**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

| **(mark  one)**                                    |
|----------------------------------------------------|
|                                               |   |
| **ý**                                         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                               |   |
| **FOR THE QUARTERLY PERIOD ENDED  MARCH 31, 2003** |
|                                               |   |
| **or**                                             |
|                                               |   |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                               |   |
| **Commission  file No. 0-30066**                   |

 

----

 

| **SANDERS  MORRIS HARRIS GROUP INC.**                           |
|-----------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)         |
|                                                            |
| **Texas**                                                       |   | **76-0583569** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |
| **600 Travis, Suite 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 was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.   YES  ý        NO  o

 

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

 

The number of shares of the registrant’s Common Stock,par value $0.01 per share, outstanding as of May 1, 2003, was 17,073,844.

 

 

----

 

 

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

 

**INDEX**

 
| **PART I.**  | **CONDENSED CONSOLIDATED  FINANCIAL INFORMATION** |
|--------------|---------------------------------------------------|
|         |
|         | Item 1.                                           | Financial Statements |
|         |                                              |   |
|         |                                              | Condensed Consolidated  Balance Sheet as of March 31, 2003 and  December 31, 2002 (unaudited) |
|         |                                              |   |
|         |                                              | Condensed  Consolidated Statement of Income for the Three Months  Ended March 31, 2003 and 2002 (unaudited) |
|         |                                              |   |
|         |                                              | Condensed  Consolidated Statement of Shareholders’ Equity for the Three  Months Ended March 31, 2003 (unaudited) |
|         |                                              |   |
|         |                                              | Condensed  Consolidated Statement of Cash Flows for the Three Months  Ended March 31, 2003 and 2002 (unaudited) |
|         |                                              |   |
|         |                                              | Notes  to Condensed Consolidated Financial Statements (unaudited) |
|         |                                              |   |
|         | Item  2.                                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |                                              |   |
|         | Item  3.                                          | Quantitative  and Qualitative Disclosures About Market Risk |
|         |                                              |   |
|         | Item 4.                                           | Controls and Procedures |
|         |
| **PART II.** | **OTHER INFORMATION**                             |
|         |
|         | Item 1.                                           | Legal Proceedings |
|         |                                              |   |
|         | Item 6.                                           | Exhibits and  Reports on Form 8-K |
|              |                                                   |  |  |

 

1

----

 

**PART I.  FINANCIAL INFORMATION******Item 1.  *FinancialStatements*

 

**SANDERSMORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEET**(in thousands, except share and per share amounts)(unaudited)

 
|                                                                                                                  |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                            |   |                |    |                   |   |
| Cash and cash equivalents                                                                                             |   | $                   | 30,322  |                   | $      | 34,890 |   |
| Receivables, net  of allowance of $295                                                                                |   |                |    |                   |   |
| Broker-dealers                                                                                                        |   | 1,136               |    | 641                    |   |
| Customers                                                                                                             |   | 2,755               |    | 2,026                  |   |
| Related parties                                                                                                       |   | 4,950               |    | 4,489                  |   |
| Other                                                                                                                 |   | 577                 |    | 719                    |   |
| Deposits with  clearing brokers                                                                                       |   | 1,502               |    | 1,000                  |   |
| Securities owned                                                                                                      |   | 17,367              |    | 16,995                 |   |
| Securities  available for sale                                                                                        |   | 2,760               |    | 3,064                  |   |
| Furniture and  equipment, net                                                                                         |   | 3,988               |    | 4,021                  |   |
| Deferred income  taxes, net                                                                                           |   | 414                 |    | 638                    |   |
| Other assets                                                                                                          |   | 1,302               |    | 1,167                  |   |
| Goodwill, net of  accumulated amortization of $4,268                                                                  |   | 47,673              |    | 47,673                 |   |
| Total assets                                                                                                          |   | $                   | 114,746 |                   | $      | 117,323 |   |
|                                                                                                                  |   |                |    |                   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                        |   |                |    |                   |   |
|                                                                                                                  |   |                |    |                   |   |
| Liabilities:                                                                                                          |   |                |    |                   |   |
| Accounts payable  and accrued liabilities                                                                             |   | $                   | 11,071  |                   | $      | 15,308 |   |
| Securities sold,  not yet purchased                                                                                   |   | 60                  |    | 93                     |   |
| Other liabilities                                                                                                     |   | 180                 |    | 190                    |   |
| Total  liabilities                                                                                                    |   | 11,311              |    | 15,591                 |   |
|                                                                                                                  |   |                |    |                   |   |
| Commitments and  contingencies                                                                                        |   |                |    |                   |   |
|                                                                                                                  |   |                |    |                   |   |
| Minority  interests                                                                                                   |   | 200                 |    | 421                    |   |
|                                                                                                                  |   |                |    |                   |   |
| 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; 17,625,880 and 17,439,743  shares issued, respectively |   | 176                 |    | 174                    |   |
| Additional  paid-in capital                                                                                           |   | 111,000             |    | 109,959                |   |
| Receivables for  shares issued                                                                                        |   | (1,011              | )       | (705                   | )      |
| Accumulated  deficit                                                                                                  |   | (2,178              | )       | (3,367                 | )      |
| Accumulated  other comprehensive loss                                                                                 |   | (299                | )       | (243                   | )      |
| Unearned  compensation                                                                                                |   | (1,219              | )       | (1,392                 | )      |
| Treasury stock  at cost, 717,503 and 702,849 shares, respectively                                                     |   | (3,234              | )       | (3,115                 | )      |
| Total  shareholders’ equity                                                                                      |   | 103,235             |    | 101,311                |   |
| Total  liabilities and shareholders’ equity                                                                      |   | $                   | 114,746 |                   | $      | 117,323 |   |

