 122,791            |    | 114,853                 |   |
| Total  liabilities and shareholders' equity                                                                           |   | $                  | 142,445 |                    | $      | 137,002 |   |

 

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

 

2

----

 

**SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OF INCOME**

(in thousands, except share and per share amounts)

(unaudited)

 
|                                                                                         |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                         |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Revenues:                                                                                    |   |                              |   |                            |   |   |   |   |   |
| Commissions                                                                                  |   | $                                 | 12,613 |                            | $      | 13,321 |   | $ | 26,523 |   | $ | 25,633 |   |
| Principal  transactions                                                                      |   | 1,989                             |   | 3,939                           |   | 3,442 |   | 5,949 |   |
| Investment  banking                                                                          |   | 7,825                             |   | 6,797                           |   | 17,361 |   | 10,201 |   |
| Fiduciary, custodial  and advisory fees                                                      |   | 4,732                             |   | 2,527                           |   | 8,252 |   | 4,281 |   |
| Interest and  dividends                                                                      |   | 979                               |   | 684                             |   | 1,845 |   | 1,209 |   |
| Other income                                                                                 |   | 517                               |   | 351                             |   | 1,039 |   | 1,277 |   |
| Total revenues                                                                               |   | 28,655                            |   | 27,619                          |   | 58,462 |   | 48,550 |   |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Expenses:                                                                                    |   |                              |   |                            |   |   |   |   |   |
| Employee  compensation and benefits                                                          |   | 17,118                            |   | 16,053                          |   | 34,975 |   | 29,467 |   |
| Floor brokerage,  exchange and clearance fees                                                |   | 1,310                             |   | 1,470                           |   | 2,526 |   | 2,900 |   |
| Communications  and data processing                                                          |   | 1,926                             |   | 1,408                           |   | 3,462 |   | 2,738 |   |
| Occupancy                                                                                    |   | 1,695                             |   | 1,635                           |   | 3,403 |   | 2,882 |   |
| Other general  and administrative                                                            |   | 2,809                             |   | 2,592                           |   | 5,254 |   | 4,652 |   |
| Total expenses                                                                               |   | 24,858                            |   | 23,158                          |   | 49,620 |   | 42,639 |   |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Income before  equity in income of limited partnerships, minority interests and income taxes |   | 3,797                             |   | 4,461                           |   | 8,842 |   | 5,911 |   |
| Equity in income  of limited partnerships                                                    |   | 2,025                             |   | 1,985                           |   | 2,830 |   | 2,853 |   |
|                                                                                         |   | 5,822                             |   | 6,446                           |   | 11,672 |   | 8,764 |   |
| Minority  interests in net income of consolidated companies                                  |   | (933                              | )      | (686                            | )      | (1,385 | ) | (986 | ) |
| Income before  income taxes                                                                  |   | 4,889                             |   | 5,760                           |   | 10,287 |   | 7,778 |   |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Provision for  income taxes                                                                  |   | (1,942                            | )      | (2,365                          | )      | (4,070 | ) | (3,194 | ) |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Net income                                                                                   |   | $                                 | 2,947  |                            | $      | 3,395 |   | $ | 6,217 |   | $ | 4,584 |   |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Earnings per  share:                                                                         |   |                              |   |                            |   |   |   |   |   |
| Basic                                                                                        |   | $                                 | 0.17   |                            | $      | 0.20 |   | $ | 0.36 |   | $ | 0.27 |   |
| Diluted                                                                                      |   | $                                 | 0.16   |                            | $      | 0.19 |   | $ | 0.34 |   | $ | 0.26 |   |
|                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Weighted average  common shares outstanding:                                                 |   |                              |   |                            |   |   |   |   |   |
| Basic                                                                                        |   | 17,592,623                        |   | 17,115,147                      |   | 17,493,334 |   | 16,981,008 |   |
| Diluted                                                                                      |   | 18,186,799                        |   | 17,641,257                      |   | 18,088,780 |   | 17,526,008 |   |

 

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

 

3

----

 

**SANDERSMORRIS HARRIS GROUP INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY**

**Forthe six months ended June 30, 2004**

(in thousands,except shares)

(unaudited)

 
|                                                                    |   | **Amounts** |    |   |   | **Shares** |       |
|-------------------------------------------------------------------------|--------|-------------|---------|--------|--------|------------|------------|
| **Common stock**                                                        |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | $           | 180     |   |   |       | 17,991,653 |   |
| Stock issued  pursuant to employee benefit plan                         |   | 4           |    |   |   | 387,889    |       |
| Balance, end of  period                                                 |   | 184         |    |   |   | 18,379,542 |       |
| **Additional paid-in capital**                                          |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | $           | 113,781 |   |   |       |       |   |
| Stock issued  pursuant to employee benefit plan                         |   | 4,725       |    |   |   |       |       |
| Balance, end of  period                                                 |   | 118,506     |    |   |   |       |       |
| **Receivables for shares issued**                                       |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | ($1,117     | )       |   |   |       |       |
| Issuance of  restricted stock                                           |   | (1,566      | )       |   |   |       |       |
| Amortization of  notes receivable                                       |   | 626         |    |   |   |       |       |
| Balance, end of  period                                                 |   | (2,057      | )       |   |   |       |       |
| **Retained earnings**                                                   |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | $           | 6,015   |   |   |       |       |   |
| Dividends                                                               |   | (653        | )       |   |   |       |       |
| Net income                                                              |   | 6,217       |    | 6,217  |   |       |       |
| Balance, end of  period                                                 |   | 11,579      |    | 6,217  |   |       |       |
| **Accumulated other comprehensive  loss**                               |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | $           | (70     | )      |   |       |       |   |
| Net change in  unrealized depreciation on securities available for sale |   | (11         | )       | (11    | )      |       |       |
| Income tax  benefit on change                                           |   | 4           |    | 4      |   |       |       |
| Balance, end of  period                                                 |   | (77         | )       | 7      |   |       |       |
| **Comprehensive income**                                                |   |        |    | 6,224  |   |       |       |
| **Unearned compensation**                                               |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | $           | (638    | )      |   |       |       |   |
| Net issuance of  restricted stock                                       |   | (1,685      | )       |   |   |       |       |
| Amortization of  unearned compensation                                  |   | 460         |    |   |   |       |       |
| Balance, end of  period                                                 |   | (1,863      | )       |   |   |       |       |
| **Treasury stock**                                                      |   |        |    |   |   |       |       |
| Balance,  beginning of period                                           |   | $           | (3,298  | )      |   |       | (724,003   | ) |
| Acquisition of  treasury stock                                          |   | (183        | )       |   |   | (15,399    | )          |
| Balance, end of  period                                                 |   | (3,481      | )       |   |   | (739,402   | )          |
| **Total shareholders' equity and  common shares outstanding**           |   | $           | 122,791 |   |   |       | 17,640,140 |   |

 

4

----

 

**SANDERS MORRIS HARRIS GROUP INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS**

**For the six months ended June 30, 2004 and 2003**

(in thousands)