 

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

 

2

----

 

**SANDERSMORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTOF INCOME**(in thousands, except share and per share amounts)(unaudited)

 
|                                                                                         |   | **Three Months Ended  March 31,** |       |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                         |   | **2003**                          |       | **2002** |   |
|                                                                                         |   |                              | ** ** |   | ** ** |
| Revenues:                                                                                    |   |                              |       |   |   |
| Commissions                                                                                  |   | $                                 | 12,312     |   | $ | 9,660 |   |
| Principal  transactions                                                                      |   | 2,010                             |       | 4,783 |   |
| Investment  banking                                                                          |   | 3,404                             |       | 3,675 |   |
| Fiduciary,  custodial and advisory fees                                                      |   | 1,755                             |       | 1,713 |   |
| Interest and  dividends                                                                      |   | 525                               |       | 427 |   |
| Other income                                                                                 |   | 926                               |       | 565 |   |
| Total revenues                                                                               |   | 20,932                            |       | 20,823 |   |
|                                                                                         |   |                              |       |   |   |
| Expenses:                                                                                    |   |                              |       |   |   |
| Employee  compensation and benefits                                                          |   | 13,715                            |       | 13,423 |   |
| Floor brokerage,  exchange and clearance fees                                                |   | 1,430                             |       | 923 |   |
| Communications  and data processing                                                          |   | 1,329                             |       | 1,005 |   |
| Occupancy                                                                                    |   | 1,247                             |       | 1,045 |   |
| Other general  and administrative                                                            |   | 2,061                             |       | 1,903 |   |
| Total expenses                                                                               |   | 19,782                            |       | 18,299 |   |
|                                                                                         |   |                              |       |   |   |
| Income before  equity in income of limited partnerships, income taxes and minority interests |   | 1,150                             |       | 2,524 |   |
| Equity in income  of limited partnerships                                                    |   | 868                               |       | 623 |   |
|                                                                                         |   | 2,018                             |       | 3,147 |   |
| Provision for  income taxes                                                                  |   | (830                              | )          | (1,162 | ) |
| Minority  interests in net loss (income) of consolidated companies                           |   | 1                                 |       | (16 | ) |
|                                                                                         |   |                              |       |   |   |
| Net income                                                                                   |   | $                                 | 1,189      |   | $ | 1,969 |   |
|                                                                                         |   |                              |       |   |   |
| Earnings per  share:                                                                         |   |                              |       |   |   |
| Basic                                                                                        |   | $                                 | 0.07       |   | $ | 0.12 |   |
| Diluted                                                                                      |   | $                                 | 0.07       |   | $ | 0.12 |   |
|                                                                                         |   |                              |       |   |   |
| Weighted average  common shares outstanding:                                                 |   |                              |       |   |   |
| Basic                                                                                        |   | 16,845,379                        |       | 16,468,579 |   |
| Diluted                                                                                      |   | 17,394,518                        |       | 16,604,213 |   |

 

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

 

3

----

 

**SANDERSMORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTOF SHAREHOLDERS’ EQUITYFor the three months ended March 31, 2003**(in thousands, except shares)(unaudited)

 
|                                                                    |   | **Amounts** |        |       |   | **Shares** |           |
|-------------------------------------------------------------------------|--------|-------------|-------------|------------|--------|------------|----------------|
|                                                                    |   |        |        |       |   |       |           |
| **Common  stock**                                                       |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | 174         |       |   |       | 17,439,743     |   |
| Stock issued  pursuant to employee benefit plan                         |   | 2           |        |       |   | 186,137    |           |
| Balance, end of  period                                                 |   | 176         |        |       |   | 17,625,880 |           |
| **Additional  paid-in capital**                                         |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | 109,959     |       |   |       |           |   |
| Stock issued  pursuant to employee benefit plan                         |   | 1,555       |        |       |   |       |           |
| Dividends                                                               |   | (514        | )           |       |   |       |           |
| Balance, end of  period                                                 |   | 111,000     |        |       |   |       |           |
| **Receivables  for shares issued**                                      |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | (705        | )          |   |       |           |   |
| Issuance of  restricted stock                                           |   | (515        | )           |       |   |       |           |
| Amortization of  notes receivable                                       |   | 209         |        |       |   |       |           |
| Balance, end of  period                                                 |   | (1,011      | )           |       |   |       |           |
| **Accumulated  deficit**                                                |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | (3,367      | )          |   |       |           |   |
| Net income                                                              |   | 1,189       |        | 1,189      |   |       |           |
| Balance, end of  period                                                 |   | (2,178      | )           | 1,189      |   |       |           |
| **Accumulated  other comprehensive loss**                               |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | (243        | )          |   |       |           |   |
| Net change in  unrealized depreciation on securities available for sale |   | (88         | )           | (88        | )      |       |           |
| Income tax  benefit on change                                           |   | 32          |        | 32         |   |       |           |
| Balance, end of  period                                                 |   | (299        | )           | (56        | )      |       |           |
| **Comprehensive  income**                                               |   |        |        | 1,133      |   |       |           |
| **Unearned  compensation**                                              |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | (1,392      | )          |   |       |           |   |
| Net issuance of  restricted stock                                       |   | (34         | )           |       |   |       |           |
| Amortization of  unearned compensation                                  |   | 207         |        |       |   |       |           |
| Balance, end of  period                                                 |   | (1,219      | )           |       |   |       |           |
| **Treasury  stock**                                                     |   |        |        |       |   |       |           |
| Balance,  beginning of period                                           |   | $           | (3,115      | )          |   |       | (702,849       | ) |
| Acquisition of  treasury stock                                          |   | (119        | )           |       |   | (14,654    | )              |
| Balance, end of  period                                                 |   | (3,234      | )           |       |   | (717,503   | )              |
| **Total  shareholders’ equity and common shares outstanding**      |   | **$**       | **103,235** | ** ** |   |       | **16,908,377** | ** ** |

 

4

----

 

**SANDERSMORRIS HARRIS GROUP INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTOF CASH FLOWSFor the three months ended March 31, 2003 and 2002**(in thousands)(unaudited)

 
|                                                                                         |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                       |   |     |   |     |   |
| Net income                                                                                   |   | $        | 1,189  |     | $      | 1,969 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities: |   |     |   |     |   |
| Realized gain on  securities available for sale                                              |   | —   |   | (4       | )      |
| Depreciation                                                                                 |   | 273      |   | 199      |   |
| Provision for  bad debts                                                                     |   | —   |   | 183      |   |
| Compensation  expense related to amortization of notes receivable and unearned compensation  |   | 416      |   | 206      |   |
| Deferred income  taxes                                                                       |   | 258      |   | 532      |   |
| Minority  interests in loss of consolidated companies                                        |   | (1       | )      | 16       |   |
| Changes in  operating assets and liabilities:                                                |   |     |   |     |   |
| Increase in  receivables                                                                     |   | (1,543   | )      | (131     | )      |
| Increase in  deposits with clearing brokers                                                  |   | (502     | )      | —   |   |
| Increase in  securities owned                                                                |   | (372     | )      | (982     | )      |
| Increase in  other assets                                                                    |   | (135     | )      | (536     | )      |
| Decrease in  securities sold, not yet purchased                                              |   | (33      | )      | (28      | )      |
| Decrease in other  liabilities                                                               |   | (10      | )      | (15      | )      |
| Increase  (decrease) in accounts payable and accrued liabilities                             |   | (4,327   | )      | 731      |   |
| Net cash (used  in) provided by operating activities                                         |   | (4,791   | )      | 2,140    |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                       |   |     |   |     |   |
| Capital  expenditures                                                                        |   | (240     | )      | (399     | )      |
| Purchase of  securities available for sale                                                   |   | (33      | )      | (859     | )      |
| Proceeds from  sales and maturities of securities available for sale                         |   | 250      |   | 178      |   |
| Net cash used in  investing activities                                                       |   | (23      | )      | (1,080   | )      |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                       |   |     |   |     |   |
| Purchase of  treasury stock                                                                  |   | (119     | )      | (555     | )      |
| Collection of  receivable for shares issued                                                  |   | —   |   | 48       |   |
| Proceeds from  shares issued                                                                 |   | 1,008    |   | 530      |   |
| Distributions to  minority interests                                                         |   | (219     | )      | —   |   |
| Payments of cash  dividends                                                                  |   | (424     | )      | —   |   |
| Net cash  provided by financing activities                                                   |   | 246      |   | 23       |   |
| Net (decrease)  increase in cash and cash equivalents                                        |   | (4,568   | )      | 1,083    |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                                            |   | 34,890   |   | 30,410   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                  |   | $        | 30,322 |     | $      | 31,493 |   |
|                                                                                         |   |     |   |     |   |
| Noncash  investing and financing activities:                                                 |   |     |   |     |   |
| Cash paid for  income taxes                                                                  |   | $        | 139    |     | $      | 505 |   |

 

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

 

5

----

 

**SandersMorris Harris Group Inc. and SubsidiariesNotes to Condensed ConsolidatedFinancial Statements(unaudited)**

 

**1.****              BASIS OFPRESENTATION**

 

*Nature of Operations*

 

Through its operating subsidiaries Pinnacle Management& Trust Co. (“PMT”), Sanders Morris Harris Inc. (“SMH”) and SMH CapitalAdvisors (“SMCA”), the Company provides a broad range of financial services,including institutional, prime and retail brokerage, investment banking, otherinvestment banking services,  merchantbanking, financial advisory, trust related services, investment management andfinancial planning. The Company serves a diverse group of institutional,corporate and individual clients.