(unaudited)

 
|                                                                                        |   | **2004** |   | **2003** |   |
|---------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                      |   |     |   |     |   |
| Net income                                                                                  |   | $        | 6,217  |     | $      | 4,584 |   |
| Adjustments to  reconcile net income to net cash used in operating activities:              |   |     |   |     |   |
| Realized gain on  securities available for sale                                             |   | (12      | )      | (9       | )      |
| Depreciation                                                                                |   | 974      |   | 567      |   |
| Provision for  bad debts                                                                    |   | 45       |   | 160      |   |
| Compensation  expense related to amortization of notes receivable and unearned compensation |   | 1,086    |   | 864      |   |
| Deferred income  taxes                                                                      |   | (561     | )      | 512      |   |
| Equity in income  of limited partnerships                                                   |   | (2,830   | )      | (2,853   | )      |
| Minority  interests in income of consolidated companies                                     |   | 1,385    |   | 24       |   |
| Changes in  operating assets and liabilities excluding effects of acquisition:              |   |     |   |     |   |
| Increase in  receivables                                                                    |   | (5,986   | )      | (2,040   | )      |
| Decrease  (increase) in securities owned                                                    |   | 387      |   | (626     | )      |
| Decrease  (increase) in other assets                                                        |   | 50       |   | (965     | )      |
| (Decrease)  increase in securities sold, not yet purchased                                  |   | (9       | )      | 183      |   |
| (Decrease)  increase in other liabilities                                                   |   | (37      | )      | 25       |   |
| Decrease in  accounts payable and accrued liabilities                                       |   | (4,140   | )      | (476     | )      |
| Net cash used in  operating activities                                                      |   | (3,431   | )      | (50      | )      |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                      |   |     |   |     |   |
| Capital  expenditures                                                                       |   | (4,234   | )      | (460     | )      |
| Acquisition, net  of cash acquired of $478 and $142, respectively                           |   | (2,938   | )      | (1,608   | )      |
| Cash of business  consolidated                                                              |   | 49       |   | —   |   |
| Purchase of  securities available for sale                                                  |   | (1,163   | )      | (784     | )      |
| Proceeds from  sales and maturities of securities available for sale                        |   | 343      |   | 1,302    |   |
| Net cash used in  investing activities                                                      |   | (7,943   | )      | (1,550   | )      |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                      |   |     |   |     |   |
| Purchase of  treasury stock                                                                 |   | (183     | )      | (168     | )      |
| Proceeds from  shares issued                                                                |   | 1,478    |   | 2,130    |   |
| Investment by  minority interest                                                            |   | 27       |   | 38       |   |
| Distributions to  minority interests                                                        |   | (1,202   | )      | (344     | )      |
| Payment of cash  dividends                                                                  |   | (653     | )      | (515     | )      |
| Net cash (used  in) provided by financing activities                                        |   | (533     | )      | 1,141    |   |
| Net decrease in  cash and cash equivalents                                                  |   | (11,907  | )      | (459     | )      |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                           |   | 32,590   |   | 34,890   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                 |   | $        | 20,683 |     | $      | 34,431 |   |
| Noncash  investing and financing activities:                                                |   |     |   |     |   |
| Cash paid for  income taxes                                                                 |   | $        | 2,085  |     | $      | 1,514 |   |
| Acquisition and  consolidation:                                                             |   |     |   |     |   |
| Cash                                                                                        |   | —   |   | 142      |   |
| Receivables                                                                                 |   | —   |   | 167      |   |
| Fixed assets                                                                                |   | 6        |   | 30       |   |
| Other assets                                                                                |   | (5       | )      | —   |   |
| Securities owned                                                                            |   | (800     | )      | —   |   |
| Goodwill                                                                                    |   | 800      |   | —   |   |
| Accounts payable  and accrued liabilities                                                   |   | (18      | )      | (206     | )      |
| Minority  interests                                                                         |   | (32      | )      | —   |   |

 

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

 

5

----

 

**Sanders Morris Harris Group Inc. andSubsidiaries**

**Notes to Consolidated Financial Statements**

 

### **1.**              BASIS OF PRESENTATION

 

###### *Natureof Operations*

###### * *

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

 

The Company merged with and acquired its operatingsubsidiaries in 1999 through 2004.  Theacquisitions were accounted for using the purchase method.

 

###### *Consolidation*

###### * *

The unaudited condensed consolidated financialstatements of the Company include the accounts of its wholly ownedsubsidiaries. All material intercompany transactions and balances have beeneliminated in consolidation.

 

In management’s opinion, the unaudited condensedconsolidated financial statements include all adjustments necessary for a fairpresentation of our consolidated financial position at June 30, 2004, ourresults of operations for the three and six months ended June 30, 2004 and2003, and our cash flows for the six months ended June 30, 2004 and 2003.  All adjustments are of a normal recurringnature. Interim results are not necessarily indicative of results for a fullyear.

 

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

 

###### *Effectsof Recently Issued Accounting Standards*

 

In December 2003, the FASB issued FASB InterpretationNo. 46R (revised December 2003), *Consolidationof Variable Interest Entities,*which addresses how a businessenterprise should evaluate whether it has a controlling financial interest inan entity through means other than voting rights and accordingly shouldconsolidate the entity.  FIN 46Rreplaces FASB Interpretation No. 46, *Consolidationof Variable Interest Entities,*which was issued in January2003.  The Company was required to applyFIN 46R to variable interests in VIEs in its consolidated financial statementsbeginning with the quarter ended March 31, 2004.  For any VIEs that must be consolidated under FIN 46R that werecreated before January 1, 2004, the assets, liabilities and noncontrollinginterests of the VIE initially would be measured at their carrying amounts withany difference between the net amount added to the balance sheet and anypreviously recognized interest being recognized as the cumulative effect of anaccounting change.  If determining thecarrying amounts is not practicable, fair value at the date FIN 46R firstapplies may be used to measure the assets, liabilities and noncontrollinginterest of the VIE.  The Company hasidentified one entity that requires consolidation under this Interpretation.  Consolidation of this entity increased theCompany’s assets by approximately $22,000, liabilities by approximately $25,000and had an insignificant effect on the other basic consolidated financialstatements.

 

*Stock-BasedCompensation*

 

The Company applies the intrinsic value-based methodof accounting prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,*andrelated interpretations including FASB Interpretation No. 44, *Accounting for Certain Transactions involving StockCompensation an Interpretation of APB Opinion No. 25,*issued inMarch 2000, to account for its fixed plan stock options.  Under this method, compensation expense isrecorded on the date of grant only if the current market price of the underlyingstock exceeded the exercise price.

 

6

----

 

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

 
|                                                                                                                                                |   | **Three  Months Ended  June 30,**     |   | **Six Months  Ended  June 30,**       |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                |   | **2004**                              |   | **2003**                              |   | **2004** |   | **2003** |   |
|                                                                                                                                                |   | **(in  thousands, except per share)** |   | **(in  thousands, except per share)** |   |
|                                                                                                                                                |   |                                  |   |                                  |   |   |   |   |   |
| Net income as  reported                                                                                                                             |   | $                                     | 2,947  |                                  | $      | 3,395 |   | $ | 6,217 |   | $ | 4,584 |   |
| Deduct:  Total stock based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (189                                  | )      | (109                                  | )      | (250 | ) | (233 | ) |
| Pro forma net  income                                                                                                                               |   | $                                     | 2,758  |                                  | $      | 3,286 |   | $ | 5,967 |   | $ | 4,351 |   |
|                                                                                                                                                |   |                                  |   |                                  |   |   |   |   |   |
| Earnings per  share                                                                                                                                 |   |                                  |   |                                  |   |   |   |   |   |
| Basic-as  reported                                                                                                                                  |   | $                                     | 0.17   |                                  | $      | 0.20 |   | $ | 0.36 |   | $ | 0.27 |   |
| Basic-pro forma                                                                                                                                     |   | $                                     | 0.16   |                                  | $      | 0.19 |   | $ | 0.34 |   | $ | 0.26 |   |
|                                                                                                                                                |   |                                  |   |                                  |   |   |   |   |   |
| Diluted-as  reported                                                                                                                                |   | $                                     | 0.16   |                                  | $      | 0.19 |   | $ | 0.34 |   | $ | 0.26 |   |
| Diluted-pro  forma                                                                                                                                  |   | $                                     | 0.15   |                                  | $      | 0.19 |   | $ | 0.33 |   | $ | 0.25 |   |

 

*Reclassifications*

 

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

 

### **2.**              ACQUISITIONS

### ** **

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

 