 

The Company merged with and acquired its operatingsubsidiaries in 2001, 2000 and 1999. The acquisitions 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 March 31, 2003, ourresults of operations for the three months ended March 31, 2003 and 2002, andour cash flows for the three months ended March 31, 2003 and 2002.  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, 2002.

 

*Effects of Recently IssuedAccounting Standards*

 

SFAS No. 141 entitled *BusinessCombinations* was issued in June 2001 and became effective July 1,2001.  SFAS No. 141 requires that allbusiness combinations be accounted for using the purchase method of accounting,which requires that acquisitions be recorded at fair value as of the date ofacquisition.  SFAS No. 142 entitled *Goodwill and Other**Intangible Assets*was also issued in June2001, in concert with SFAS No. 141. SFAS No. 142 became effective for us on January 1, 2002.  SFAS No. 142 requires SMHG to performgoodwill impairment tests on at least an annual basis.  There can be no assurance that futuregoodwill impairment tests will not result in a charge to earnings.

 

In January 2003, the FASB issued Interpretation No.46, *Consolidation of Variable InterestEntities, an interpretation of ARB No. 51. *This Interpretation addresses the consolidation bybusiness enterprises of variable interest entities as defined in theInterpretation.  The Interpretationapplies immediately to variable interests in variable interest entities createdafter January 31, 2003, and to variable interests in a variable interest entityobtained after January 31, 2003.  Forpublic enterprises, such as the Company, with a variable interest in a variableinterest entity created before February 1, 2003, the Interpretation is appliedto the enterprise no later than the beginning of the first annual or interimreporting period beginning after June 15, 2003.  The application of this Interpretation is not expected to have amaterial effect on the Company’s consolidated financial statements.  The Interpretation requires certaindisclosures in financial statements issued after January 31, 2003 if it isreasonably possible that the Company will consolidate or disclose informationabout variable interest entities when the Interpretation becomes effective.  The Company is currently evaluating theeffect of this Interpretation on its potential variable interest entities thatwould require consolidation under this Interpretation.

 

6

----

 

*Compensation*

 

Statement of Financial Accounting Standards (SFAS) No.148, *Accounting for Stock-Based Compensation– Transaction and Disclosure,*was issued in December 2002.  SFAS No. 148 amends SFAS No. 123, *Accounting for Stock-Based Compensation,*toprovide alternative methods for transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, SFAS No 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The Company has adopted thedisclosure provisions included on SFAS No. 148 in the notes to the consolidatedfinancial statements contained herein.

 

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 theunderlying stock exceeded the exercise price.

 

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  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                                                |   | **2003**                          |   | **2002** |   |
| Net income as  reported                                                                                                                             |   | $                                 | 1,189  |   | $ | 1,969 |   |
| Deduct:  Total stock based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (36                               | )      | (137 | ) |
| Pro forma net  income                                                                                                                               |   | $                                 | 1,153  |   | $ | 1,832 |   |
|                                                                                                                                                |   |                              |   |   |   |
| Earnings per  share                                                                                                                                 |   |                              |   |   |   |
| Basic-as  reported                                                                                                                                  |   | $                                 | 0.07   |   | $ | 0.12 |   |
| Basic-pro forma                                                                                                                                     |   | $                                 | 0.07   |   | $ | 0.11 |   |
|                                                                                                                                                |   |                              |   |   |   |
| Diluted-as  reported                                                                                                                                |   | $                                 | 0.07   |   | $ | 0.12 |   |
| Diluted-pro  forma                                                                                                                                  |   | $                                 | 0.07   |   | $ | 0.11 |   |

 

*Reclassifications*

 

Certain reclassificationshave been made to the 2002 condensed consolidated financial statements toconform them with the 2003 presentation. The reclassifications had no effect on accumulated deficit, results ofoperations or cash flows as previously reported.

 

7

----

 

**2.****              SECURITIES OWNED ANDSECURITIES SOLD, NOT YET PURCHASED**

 

Securities owned and securities sold, not yetpurchased as of March 31, 2003 were as follows:

 
|                                                |   | **Owned**          |   | **Sold, Not Yet  Purchased** |   |
|-----------------------------------------------------|--------|--------------------|--------|------------------------------|--------|
|                                                |   | **(in thousands)** |   |
| Marketable:                                         |   |               |   |                         |   |
| Corporate stocks  (cost $248)                       |   | $                  | 229    |                         | $      | 60 |   |
| Corporate bonds  and commercial paper (cost $1,921) |   | 1,554              |   | —                       |   |
|                                                |   | 1,783              |   | 60                           |   |
| Not readily  marketable:                            |   |               |   |                         |   |
| Partnerships  (cost $6,084)                         |   | 10,905             |   | —                       |   |
| Corporate stocks  and warrants (cost $2,630)        |   | 4,679              |   | —                       |   |
|                                                |   | $                  | 17,367 |                         | $      | 60 |   |

 

Securities not readily marketable include investmentsecurities (a) for which there is no market on a securities exchange or noindependent publicly quoted market, (b) that cannot be publicly offered or soldunless registration has been effected under the Securities Act of 1933, or (c)that cannot be offered or sold because of other arrangements, restrictions, orconditions applicable to the securities or to the Company.  Not readily marketable securities consist ofinvestments in limited partnerships, equities, options and warrants.  The investments in limited partnerships areaccounted for using the equity method, which approximates fair value, andprincipally consist of Environmental Opportunities Fund, L.P., EnvironmentalOpportunities Fund II, L.P., Environmental Opportunities Fund II(Institutional), L.P., Corporate Opportunities Fund, L.P., CorporateOpportunities Fund (Institutional), L.P., Sanders Opportunity Fund, L.P.,Sanders Opportunity Fund (Institutional), L.P., Tactical Opportunities HighYield Fund, L.P., and Life Sciences Opportunity Fund, L.P.

 

**3.****              SECURITIES AVAILABLEFOR SALE**

 

Securities available for sale at March 31, 2003 wereas follows:

 
|                                    |      | **Amortized  Cost** |       | **Gross Unrealized** |   | **Estimated  Fair Value** |   |
|-----------------------------------------|-----------|---------------------|------------|----------------------|--------|---------------------------|--------|
|                                    | **Gains** |                | **Losses** |                 |   |
|                                    |      | **(in thousands)**  |       |
|                                    |      |                |       |                 |   |                      |   |   |   |
| U.S. Government  and agency obligations |      | $                   | 1,060      |                 | $      | 14                        |   | $ | (9 | ) | $ | 1,065 |   |
| Marketable  equity securities           |      | 2,174               |       | 18                   |   | (497                      | )      | 1,695 |   |
| Total                                   |      | $                   | 3,234      |                 | $      | 32                        |   | $ | (506 | ) | $ | 2,760 |   |

 

The contractual maturities of debt securities available for sale atMarch 31, 2003, were as follows:

 
| Due before 5  years |   | $ | 1,065 |   |
|---------------------|--------|---|-------|--------|

 

8

----

 

Gross gains on sales of securities available for salewere $7,000 for the three months ended March 31, 2002.  Gross realized losses, including unrealizedpermanent impairment losses, on securities available for sale were  $3,000 for the three months ended March 31,2002.  No gains or losses on sales ofsecurities available for sale were recorded during the three months ended March31, 2003.

 

**4.****              INCOME TAXES**

 

The differences between the effective tax ratereflected in the income tax (benefit) provision from operations and thestatutory federal rate were as follows:

 
|                                   |   | **Three Months Ended  March 31,** |   |
|----------------------------------------|--------|-----------------------------------|--------|
|                                   |   | **2003**                          |   | **2002** |   |
|                                   |   | **(in thousands)**                |   |
|                                   |   |                              |   |   |   |
| Tax computed  using the statutory rate |   | $                                 | 670    |   | $ | 1,070 |   |
| State income  taxes and other          |   | 160                               |   | 92 |   |
| Total                                  |   | $                                 | 830    |   | $ | 1,162 |   |

 

**5.****              COMMITMENTS ANDCONTINGENCIES**

 

There were no firm underwriting commitments open at March31, 2003.

 

The Company and its subsidiaries have obligationsunder operating leases that expire by 2012 with initial noncancelable terms inexcess of one year.

 

The Company is a party to various legal proceedingsthat are of an ordinary 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.

 

The Company has uncommitted financing arrangementswith clearing brokers who finance customer accounts, certain broker-dealerbalances and firm trading positions. Although these customer accounts and broker-dealer balances are notreflected on the consolidated balance sheet for financial accounting andreporting purposes, the Company has generally agreed to indemnify theseclearing brokers for losses they may sustain in connection with the accounts,and therefore, retains risk on these accounts. The Company is required to maintain certain cash or securities ondeposit with its clearing brokers.

 

9

----

 

**6.****              EARNINGS PER COMMONSHARE**

 

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

 
|                                                                                            |   | **Three Months Ended March 31,**                       |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                                            |   | **2003**                                               |   | **2002** |   |
|                                                                                            |   | **(in thousands, except share and per share amounts)** |   |
| Computation of  basic and diluted income per common share for the three months ended March  31: |   |                                                   |   |   |   |
| Net income                                                                                      |   | $                                                      | 1,189  |   | $ | 1,969 |   |
| Weighted average  number of common shares outstanding                                           |   | 16,845,379                                             |   | 16,468,579 |   |
| Common shares  issuable under stock option plan                                                 |   | 1,309,511                                              |   | 1,065,348 |   |
| Less shares  assumed repurchased with proceeds                                                  |   | (760,372                                               | )      | (929,714 | ) |
| Weighted average  common shares outstanding                                                     |   | 17,394,518                                             |   | 16,604,213 |   |
| Basic and  diluted income per common share                                                      |   | $                                                      | 0.07   |   | $ | 0.12 |   |

 

Outstanding stock options exercisable for 50,000common shares for the three months ended March 31, 2003 and 247,000 commonshares for the three months ended March 31, 2002 have not been included indiluted earnings per common share because their inclusion would have beenantidilutive for the periods presented.