On May 2, 2003, the Company acquired a 50% ownership interest in theSalient companies.  Additionally, theCompany acquired a 23.15% profits interest in the advisor to The EndowmentFund, a related entity.  The former ownersof Salient and The Endowment Fund received cash payments totaling $1.75 millionand may later receive an additional $250,000 cash payment and up to 1,200,000common shares of the Company based on profitability of Salient/PMT for the yearended December 31, 2004.  No additionalconsideration has been earned through June 30, 2004.  The Salient companies and Pinnacle Management & Trust Company(“PMT”) were contributed to Salient Capital Management, which entity’s Class Alimited partner units are jointly owned by the Company and the former owners ofSalient.  Additionally, the Companyreceived Class B limited partner units of Salient/PMT which, in the event of aliquidation or sale of Salient/PMT, entitles the Company to first receiveproceeds, if any, equal to the net

 

7

----

 

asset value of PMT as of May 2, 2003, (approximately $4.4 million) withthe remaining proceeds to be divided equally among the owners of the Class Aunits.  The Salient companies provideinvestment advisory services to individuals and institutions.  The Endowment Fund is a diversified fund offunds using hedge fund managers that specialize in a variety of investmentapproaches.  The acquisitions wereaccounted for as a purchase, and accordingly, the financial information of the Salientcompanies and the advisor to The Endowment Fund has been included in theCompany’s consolidated financial statements from May 2, 2003.  The purchase price of approximately $1.8million exceeded the fair market value of identifiable net assets by approximately$1.7 million, which has been recorded as goodwill.  The Company uses the consolidation method to account for itsinvestment in Salient/PMT.

 

On December 2, 2003, the Company acquired the Tulsa, Oklahoma branchoffice of U.S. Bancorp Piper Jaffray Inc. The Tulsa office provides retail brokerage services to its clients.  The former owner of the Tulsa officereceived $377,000 in cash.  Theacquisition was accounted for as a purchase and, accordingly, the financialinformation of the Tulsa office has been included in the Company’s consolidatedfinancial statements from December 2, 2003. The purchase price of approximately $377,000 exceeded the fair value ofidentifiable net assets acquired by approximately $17,000, which has beenrecorded as goodwill.

 

### **3.**              SECURITIES OWNED AND SECURITIES SOLD, NOTYET PURCHASED

### ** **

Securities owned and securities sold, not yetpurchased as of June 30, 2004 were as follows:

 
|                                  |   | **Owned**           |   | **Sold, Not  Yet  Purchased** |   |
|---------------------------------------|--------|---------------------|--------|-------------------------------|--------|
|                                  |   | **(in  thousands)** |   |
| Marketable:                           |   |                |   |                          |   |
| U.S. Government  and agency           |   | $                   | 2,020  |                          | $      | — |   |
| Corporate stocks                      |   | 516                 |   | 246                           |   |
| Corporate bonds  and commercial paper |   | 5,420               |   | —                        |   |
|                                  |   | 7,956               |   | 246                           |   |
| Not readily  marketable:              |   |                |   |                          |   |
| Partnerships                          |   | 19,113              |   | —                        |   |
| Corporate stocks  and warrants        |   | 6,896               |   | —                        |   |
|                                  |   | $                   | 33,965 |                          | $      | 246 |   |

 

 

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

 

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

 

8

----

 

### **4.**              SECURITIES AVAILABLE FOR SALE

 

Securities available for sale at June 30, 2004 were asfollows:

 
|                                    |   | **Amortized  Cost** |   | **Gross  Unrealized** |   | **Estimated  Fair Value** |   |
|-----------------------------------------|--------|---------------------|--------|-----------------------|--------|---------------------------|--------|
| **Gains**                               |   | **Losses**          |
|                                    |   | **(in  thousands)** |   |
|                                    |   |                |   |                  |   |                      |   |   |   |
| U.S. Government  and agency obligations |   | $                   | 1,043  |                  | $      | 2                         |   | $ | (11 | ) | $ | 1,034 |   |
| Marketable  equity securities           |   | 2,006               |   | 77                    |   | (184                      | )      | 1,899 |   |
| Corporate bonds                         |   | 251                 |   | 1                     |   | -                         |   | 252 |   |
| Partnerships                            |   | 800                 |   | 2                     |   | (9                        | )      | 793 |   |
| Total                                   |   | $                   | 4,100  |                  | $      | 82                        |   | $ | (204 | ) | $ | 3,978 |   |

 

The contractual maturities of debt securitiesavailable for sale at June 30, 2004, were as follows:

 
| Due before 5  years                  |   | $ | 996 |   |
|--------------------------------------|--------|---|-----|--------|
| Due after 25  years through 30 years |   | $ | 290 |   |

 

Gross realized gains on sales of securities availablefor sale were $13,000 for the six months ended June 30, 2004 and $36,000 forthe six months ended June 30, 2003. Gross realized losses on securities available for sale were $1,000 forthe six months ended June 30, 2004 and $27,000 for the six months ended June30, 2003.

 

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

 

### **5.**              INCOME TAXES

### ** **

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

 
|                                   |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                   |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
|                                   |   | **(in  thousands)**               |   | **(in  thousands)**             |   |
|                                   |   |                              |   |                            |   |   |   |   |   |
| Tax computed  using the statutory rate |   | $                                 | 1,662  |                            | $      | 1,958 |   | $ | 3,498 |   | $ | 2,645 |   |
| State income  taxes and other          |   | 280                               |   | 407                             |   | 572 |   | 549 |   |
| Total                                  |   | $                                 | 1,942  |                            | $      | 2,365 |   | $ | 4,070 |   | $ | 3,194 |   |

 

### **6.**              COMMITMENTS AND CONTINGENCIES

 

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

 

The Company and its subsidiaries have obligations under operatingleases that expire by 2014 with initial noncancelable terms in excess of oneyear.

 

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

 

9

----

 

The Company has uncommitted financing arrangements with clearingbrokers who finance customer accounts, certain broker-dealer balances and firmtrading positions.  Although thesecustomer accounts and broker-dealer balances are not reflected on theconsolidated balance sheet for financial accounting and reporting purposes, theCompany has generally agreed to indemnify these clearing brokers for lossesthey may sustain in connection with the accounts, and therefore, retains riskon these accounts.  The Company is requiredto maintain certain cash or securities on deposit with its clearing brokers.

 

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

 

### **7.**              EARNINGS PER COMMON SHARE

 

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

 
|                                                                                          |   | **Three  Months Ended June 30,**                        |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                          |   | **2004**                                                |   | **2003** |   |
|                                                                                          |   | **(in  thousands, except share and per share amounts)** |   |
| Computation of  basic and diluted income per common share for the three months ended June 30: |   |                                                    |   |   |   |
| Net income                                                                                    |   | $                                                       | 2,947  |   | $ | 3,395 |   |
| Weighted average  number of common shares outstanding                                         |   | 17,592,623                                              |   | 17,115,147 |   |
| Common shares  issuable under stock option plan                                               |   | 984,027                                                 |   | 1,079,830 |   |
| Less shares  assumed repurchased with proceeds                                                |   | (389,851                                                | )      | (553,720 | ) |
| Weighted average  common shares outstanding                                                   |   | 18,186,799                                              |   | 17,641,257 |   |
| Basic income per  common share                                                                |   | $                                                       | 0.17   |   | $ | 0.20 |   |
| Diluted income  per common share                                                              |   | $                                                       | 0.16   |   | $ | 0.19 |   |

 
|                                                                                        |   | **Six Months  Ended June 30,**                          |   |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                        |   | **2004**                                                |   | **2003** |   |
|                                                                                        |   | **(in  thousands, except share and per share amounts)** |   |
| Computation of  basic and diluted income per common share for the six months ended June 30: |   |                                                    |   |   |   |
| Net income                                                                                  |   | $                                                       | 6,217  |   | $ | 4,584 |   |
| Weighted average  number of common shares outstanding                                       |   | 17,493,334                                              |   | 16,981,008 |   |
| Common shares  issuable under stock option plan                                             |   | 984,026                                                 |   | 1,079,831 |   |
| Less shares  assumed repurchased with proceeds                                              |   | (388,580                                                | )      | (534,831 | ) |
| Weighted average  common shares outstanding                                                 |   | 18,088,780                                              |   | 17,526,008 |   |
| Basic income per  common share                                                              |   | $                                                       | 0.36   |   | $ | 0.27 |   |
| Diluted income  per common share                                                            |   | $                                                       | 0.34   |   | $ | 0.26 |   |

 

Outstanding stock options (45,000 for the three andsix months ended June 30, 2004, and 50,000 for the three and six months endedJune 30, 2003) have not been included in diluted earnings per common sharebecause to do so would have been antidilutive for the periods presented.

 

### **8.**              BUSINESS SEGMENT INFORMATION

### ** **

SMHG operates through six business segments: RetailBrokerage, Institutional Brokerage, Asset Management, Prime Brokerage,Investment Banking, and Corporate and Other. The business segments are basedupon factors such as the services provided and distribution channels served.Certain services are

 

10

----

 

provided to customersthrough more than one of our business segments.  Prior to April 2004, the Company aggregated the brokerage andinvestment banking businesses into one segment.

 

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

 

The Institutional Brokerage segment distributes equityand fixed income products through its distribution network to its institutionalclients. Institutional revenues consist of commissions and principal creditsearned on transactions in customer brokerage accounts, a small amount of netinterest on customers’ margin loan and credit account balances, and salescredits from the distribution of investment banking products.

 

The Asset Management segment provides investmentadvisory, wealth and investment management, financial planning, and trustservices to institutional and individual clients. Advisory fees are based onsuch factors as the amount of assets under management and the type of servicesprovided. The asset management segment may earn commission revenues from thesale of equity, fixed income, mutual fund, and annuity products; and salescredits from the distribution of investment banking issues. In addition,performance fees may be earned for exceeding performance benchmarks for theinvestment portfolios in the limited partnerships that we manage.

 

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

 

The Investment Banking segment provides corporatesecurities underwriting, private financings and financial advisory services. Weparticipate in corporate securities distributions as a manager, co-manager ormember of an underwriting syndicate or of a selling group in public offeringsmanaged by other underwriters. Fees earned for our role as an advisor, manager,or underwriter are included in the investment banking segment. Sales creditsassociated with the distribution of investment banking products are reported inRetail Brokerage, Institutional Brokerage or Asset Management as determined bythe distribution channel.

 

The Corporate and Other segment include realized andunrealized gains and losses on the Company’s investment portfolios and interestand dividends earned on our cash and securities positions. Unallocatedcorporate revenues and expenses are included in Corporate and Other.

 

11

----

 

The following summarizes certain financial informationof each reportable business segment for the three and six months ended June 30,2004 and 2003, respectively.  SMHG doesnot analyze asset information in all business segments.

 
|                                                                                                         |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                         |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
|                                                                                                         |   | **(in  thousands)**               |   | **(in thousands)**              |   |
| Revenues:                                                                                                    |   |                              |   |                            |   |   |   |   |   |
| Retail brokerage                                                                                             |   | 4,360                             |   | $                               | 3,572  |   | $ | 8,466 |   | $ | 6,464 |   |
| Institutional  brokerage                                                                                     |   | 8,085                             |   | 8,607                           |   | 16,306 |   | 15,430 |   |
| Asset management                                                                                             |   | 7,400                             |   | 4,373                           |   | 13,632 |   | 8,099 |   |
| Prime brokerage                                                                                              |   | 4,828                             |   | 6,440                           |   | 9,831 |   | 12,248 |   |
| Investment  banking                                                                                          |   | 3,122                             |   | 3,836                           |   | 8,972 |   | 5,297 |   |
| Corporate and  other                                                                                         |   | 860                               |   | 791                             |   | 1,255 |   | 1,012 |   |
| Total                                                                                                        |   | $                                 | 28,655 |                            | $      | 27,619 |   | $ | 58,462 |   | $ | 48,550 |   |
|                                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Income (loss)  before equity in income (loss) of limited partnerships, income taxes and  minority interests: |   |                              |   |                            |   |   |   |   |   |
| Retail brokerage                                                                                             |   | $                                 | 421    |                            | $      | 306 |   | $ | 619 |   | $ | 204 |   |
| Institutional  brokerage                                                                                     |   | 1,350                             |   | 1,665                           |   | 2,786 |   | 2,683 |   |
| Asset management                                                                                             |   | 2,562                             |   | 1,459                           |   | 4,348 |   | 2,674 |   |
| Prime brokerage                                                                                              |   | 723                               |   | 1,237                           |   | 1,629 |   | 2,285 |   |
| Investment banking                                                                                           |   | 1,154                             |   | 2,008                           |   | 4,592 |   | 2,784 |   |
| Corporate and  other                                                                                         |   | (2,413                            | )      | (2,214                          | )      | (5,132 | ) | (4,719 | ) |
| Total                                                                                                        |   | $                                 | 3,797  |                            | $      | 4,461 |   | $ | 8,842 |   | $ | 5,911 |   |
|                                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Equity in income  (loss) of limited partnerships:                                                            |   |                              |   |                            |   |   |   |   |   |
| Retail brokerage                                                                                             |   | $                                 | — |                            | $      | — |   | $ | — |   | $ | — |   |
| Institutional  brokerage                                                                                     |   | —                            |   | —                          |   | — |   | — |   |
| Asset management                                                                                             |   | 2,031                             |   | 1,783                           |   | 2,763 |   | 2,557 |   |
| Prime brokerage                                                                                              |   | —                            |   | —                          |   | — |   | — |   |
| Investment  banking                                                                                          |   | —                            |   | —                          |   | — |   | — |   |
| Corporate and  other                                                                                         |   | (6                                | )      | 202                             |   | 67 |   | 296 |   |
| Total                                                                                                        |   | $                                 | 2,025  |                            | $      | 1,985 |   | $ | 2,830 |   | $ | 2,853 |   |
|                                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Minority  interests in net (income) loss of consolidated companies:                                          |   |                              |   |                            |   |   |   |   |   |
| Retail brokerage                                                                                             |   | $                                 | — |                            | $      | — |   | $ | — |   | $ | — |   |
| Institutional  brokerage                                                                                     |   | —                            |   | —                          |   | — |   | — |   |
| Asset management                                                                                             |   | (934                              | )      | (686                            | )      | (1,399 | ) | (986 | ) |
| Prime brokerage                                                                                              |   | —                            |   | —                          |   | — |   | — |   |
| Investment  banking                                                                                          |   | —                            |   | —                          |   | — |   | — |   |
| Corporate and  other                                                                                         |   | 1                                 |   | —                          |   | 14 |   | — |   |
| Total                                                                                                        |   | $                                 | (933   | )                               | $      | (686 | ) | $ | (1,385 | ) | $ | (986 | ) |
|                                                                                                         |   |                              |   |                            |   |   |   |   |   |
| Income (loss)  before income taxes:                                                                          |   |                              |   |                            |   |   |   |   |   |
| Retail brokerage                                                                                             |   | $                                 | 421    |                            | $      | 306 |   | $ | 619 |   | $ | 204 |   |
| Institutional  brokerage                                                                                     |   | 1,350                             |   | 1,665                           |   | 2,786 |   | 2,683 |   |
| Asset management                                                                                             |   | 3,659                             |   | 2,556                           |   | 5,712 |   | 4,245 |   |
| Prime brokerage                                                                                              |   | 723                               |   | 1,237                           |   | 1,629 |   | 2,285 |   |
| Investment  banking                                                                                          |   | 1,154                             |   | 2,008                           |   | 4,592 |   | 2,784 |   |
| Corporate and  other                                                                                         |   | (2,418                            | )      | (2,012                          | )      | (5,051 | ) | (4,423 | ) |
| Total                                                                                                        |   | $                                 | 4,889  |                            | $      | 5,760 |   | $ | 10,287 |   | $ | 7,778 |   |

 

12

----

 

### **9.**              EMPLOYEE BENEFIT PLANS

### ** **

Under its 1998 Incentive Plan, as amended, the Companyhas reserved 25% of the issued and outstanding Common Stock of the Company, or4,000,000 shares of Common Stock, whichever is greater, for the purpose ofissuing incentive awards under the Incentive Plan.  The Company had 1,319,523 shares of Common Stock available forgrant under the Incentive Plan at June 30, 2004.