 

**7.****              BUSINESS SEGMENTINFORMATION**

 

The Company’s businesses operate in two reportablebusiness segments.  The Company’sinvestment banking and brokerage segment includes the operations of SMH.  SMH is an investment banking and brokeragefirm whose activities primarily include securities underwriting, otherinvestment banking services, private placements, and institutional, prime andretail brokerage.  The Company’s assetmanagement segment includes the operations of PMT and SMH CapitalAdvisors.  PMT is a state charteredtrust company providing a variety of trust services, including investmentmanagement, estate settlement and retirement planning.  SMH Capital Advisors provides financialplanning services to individuals and asset management services to investorswith an emphasis on fixed income securities. The following summarizes certain financial information of eachreportable segment for the three months ended March 31, 2003 and 2002,respectively.

 

10

----

 
| **(in thousands)**                                                                                   |   | **Investment  Banking and  Brokerage** |   | **Investment  Management** |   | **Corporate  and Other** |   | **Consolidated  Total** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|----------------------------|--------|--------------------------|--------|-------------------------|--------|
| **Three  Months Ended March 31, 2003**                                                               |   |                                   |   |                       |   |                     |   |                    |   |
| Revenues                                                                                             |   | $                                      | 19,355 |                       | $      | 1,411                    |   | $                       | 166    |   | $ | 20,932 |   |
| Expenses                                                                                             |   | (18,145                                | )      | (1,314                     | )      | (323                     | )      | (19,782                 | )      |
| Income (loss)  before equity in income of limited partnerships, income taxes and minority  interests |   | 1,210                                  |   | 97                         |   | (157                     | )      | 1,150                   |   |
| Equity in income of limited partnerships                                                             |   | 774                                    |   | —                     |   | 94                       |   | 868                     |   |
| Income (loss)  before income taxes and minority interests                                            |   | $                                      | 1,984  |                       | $      | 97                       |   | $                       | (63    | ) | $ | 2,018 |   |
|                                                                                                 |   |                                   |   |                       |   |                     |   |                    |   |
| **Three  Months Ended March 31, 2002**                                                               |   |                                   |   |                       |   |                     |   |                    |   |
| Revenues                                                                                             |   | $                                      | 19,498 |                       | $      | 1,309                    |   | $                       | 16     |   | $ | 20,823 |   |
| Expenses                                                                                             |   | (16,491                                | )      | (1,123                     | )      | (685                     | )      | (18,299                 | )      |
| Income (loss)  before equity in income of limited partnerships, income taxes and minority  interests |   | 3,007                                  |   | 186                        |   | (669                     | )      | 2,524                   |   |
| Equity in income  of limited partnerships                                                            |   | 547                                    |   | —                     |   | 76                       |   | 623                     |   |
| Income (loss)  before income taxes and minority interests                                            |   | $                                      | 3,554  |                       | $      | 186                      |   | $                       | (593   | ) | $ | 3,147 |   |

 
| **(in thousands)**                    |   | **Investment  Banking and  Brokerage** | ** ** | **Investment  Management** | ** ** | **Corporate  and Other** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------|--------|----------------------------------------|------------|----------------------------|------------|--------------------------|------------|-------------------------|------------|
| Total assets as  of March 31, 2003    |   | $                                      | 77,739     |                       | $          | 6,713                    |       | $                       | 30,294     |   | $ | 114,746 |   |
| Total assets as  of December 31, 2002 |   | $                                      | 80,614     |                       | $          | 6,701                    |       | $                       | 30,008     |   | $ | 117,323 |   |

 

**8.****              EMPLOYEE BENEFITPLANS**

 

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 1,523,986 shares of Common Stock available forgrant under the Incentive Plan at March 31, 2003.

 

**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.

 

**Restricted and 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 effectiveNovember 1, 2001 to include eligible consultants as potential participantsunder the program.

 

11

----

 

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.

 

The following summarizes certain information relatedto the CIP for the three months ended March 31, 2003 and 2002.

 
|                                   |   | **Three Months Ended  March 31,** |   |
|----------------------------------------|--------|-----------------------------------|--------|
|                                   |   | **2003**                          |   | **2002** |   |
|                                   |   | **(in thousands, except shares)** |   |
|                                   |   |                              |   |   |   |
| Number of shares  issued               |   | 68,653                            |   | 229,025 |   |
| Value of shares  issued                |   | $                                 | 549    |   | $ | 1,207 |   |
| Additions to  unearned compensation    |   | 34                                |   | 605 |   |
| Additions to  notes receivable         |   | 515                               |   | 234 |   |
| Amortization of  unearned compensation |   | 207                               |   | 109 |   |
| Amortization of  notes receivable      |   | 209                               |   | 97 |   |
|                                        |        |                                   |        |  |  |  |  |

 

**9.****              RELATED PARTIES**

 

The Company had receivables from related partiestotaling $5.0 million at March 31, 2003, primarily consisting of $1.4 millionof unpaid management fees earned on the Company’s investments in limitedpartnerships and $3.0 million of notes receivable from employees andconsultants.