 

**Stock Options**

 

The Incentive Plan provides for the issuance toeligible employees of, among other things, incentive and non-qualified stockoptions, that may expire up to 10 years from the date of grant.   The outstanding options vest over varyingperiods and have an exercise price equal to the closing price of the Company’sstock on the date of the grant.

 

**Capital Incentive Plan (“CIP”)**

 

Effective January 2, 2001, the Company adopted the CIPunder its Incentive Plan in which eligible employees may purchase shares of theCompany’s restricted common stock at a discount of up to 33 1/3 % of the 20-dayaverage of the closing sales prices for a share of the Company’s common stock,ending on the day prior to the date the shares are issued.  The CIP was amended effective November 1,2001 to include eligible consultants as potential participants under theprogram.

 

All shares issued are valued at the closing price onthe date the shares are issued. Consideration paid through the deferral of salaries, commissions, ordiscretionary bonuses is recorded as compensation expense on the date theshares are issued.  The differencebetween the value of the shares issued and the consideration paid is recordedas unearned compensation and is shown as a separate component of shareholders’equity.  Additionally, shares are issuedunder the Incentive Plan in conjunction with notes receivable, which are alsoshown as a separate component of shareholders’ equity. Unearned compensationand the notes receivable are amortized to compensation expense over thethree-year vesting periods.

 

**Restricted Stock**

 

The Incentive Plan provides for the issuance ofrestricted stock to eligible employees. The restricted shares vest over varying periods.  All shares issued are valued at the closingprice on the date the shares are issued. The value of the shares is recorded as unearned compensation and isshown as a separate component of shareholders’ equity.   Unearned compensation is amortized tocompensation expense over the vesting period.

 

The following summarizes certain information related to the CIP andrestricted stock plans for the three and six months ended June 30, 2004 and2003.

 
|                                   |   | **Three  Months Ended  June 30,**  |   | **Six Months  Ended  June 30,**    |   |
|----------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                   |   | **2004**                           |   | **2003**                           |   | **2004** |   | **2003** |   |
|                                   |   | **(in  thousands, except shares)** |   | **(in  thousands, except shares)** |   |
|                                   |   |                               |   |                               |   |   |   |   |   |
| Number of shares  issued               |   | 147,314                            |   | 24,125                             |   | 265,451 |   | 92,778 |   |
| Value of shares  issued                |   | $                                  | 1,816  |                               | $      | 236 |   | $ | 3,252 |   | $ | 785 |   |
| Additions to  unearned compensation    |   | 1,159                              |   | 22                                 |   | 1,685 |   | 57 |   |
| Additions to  notes receivable         |   | 658                                |   | 213                                |   | 1,566 |   | 729 |   |
| Amortization of  unearned compensation |   | (274                               | )      | 275                                |   | (460 | ) | 481 |   |
| Amortization of  notes receivable      |   | (326                               | )      | 175                                |   | (626 | ) | 384 |   |
|                                        |        |                                    |        |                                    |        |  |  |  |  |  |  |  |  |

 

13

----

 

### **10.**       RELATED PARTIES

 

The Company had receivables from related partiestotaling $10.0 million at June 30, 2004, primarily consisting of $1.5 millionof unpaid management fees earned by the Company for managing the limitedpartnerships, $5.3 million of notes receivable from employees, consultants andother related parties and a secured note receivable in the amount of $3.0million that the Company expects to convert into an investment during thesecond half of 2004.

 

14

----

 

### **Item 2**.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

### ** **

The following discussion should be read in conjunctionwith the Condensed Consolidated Financial Statements and their related notes.

 

**General**

 

We provide diversified financial services through our subsidiaries,including institutional, prime and retail brokerage, principal trading,investment banking, merchant banking, financial advisory, trust relatedservices, investment management and financial planning. All of these activitiesare highly competitive and are sensitive to many factors outside our control,including those factors listed under “Factors Affecting Forward-LookingStatements.”

 

We closely monitor our operating environment to enable us to respondpromptly to market cycles. In addition, we seek to lessen earnings volatilityby controlling expenses, increasing fee-based business and developing newrevenue sources. Nonetheless, operating results for any specific period shouldnot be considered representative of future performance.

 

**Components of Revenues and Expenses**

 

*Revenues*.      Our revenues are comprised primarily of(1) commission revenue from retail, prime and institutional brokeragetransactions, (2) fees from asset-based advisory services, (3) principal andagent transactions, (4) investment banking revenue from corporate finance fees,public and private offerings, mergers and acquisitions, merchant banking and(5) fees from asset management, financial planning and fiduciary services.  We also earn interest on the cash held anddividends received from the equity securities held by us for our corporatecapital accounts and have realized and unrealized gains (or losses) onsecurities in our inventory account.

 

*Expenses.*      Our expenses consist of (1) employeecompensation and benefits, (2) brokerage and clearing costs, and (3) otherexpenses.  Compensation and benefitshave both a variable component based on revenue production and a fixedcomponent.  The variable componentincludes institutional and retail sales commissions, bonuses, overrides, andother incentives.  Retail andinstitutional commissions are based on a competitive commission schedule.  The investment banking group and theresearch group receive a salary and discretionary bonus as compensation.  The fixed component includes administrativeand executive salaries, payroll taxes, employee benefits and temporary employeecosts.  Compensation and benefits is ourlargest expense item and includes wages, salaries and benefits. During thesecond quarter of 2004, compensation and benefits represented 69% of totalexpenses, and 60% of total revenues compared to 69% of total expenses, and 58%of total revenues during the comparable period in 2003.   During the first six months of 2004,compensation and benefits represented 70% of total expenses, and 60% of totalrevenues compared to 69% of total expenses and 61% of total revenues during thecomparable period in 2003.

 

Brokerage and clearance expenses include clearing and trade executioncosts associated with the retail, prime and institutional brokerage business atSMH.  SMH clears its transactionsprimarily through Pershing LLC, a member of BNY Securities Group and asubsidiary of The Bank of New York and other clearing brokers.

 

Other expenses include (1) occupancy and equipment expenses, such asrent and utility charges for facilities and (2) communications and dataprocessing expenses, such as third-party systems, market data and softwareprogram providers.

 

# **BusinessEnvironment**

# ** **

Our financial services business is affected by general economicconditions. The improvement in the economy, as well as in the overall stockmarket has had a positive impact on underwriting fees derived from publicofferings and advisory fees from private placements. During 2004, the

 

15

----

 

increase in interest rates during the first six months led to adecrease in residential loan refinancing, which had a negative impact on thatportion of our business that derives its income from mortgage-backed fixed-incomesecurities.  In the second quarter of2004, stock trading volume declined significantly from the same period in 2003.

 

Our revenues relating to asset-based advisory services and managedaccounts are typically from fees based on the market value of assets undermanagement. The overall increase in equity prices resulted in growth in thevalues of our customers’ investment portfolios, which in turn led to highermanagement fees for the Company.  Theimproved stock market has caused many of our customers to rebalance theirinvestment portfolios, thereby reducing concentrations in money marketinstruments and increasing exposure to equity and other securities with agreater potential for growth.

 

We have organized 13 private equity funds for the purpose of investingin public and private companies that we believe are either significantlyundervalued relative to their growth potential or have substantial prospectsfor capital growth. We invest in these funds along with our clients and earnmanagement fees based on capital commitments, net assets or capitalcontributions. We also receive incentive compensation of a portion of theprofit if the profit exceeds specified hurdle rates. The improvement in theoverall stock market, as well as in individual investment positions owned bythe private equity funds provided the Company with realized and unrealizedgains from its ownership interests and incentive compensation due to fundperformance.

 

We invest a portion of our excess cash in public equity and debtsecurities that we feel are undervalued. Additionally, we may receive warrantsas a part of our compensation for investment banking services.