 

12

----

 

**Item 2.****           *Management’s Discussion and Analysis of FinancialCondition 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 oursubsidiaries, including institutional, prime and retail brokerage, investmentbanking, merchant banking, financial advisory, trust related services,investment management and financial planning. All of these activities arehighly 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 enableus to respond promptly to market cycles. In addition, we seek to lessenearnings volatility by controlling expenses, increasing fee-based business anddeveloping new revenue sources. Nonetheless, operating results for any specificperiod should not be considered representative of future performance.

 

**Components of Revenues and Expenses**

 

*Revenues*.                  Our revenues are comprised primarilyof (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. Interest income results from interest earned on our inventories of fixedincome securities prior to sale, and from interest and dividends earned oninvestments in our capital accounts.

 

*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, andtrading desk 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 thefirst three months of 2003, compensation and benefits represented 69% of totalexpenses, and 66% of total revenues compared to 73% of total expenses, and 64%of total revenues during the comparable period in 2002.

 

Brokerage and clearance expenses include clearing andtrade execution costs associated with the retail, prime and institutionalbrokerage business at SMH.  SMH clearsits transactions primarily through the Pershing Division of Donaldson, Lufkinand Jenrette Securities Corporation, a Credit Suisse First Boston Company, andother clearing brokers.

 

Other expenses include (1) occupancy and equipmentexpenses, such as rent and utility charges for facilities, and (2)communications and data processing expenses, such as third-party systems,quotes, market data and software program providers.

 

13

----

 

**Resultsof Operations**

 

*ThreeMonths Ended March 31, 2003 Compared to Three Months Ended March 31, 2002*

 

Total revenues were $20.9million in the first quarter of 2003 compared to $20.8 million for the samequarter in 2002.  An increase incommission revenue from prime brokerage services was partially offset by adecline in fixed income brokerage revenues. Total expenses for the same 2003 period increased to $19.8 million from$18.3 million in the same quarter of the previous year.  Equity in income of limited partnershipsincreased from $623,000 during the first quarter of 2002 to $868,000 during thefirst quarter of 2003, due to increases in the Company’s share of the values ofsecurities held in the investment portfolios of the limited partnershipsmanaged by the Company.  Net income forthe three month period ended March 31, 2003 declined to $1.2 from $2.0 millionin the same period in 2002.  Basic anddiluted income per share was $0.07 for the three months ended March 31, 2003compared to $0.12 for the same period in 2002.

 

Commissions revenueincreased to $12.3 million in the first quarter of 2003 from $9.7 million in2002, primarily as a result of increased trading volume related to the growthof both the number and size of prime broker accounts.  Principal transactions revenue totaled $2.0 million for the 2003period versus $4.8 million in the first quarter of 2002.  Revenues from fixed income brokeragedeclined to $1.6 million during the first quarter of 2003 from $3.9 millionduring the comparable prior year quarter due to the reduced impact on themortgage-related securities market caused by stabilizing interest rates in thecurrent year, compared to declining interest rates during the first quarter of2002.  Investment banking revenue declinedto $3.4 million during the first quarter of 2003 from $3.7 million in the sameperiod of 2002, principally due to a decline in fees earned from privateplacement transactions.  Revenues fromfiduciary, custodial and advisory fees increased to $1.8 million in the firstquarter of 2003 from $1.7 million in same quarter of 2002.  Interest and dividend income increased to$525,000 in 2003 from $427,000 in the same period last year.  Other income increased from $565,000 during2002 to $926,000 during 2003, due to an increase in interest earned on theCompany’s cash balances and customer credit balances at its clearing brokers aswell as increased fees earned from the sale of insurance annuity products.

 

During the three monthsended March 31, 2003, employee compensation and benefits, increased to $13.7million from $13.4 million in the same period last year.  Floor brokerage, exchange and clearance feesincreased to $1.4 million in the first quarter of 2003 from $923,000 in thesame quarter of 2002 reflecting increased clearing and execution costsresulting from the additional trading volume attributable to the growth inrevenues from prime brokerage services. Communication and data processing costs increased to $1.3 million in2003 from $1.0 million in the same period last year resulting primarily fromincreased personnel and trading volumes related to the prime brokeragedivision.  Occupancy costs totaled $1.2million during the first quarter of 2003, compared to $1.0 million in the prioryear quarter.  Other general andadministrative expenses increased to $2.1 million during the first three monthsof 2003 from $1.9 million in the first quarter of last year mainly due to thegrowth in the prime brokerage division.

 

The effective tax rate fromoperations was 41% for the three months ended March 31, 2003 compared to 37%for the three months ended March 31, 2002.

 

**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 March 31, 2003, we had approximately $30.3 millionin cash and cash equivalents, which together with receivables frombroker-dealers, deposits with clearing brokers, marketable securities owned,and securities available for sale represented about 33% of our total assets atthe end of the first quarter.