 

We have expanded both the range and depth of services offered to ourclients through a combination of acquisitions and internal expansion. Thisgrowth has necessitated that we add personnel, as well as production-relatedincentive compensation plans. We have also improved and expanded ourinfrastructure including facilities, technology, and information services, toenable us to better compete with other firms that offer services similar toours.

 

**Resultsof Operations**

 

*ThreeMonths Ended June 30, 2004 Compared to Three Months Ended June 30, 2003*

 

FINANCIAL OVERVIEW

 

Total revenues were $28.7million in the second quarter of 2004 compared to $27.6 million for the samequarter in 2003.  An increase ininvestment banking revenue and fiduciary, custodial and advisory fees waspartially offset by a decline in revenues from prime brokerage services.  Total expenses for the 2004 period increasedto $24.9 million from $23.2 million in the same quarter of the previousyear.  Minority interests in net incomeof consolidated companies increased to $933,000 during the second quarter of2004 from $686,000 during the second quarter of 2003.  Net income for the three month period ended June 30, 2004declined to $2.9 million from $3.4 million in the same period in 2003.  Basic income per share was $0.17 for the threemonths ended June 30, 2004 compared to $0.20 for the same period in 2003.   Diluted income per share was $0.16 for thethree months ended June 30, 2004 compared to $0.19 for the same period in 2003.

 

Commissions revenue declinedto $12.6 million in the second quarter of 2004 from $13.3 million in 2003,primarily due to decreased trading volume in our prime brokerage division.  Principal transactions revenue totaled $2.0million for the 2004 period versus $3.9 million in the second quarter of2003.   Revenues from fixed incomebrokerage declined to $1.4 million during the second quarter of 2004 from $2.4million during the comparable prior year quarter mainly due to a decline inresidential loan refinancing. Investment banking revenue increased to $7.8 million during the secondquarter of 2004 from $6.8 million in the same period of 2003, principally dueto an increase in fees earned from the Company’s participation in underwritingsyndicates.  Revenues from fiduciary,custodial and advisory fees increased to $4.7 million in the second quarter of2004 from $2.5 million in same quarter of 2003.  The acquisitions of Salient during the

 

16

----

 

secondquarter of 2003 and Charlotte Capital during the second quarter of 2004, theDecember 2003 start up of a new private equity fund managed by the Company witha focus on life sciences investments and growth in assets under management havecontributed to the increase in revenues from advisory fees.  Interest and dividend income increased to$979,000 in 2004 from $684,000 in the same period last year.  Interest income has increased due to highermargin interest reflecting an increase in margin balances.  Other income increased from $351,000 during2003 to $517,000 during 2004, due to an increase in fees earned on theCompany’s cash balances and customer credit balances at its clearing brokersresulting from higher deposit balances.

 

During the three monthsended June 30, 2004, employee compensation and benefits increased to $17.1million from $16.1 million in the same period last year due to the higher revenueduring 2004.  Floor brokerage, exchangeand clearance fees declined to $1.3 million in the second quarter of 2004 from$1.5 million in the same quarter of 2003 reflecting lower clearing andexecution costs resulting from the reduced trading volume attributable to primebrokerage services.  Communication anddata processing costs increased to $1.9 million in 2004 from $1.4 million inthe same period last year resulting from increased personnel and additional offices.  Occupancy costs totaled $1.7 million duringthe second quarter of 2004, compared to $1.6 million in the prior year quarterdue to expansion of our New York City offices, the addition of CharlotteCapital in April 2004 and the Tulsa office of U.S. Bankcorp Piper Jaffray Inc.,which was acquired in December 2003. Other general and administrative expenses increased to $2.8 millionduring the second three months of 2004 from $2.6 million in the second quarterof last year mainly due to our growth.

 

Minority interests in net income of consolidatedcompanies reflect the portion of net income attributable to minority interestownership of entities included in the Company’s consolidated financialstatements.  Income attributable tominority interests increased to $933,000 during the second quarter of 2004 from$686,000 during the second quarter of 2003, principally due to increased incomefrom our share of the income of the limited partnerships managed by theCompany.

 

The effective tax rate from operations was40% for the three months ended June 30, 2004 compared to 41% for the threemonths ended June 30, 2003.

 

RESULTS BY SEGMENT

 

*RetailBrokerage*

 

Revenues from retailbrokerage increased to $4.4 million from $3.6 million, and income before incometaxes increased to $421,000 from $306,000. Commission revenue increased to $2.3million from $1.4 million reflecting increased trading volume due to theadditions of several new retail brokers and the Tulsa office in December 2003.Sales credits from investment banking transactions decreased to $1.0 millionfrom $1.4 million, due to a decline in fees earned from the Company’sparticipation in private placement transactions. Compensation expense increasedto $3.1 million from $2.7 million due to the revenue increase.

 

*InstitutionalBrokerage*

 

Revenues from institutional brokerage declined to $8.1million from $8.6 million, and income before taxes declined to $1.4 millionfrom $1.7 million. Commission revenue declined to $4.6 million from $5.6million due to a slowdown in institutional commission transactions. However,sales credits from investment banking transactions increased to $2.5 millionfrom $1.3 million, due to increases in fees earned from the Company’sparticipation in underwriting syndicates. Principal transaction revenuedeclined to $851,000 from $1.5 million due to reduced trading volume from fixedincome products relating to fewer residential home refinancings caused byhigher interest rates.

 

17

----

 

*AssetManagement*

 

Revenues from asset management increased to $7.4million from $4.4 million, and income before taxes increased to $3.7 millionfrom $2.6 million. Fiduciary, custodial and advisory fees increased to $4.4million from $2.4 million. The acquisition of Charlotte Capital in April 2004,growth in assets under management at Salient/PMT and Cummer/Moyers, and theDecember 2003 startup of a new private equity fund managed by the Company witha focus on life sciences investments have contributed to the increase inrevenues from advisory fees. Sales credits from investment banking transactionsincreased to $1.1 million from $318,000 due to increases in fees earned fromthe Company’s participation in underwriting syndicates. Compensation expenserose to $3.2 million from $1.8 million related to the higher revenues. Minorityinterests in net income of consolidated companies reflect the portion of netincome attributable to minority interest ownership of entities included in theCompany’s consolidated financial statements. Income attributable to minority interests, which reduce SMHG’s pretaxincome, increased to $934,000 from $686,000, principally due to income from oneof the limited partnerships of which minority interests own 40%, and theaddition of Charlotte Capital in April 2004, of which minority interests own31%.

 

*PrimeBrokerage*

 

Revenues from prime brokerage declined to $4.8 millionfrom $6.4 million, and income before taxes declined to $723,000 from $1.2million. Commission revenue declined to $3.9 million from $5.0 millionreflecting the loss of assets managed by one of our prime brokerage clientsduring the first half of 2004.  Thatloss has been replaced with new customers who are expected to begin tradingthrough the Company during the second half of 2004. Principal transactionsrevenues declined to $596,000 from $1.1 million due to reduced trading volumefrom fixed income products. Compensation expense declined to $2.3 million from$2.9 million due to lower revenues.

 

*InvestmentBanking*

 

Revenues from investment banking declined to $3.1million from $3.8 million, and income before taxes declined to $1.2 millionfrom $2.0 million. The revenue decline is primarily due to a reduced number ofprivate placement transactions during the second quarter of 2004.

 

*Corporateand Other*

 

Revenues from corporate and other increased to$860,000 from $791,000, and the loss before taxes increased to $2.4 millionfrom $2.0 million. Compensation expense increased to $1.7 million from $1.5million.  The change in value of ourinvestments in limited partnerships resulted in a loss of $6,000 in 2004,compared to a gain of $202,000 during 2003.

 

*Six MonthsEnded June 30, 2004 Compared to Six Months Ended June 30, 2003*

 

FINANCIAL OVERVIEW

 

Total revenues increased to$58.5 million in the first half of 2004 from $48.6 million for the same periodin 2003, principally due to increases in fiduciary, custodial and advisory feesand investment banking.  Total expensesfor the same 2004 period increased to $49.6 million from $42.6 million in thesame period of the previous year. Equity in income of limited partnerships totaled $2.8 million during thefirst six months of 2004 compared to $2.9 million during the first six monthsof 2003.  Minority interests in netincome of consolidated companies increased to $1.4 million during the first sixmonths of 2004 from $986,000 during the first six months of 2003.  Net income for the six month period endedJune 30, 2004 increased to $6.2 million from $4.6 million in the same period in2003.  Basic income per share was $0.36for the six months ended June 30, 2004 compared to $0.27 for the same period in2003.  Diluted income per share was$0.34 for the six months ended June 30, 2004, compared to $0.26 for the sameperiod in 2003.

 

18

----

 

Commissions revenue increased to $26.5 million in thefirst six months of 2004 from $25.6 million in 2003, primarily as a result ofincreased trading volume in our retail brokerage division.  Principal transactions revenue totaled $3.4million for the 2004 period versus $5.9 million in 2003.   Revenues from fixed income brokeragedeclined from $4.0 million during the first six months of 2003 to $2.5 millionduring the first six months of 2004 primarily from a decline in residentialloan refinancings.  Investment bankingrevenue increased to $17.4 million during the first six months of 2004 from$10.2 million in the same period of 2003, principally due to an increase infees earned from private placement transactions.  Revenues from fiduciary, custodial and advisory fees increased to$8.3 million in the first half of 2004 from $4.3 million in same period of2003.  The acquisition of CharlotteCapital in April 2004, growth in assets under management at Salient/PMT andCummer/Moyers, and the December 2003 startup of a new private equity fundmanaged by the Company with a focus on life sciences investments havecontributed to the increase in revenues from fiduciary, custodial and advisoryfees.  Interest and dividend income increasedto $1.8 million in 2004 from $1.2 million in the same period last year.   Other income declined to $1.0 millionduring the first six months of 2004 from $1.3 million during the same period in2003.

 

During the six months endedJune 30, 2004, employee compensation and benefits increased to $35.0 millionfrom $29.5 million in the same period last year, reflecting commissions andbonuses paid on increased revenues.   Floor brokerage, exchange and clearance fees declined to $2.5 million inthe first half of 2004 from $2.9 million in the same period of 2003 reflectingdecreased clearing and execution costs resulting from the reduced tradingvolume attributable to prime brokerage services.  Communication and data processing costs increased to $3.5 millionin 2004 from $2.7 million in the same period last year resulting primarily fromincreased personnel and additional offices.  Occupancy costs totaled $3.4 million during the first half of 2004,compared to $2.9 million in the prior year period.  Other general and administrative expenses increased to $5.3million during the first half of 2004 from $4.7 million in the first six monthsof last year mainly due to our growth.

 

The effective tax rate fromoperations was 40% for the six months ended June 30, 2004 compared to 41% forthe six months ended June 30, 2003.

 

RESULTS BY SEGMENT

 

*RetailBrokerage*

 

Revenues from retail brokerage increased to $8.5million from $6.5 million, and income before income taxes increased to $619,000from $204,000. Commission revenue increased to $4.8 million from $2.6 millionreflecting increased trading volume due to the additions of several new retailbrokers and the Tulsa office in December 2003. Compensation expense increasedto $6.1 million from $5.0 million due to the revenue increase.

 

*InstitutionalBrokerage*

 

Revenues from institutional brokerage increased to$16.3 million from $15.4 million, and income before taxes increased to $2.8million from $2.7 million. Sales credits from investment banking transactionsincreased to $4.6 million from $2.1 million due to increases in fees earnedfrom (i) the Company’s participation in underwriting syndicates and (ii)private placement transactions. Principal transaction revenue declined to $1.4million from $2.4 million due to reduced trading volume from fixed incomeproducts relating to fewer residential home refinancings caused by higherinterest rates. Compensation expense increased to $10.6 million from $9.9million due to the higher revenues.

 

*AssetManagement*

 

Revenues from asset management increased to $13.6million from $8.1 million, and income before taxes increased to $5.7 millionfrom $4.2 million. Fiduciary, custodial and advisory fees increased to $7.6million from $4.0 million. The acquisition of Charlotte Capital in April 2004,growth in assets under management at Salient/PMT and Cummer/Moyers, and theDecember 2003 startup of a new private equity fund managed by

 

19

----

 

the Company with a focuson life sciences investments have contributed to the increase in revenues fromadvisory fees. Compensation expense rose to $6.0 million from $3.4 millionrelated to the higher revenues.  Incomeattributable to minority interests, which reduce SMHG’s pretax income,increased to $1.4 million from $986,000, principally due to income from one ofthe limited partnerships, of which minority interests own 40%, and the additionof Charlotte Capital in April 2004, of which minority interests own 31%.

 

*PrimeBrokerage*

 

Revenues from prime brokerage declined to $9.8 millionfrom $12.2 million, and income before taxes declined to $1.6 million from $2.3million. Commission revenue declined to $8.1 million from $9.8 millionreflecting the loss of assets managed by one of our prime brokerage clientsduring the first half of 2004.  Thatloss has been replaced with new customers who are expected to begin tradingthrough the Company during the second half of 2004. Principal transactionsrevenues declined to $1.0 million from $1.8 million due to reduced tradingvolume from fixed income products. Compensation expense declined to $4.9million from $5.8 million due to lower revenues.

 

*InvestmentBanking*

 

Revenues from investment banking increased to $9.0million from $5.3 million, and income before taxes rose to $4.6 million from$2.8 million. The revenue increase is primarily due to an increase in both thenumber and size of private placement transactions, as well as an increase inadvisory, underwriting and management fees due to the Company’s participationin these private placements. Compensation expense increased to $3.5 millionfrom $2.3 million due to the revenue increase.

 

*Corporateand Other*

 

Revenues from corporate and other increased to $1.3million from $1.0 million, and the loss before taxes increased to $5.1 millionfrom $4.4 million. Compensation expense increased to $3.8 million from $3.1million, primarily due to bonus expense related to the increased income. Thechange in value of our investments in limited partnerships resulted in incomeof $67,000 in 2004, compared to $296,000 during 2003.

 

**Liquidityand Capital Resources**

 

We intend to satisfy a large portion of our fundingneeds with our own capital resources, consisting largely of internallygenerated earnings and liquid assets we currently hold.

 

At June 30, 2004, we had approximately $20.7 million in cash and cashequivalents, which together with receivables from broker-dealers, deposits withclearing brokers, marketable securities owned, and securities available forsale represented about 24% of our total assets at the end of the first quarter.

 

For the six months ended June 30, 2004, net cash used in operationstotaled $3.4 million versus $50,000 during the first six months of 2003.  Accounts payable and accrued liabilitiesdeclined by $4.1 million during the six months ended June 30, 2004, principallydue to the payment of accrued compensation during the first quarter of2004.  Receivables increased by $6.0million, primarily due to the addition of a secured receivable that the Companyexpects to convert into an investment during the second half of 2004, as wellas an increase in receivables from customers due to the increase in revenues.

 

Capital expenditures for the first half of 2004 were $4.2 million,mainly for the purchase of furniture and computer equipment and software, aswell as for leasehold improvements, necessary for our growth.  During the first six months of 2004, wereacquired 15,399 of our common shares at a total cost of approximately$183,000.   Dividends paid toshareholders totaled $653,000 during the first six months of 2004.

 

20

----

 

At June 30, 2004, SMH, our registered broker-dealer subsidiary, was incompliance with the net capital requirements of the Securities and ExchangeCommission’s Uniform Net Capital Rules and had capital in excess of therequired minimum.  PMT was in compliancewith the Texas Department of Banking net capital requirement and had capital inexcess of the required minimum.

 

We are a party to various legal proceedings that are of an ordinary orroutine nature incidental to our operations. We believe we have adequately reserved for such litigation matters andthat they will not have a material adverse effect on our consolidated financialposition, results of operations, or cash flows.