 

 

14

----

 

For the three months ended March 31, 2003, net cashused in operations totaled $4.8 million versus net cash provided by operationsof $2.1 million during the first three months of 2002.  Accounts payable and accrued liabilitiesdeclined by $4.3 million during the three months ended March 31, 2003,principally due to the payment of accrued compensation during the first quarterof 2003.  Accounts receivable increasedby $1.5 million during the first three months of 2003, primarily due toincreases in management fees owed to the Company by the limited partnerships,and in notes receivable from other related parties.

 

Capital expenditures for the first quarter of 2003were $240,000, mainly for the purchase of furniture and computer equipment andsoftware, as well as for leasehold improvements, necessary for our growth.  During the first three months of 2003, wereacquired 14,654 of our common shares at a total cost of approximately$119,000.

 

At March 31, 2003, SMH, our registered broker-dealersubsidiary, was in compliance with the net capital requirements of theSecurities and Exchange Commission’s Uniform Net Capital Rules and had capitalin excess of the required minimum.  PMTwas in compliance with the Texas Department of Banking net capital requirementand had capital in excess of the required minimum.

 

We are a party to various legal proceedings that areof an ordinary or routine nature incidental to our operations.  We believe we have adequately reserved forsuch litigation matters and that they will not have a material adverse effecton our consolidated financial position, 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.

 

**Item3*.******           Quantitativeand Qualitative Disclosures About Market Risk***

 

**Market Risks**

 

At March 31, 2003, PMT had equity securities undermanagement with a fair value of $415 million. PMT’s fee income for the three months ended March 31, 2003 would havebeen reduced by approximately $53,000 assuming a hypothetical 10% decrease inthe value of its equity securities under management.  PMT’s securities available for sale are recorded at a fair valueof approximately $2.8 million at March 31, 2003.  These securities are subject to equity price risk.  These securities have an original cost of$3.2 million.  At March 31, 2003, theunrealized decline in market value totaling $474,000, less tax benefit of$175,000, has been included as a separate component of shareholders’ equity.

 

 

15

----

 

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 thancost, the financial condition and near-term prospects of the issuer, and theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in marketvalue.  Management believes theunrealized losses are temporary at March 31, 2003.  However, a write-down accounted for as a realized loss may benecessary in the future.

 

The Company’s trading equity and debt securities aremarked to market on a daily basis.  AtMarch 31, 2003, the Company’s trading equity and debt securities were recordedat a fair value of approximately $1.8 million. These trading equity and debt securities are subject to equity pricerisk.  This risk would amount toapproximately $180,000 based on a potential loss in fair value from ahypothetical 10% decrease in the market value of such equity and debtsecurities.  The actual equity pricerisk related to the trading equity and debt securities may differsubstantially.

 

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

 

Our management, including ourChief Executive Officer and Chief Financial Officer, have conducted anevaluation of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-14(c) promulgated under the Securities and Exchange Act of1934, as amended) as of a date (the “Evaluation Date”) within 90 days prior tothe filing date of this report.  Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures are effective fortimely gathering, analyzing and disclosing the information we are required todisclose in our reports filed under the Securities Exchange Act of 1934, asamended.  There have been no significantchanges made in our internal controls or in other factors that could significantlyaffect our internal controls subsequent to the Evaluation Date.

 

16

----

 

**PART II.  OTHERINFORMATION**

 

**Item 1.****           *LegalProceedings***

 

We are a party to various legal proceedings that areof an ordinary or routine nature incidental to our operations.  Certain of our litigation and claims arecovered by insurance with a maximum deductible of $50,000.  We believe we have adequately reserved forsuch litigation matters and that they will not have a material adverse effecton our consolidated financial position, results of operations, or cash flows.

 

**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 (filed as Exhibit 3.2 to the Company’s Form 10-K for the year  ending December 31, 1998 (File No. 000-30066) and incorporated herein by  reference).                     |
| *99.1               |   | Certification Pursuant to 18 U.S.C. 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          |
| *99.2               |   | Certification Pursuant to 18 U.S.C. 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          |

 

----

*  Filedherewith.

 

(b)         Reportson Form 8-K.

 

On February 25, 2003, the Company filed a currentreport on Form 8-K relating to the declaration by its board of directors of acash dividend in the amount of $0.03 per share of common stock.

 

 

17

----

 

**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:  May 12, 2003** |                                 |
|                              |                                      |  |  |  |  |

 

18

----

 

**CERTIFICATIONS**

 

I, Ben T. Morris, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Sanders Morris Harris GroupInc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May  12, 2003 |
|---------------------------|
|                      |
|                      |
| /s/ BEN T. MORRIS         |   |
| Ben T. Morris             |
| Chief Executive Officer   |

 

19

----

 

I, Rick Berry, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Sanders Morris Harris GroupInc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May  12, 2003 |
|---------------------------|
|                      |
| /s/  RICK  BERRY     |   |
| Rick Berry                |
| Chief Financial Officer   |

 

20

----