 

**FactorsAffecting Forward-Looking Statements**

 

This quarterly report on Form 10-Q includes“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities andExchange Act of 1934, as amended (the “Acts”). These forward-looking statementsmay relate to such matters as anticipated financial performance, futurerevenues or earnings, business prospects, projected ventures, new products,anticipated market performance and similar matters. The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements. To comply with the safe harbor, the Company cautions readers that avariety of factors could cause the Company’s actual results to differmaterially from the anticipated results or other expectations expressed in theCompany’s forward-looking statements. These risks and uncertainties, many ofwhich are beyond the Company’s control, include, but are not limited to (1)trading volume in the securities markets; (2) volatility of the securitiesmarkets and interest rates; (3) changes in regulatory requirements, which couldaffect the demand for the Company’s services or the cost of doing business; (4)general economic conditions, both domestic and foreign, especially in theregions where the Company does business; (5) changes in the rate of inflationand related impact on securities markets; (6) competition from existingfinancial institutions and other new participants in the securities markets;(7) legal developments affecting the litigation experience of the securitiesindustry; (8) successful implementation of technology solutions; (9) changes invaluations of the Company’s trading and warrant portfolios resulting frommark-to-market adjustments; (10) dependence on key personnel and (11) demandfor the Company’s services. The Company does not undertake to publicly updateor revise any forward-looking statements.

 

**Item 3*****. Quantitative and Qualitative Disclosures About Market Risk***

 

**MarketRisks**

** **

Management evaluates the realizability of securitiesavailable for sale to determine if a decline in value is other thantemporary.  Such evaluation considersthe length of time and the extent to which market value has been less than cost,the financial condition and near-term prospects of the issuer, and the intentand ability of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in market value.  Management believes the unrealized lossesare temporary at June 30, 2004. However, a write-down accounted for as a realized loss may be necessaryin the future.

 

The Company’s trading equity and debt securities are marked to marketon a daily basis.  At June 30, 2004, theCompany’s trading equity and debt securities were recorded at a fair value ofapproximately $8.0 million.  Thesetrading equity and debt securities are subject to equity price risk.  This risk would amount to approximately$800,000 million based on a potential loss in fair value from a hypothetical 10%decrease in the market value of such equity and debt securities.  The actual equity price risk related to thetrading equity and debt securities may differ substantially.

 

**Item 4****.** ***Controls and Procedures***

 

Our management, including our Chief Executive Officerand Chief Financial Officer, have conducted an evaluation of the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e)

 

21

----

 

promulgated under the Exchange Act, as of the endof the fiscal period covered by this report. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective in ensuring that the information required to be disclosed in thereports we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission.  There have been no changes made in our internal controls overfinancial reporting during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.  

 

22

----

 

**PART II.   OTHER INFORMATION**

 

**Item 1.  *Legal Proceedings***

 

We are a party to various legal proceedings that are of an ordinary orroutine nature incidental to our operations. Certain of our litigation and claims are covered by insurance with a maximumdeductible of $50,000.    We believe wehave adequately reserved for such litigation matters and that they will nothave a material adverse effect on our consolidated financial position, resultsof operations, or cash flows.

 

**Item4.  *Submissionof Matters to a Vote of Security Holders***

 

On June 17, 2004, the Company held its annual meeting of shareholdersto vote for election of directors to the Company’s Board of Directors.  Each nominee was elected and the results ofthe votes were as follows:

 
|                      |   | **Number of  Shares  Voted For** |   | **Number of  Shares  Withheld** |   | **Number of  Broker  Non-Votes** |   |
|---------------------------|--------|----------------------------------|--------|---------------------------------|--------|----------------------------------|--------|
|                      |   |                             |   |                            |   |                             |   |
| George L. Ball            |   | 16,201,168                       |   | 220,499                         |   | —                           |   |
| Robert E.  Garrison II    |   | 16,201,993                       |   | 219,674                         |   | —                           |   |
| Titus H. Harris,  Jr.     |   | 16,201,423                       |   | 220,244                         |   | —                           |   |
| Ben T. Morris             |   | 16,224,605                       |   | 197,062                         |   | —                           |   |
| Nolan Ryan                |   | 16,231,863                       |   | 189,804                         |   | —                           |   |
| Don A. Sanders            |   | 16,200,718                       |   | 220,949                         |   | —                           |   |
| W. Blair Waltrip          |   | 16,200,143                       |   | 221,524                         |   | —                           |   |
| Dan S. Wilford            |   | 15,317,149                       |   | 1,104,518                       |   | —                           |   |
| Richard E. Bean           |   | 15,529,246                       |   | 892,421                         |   | —                           |   |
| Robert M. Collie          |   | 16,232,171                       |   | 189,496                         |   | —                           |   |
| Charles W.  Duncan III    |   | 16,232,171                       |   | 189,496                         |   | —                           |   |
| Gerald H.  Hunsicker      |   | 16,229,852                       |   | 191,815                         |   | —                           |   |
| Scott McClelland          |   | 16,230,302                       |   | 191,365                         |   | —                           |   |
| Dr. Albert W.  Niemi, Jr. |   | 16,230,127                       |   | 191,540                         |   | —                           |   |

 

**Item5.  *OtherInformation***

 

On August 3, 2004, our Board of Directors adoptedamendments to our bylaws to provide for advisory directors and to authorize ourChief Executive Officer to sign stock certificates.

 

23

----

 

**Item6**.  ***Exhibits and Reports on Form 8-K***

 

(a) Exhibits

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                      |   |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1                 |   | Articles of Incorporation of  the Company, as amended  (filed as  Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2001  (File No. 000-30066) and incorporated herein by reference). |   |
| *3.2                |   | Amended and Restated Bylaws of  the Company as amended through August 3, 2004.                                                                                                                                       |   |
| *31.1               |   | Rule 13a-14(a)/15d – 14(a) Certification of Chief  Executive Officer.                                                                                                                                           |   |
| *31.2               |   | Rule 13a-14(a)/15d – 14(a) Certification of Chief  Financial Officer.                                                                                                                                           |   |
| *32.1               |   | Certification Pursuant to 18 U.S.C. 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     |   |
| *32.2               |   | Certification Pursuant to 18 U.S.C. 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     |   |
|                |   |                                                                                                                                                                                                                 |   |
|                |   |                                                                                                                                                                                                                      |   |
|                |   | * Filed herewith.                                                                                                                                                                                                    |   |

 

 

(b) Reports on Form 8-K.

 

On April 22, 2004, the Company filed a current reporton Form 8-K under Item 9 relating to a presentation made by the Company at aninvestor relations conference.

 

On May 7, 2004, the Company filed a current report onForm 8-K under Item 5 relating to the declaration by its board of directors ofa cash dividend in the amount of $0.0375 per share of common stock and underItem 12 relating to a press release announcing its earnings for the quarterended March 31, 2004.

 

 On June 18,2004, the Company filed a current report on Form 8-K under Item 5 related tothe election of five new members of its Board of Directors.

 

24

----

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                                                   |   | **SANDERS MORRIS HARRIS GROUP INC.** |                        |
|--------------------------------------------------------|--------|--------------------------------------|-----------------------------|
|                                                   |   |                                 |                        |   |
|                                                   |   | By                                   | /s/  BEN T.  MORRIS    |   |
|                                                   |   |                                 | **Ben  T. Morris**          |   |
|                                                   |   |                                 | **Chief Executive Officer** |   |
|                                                   |   |                                 |                        |   |
|                                                   |   |                                 |                        |   |
|                                                   |   | By                                   | /s/  RICK  BERRY       |   |
|                                                   |   |                                 | **Rick Berry**              |   |
|                                                   |   |                                 | **Chief Financial Officer** |   |
|                                                   |   |                                 |                        |   |
|                                                   |   |                                 |                        |   |
| **Date:      August 9, 2004** |   |                                 |                        |   |

 

25

----