<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1997
Commission file number 0-19483
SOUTHWEST SECURITIES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2040825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 ELM STREET, SUITE 3500, DALLAS, TEXAS 75270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 651-1800
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 7, 1997, there were 10,169,986 shares of the registrant's common
stock, $.10 par value, outstanding.
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<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
September 26, l997 and June 27, l997
Consolidated Statements of Income
For the three months ended September 26, l997 and September 27, 1996
Consolidated Statements of Cash Flows
For the three months ended September 26, l997 and September 27, 1996
Notes to Consolidated Financial Statements
September 26, l997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 26, l997 and June 27, l997
(In thousands, except par values and share amounts)
<TABLE>
<CAPTION>
September June
(Unaudited)
----------------------- ----------------------
ASSETS
<S> <C> <C>
Cash $ 41,132 $ 10,745
Assets segregated for regulatory purposes 164,691 352,197
Receivable from brokers, dealers and clearing organizations 2,251,010 2,282,304
Receivable from clients, net 610,955 570,461
Securities owned, at market value 35,201 31,921
Other assets 29,960 28,764
----------------------- ----------------------
$3,132,949 $3,276,392
======================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 4,000 $ 4,000
Payable to brokers, dealers and clearing organizations 2,123,025 2,139,611
Payable to clients 827,673 963,552
Drafts payable 36,645 31,036
Other liabilities 29,106 29,865
----------------------- ----------------------
3,020,449 3,168,064
Liabilities subordinated to claims of general creditors 900 1,400
----------------------- ----------------------
3,021,349 3,169,464
Stockholders' equity:
Preferred stock of $1.00 par value. Authorized 100,000
shares; none issued. --- ---
Common stock of $.10 par value. Authorized 20,000,000 shares.
Issued 10,179,163 and outstanding 10,169,986 shares at
September 26, 1997. Issued 10,161,599 and
outstanding 10,152,422 shares at June 27, 1997. 1,018 1,016
Additional paid-in capital 56,675 56,139
Retained earnings 54,107 49,984
Receivable from employees under the Employee Stock Purchase Plan (126) (137)
Treasury stock (9,177 shares, at cost) (74) (74)
----------------------- ----------------------
Total stockholders' equity 111,600 106,928
Commitments and contingencies
----------------------- ----------------------
$3,132,949 $3,276,392
======================= ======================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the three months ended September 26, 1997 and September 27, 1996
(In thousands, except per share and share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
1997 1996
---------------------------------------
<S> <C> <C>
Net revenues from clearing operations $ 6,707 $ 4,725
Commissions 13,887 8,248
Interest 34,378 25,561
Investment banking, advisory and administrative fees 4,376 3,669
Net gains on principal transactions 3,138 3,091
Other 2,810 2,410
---------------------------------------
65,296 47,704
---------------------------------------
Commissions and other employee compensation 20,326 14,779
Interest 24,308 18,002
Occupancy, equipment and computer service costs 3,888 2,545
Communications 3,158 2,173
Floor brokerage and clearing organization charges 1,255 977
Other 4,576 3,214
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57,511 41,690
---------------------------------------
Income before income taxes 7,785 6,014
Income taxes 2,740 2,086
---------------------------------------
Net income $ 5,045 $ 3,928
=======================================
Earnings per share $.50 $.41
=======================================
Weighted average shares outstanding 10,166,578 9,668,731
=======================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended September 26, 1997 and September 27, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,045 $ 3,928
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 884 664
Provision for doubtful accounts --- 35
Deferred income taxes 183 (248)
Decrease (increase) in assets segregated for regulatory 187,506 (83,157)
purposes
Net change in broker, dealer and clearing organization 14,708 36,750
accounts
Net change in client accounts (176,373) 102,567
Decrease (increase) in securities owned (3,280) 544
Increase in other assets (1,394) (1,477)
Increase in drafts payable 5,609 1,967
Increase (decrease) in other liabilities (866) 1,309
------------------------ ------------------------
Net cash provided by operating activities 32,022 62,882
------------------------ ------------------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leasehold improvements (864) (1,218)
------------------------ ------------------------
Net cash used in investing activities (864) (1,218)
------------------------ ------------------------
Cash flows from financing activities:
Proceeds from (payments on) short term borrowings 102 (59,384)
Payment on liabilities subordinated to the claims of general (500) ---
creditors
Proceeds from employees for Employee Stock Purchase Plan 11 61
Net proceeds from exercise of stock options 225 ---
Payment of cash dividend on common stock (609) (351)
------------------------ ------------------------
Net cash used in financing activities (771) (59,674)
------------------------ ------------------------
Net increase in cash 30,387 1,990
Cash at beginning of period 10,745 5,284
------------------------ ------------------------
Cash at end of period $ 41,132 $ 7,274
======================== ========================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
GENERAL AND BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of Southwest Securities Group, Inc. ("Parent") and its wholly owned
subsidiaries, (collectively, the "Company"), Southwest Securities, Inc.
("Southwest"), Brokers Transaction Services, Inc. ("BTS"), Southwest Investment
Advisors, Inc. ("Advisors"), Westwood Trust ("Trust"), formerly Trust Company of
Texas, Westwood Management Corporation ("Westwood"), SW Capital Corporation
("Capital"), SWST Computer Corporation ("Computer Corp.") Sovereign Securities,
Inc. ("Sovereign") and Equity Securities Trading Company ("ESTC"). Southwest,
BTS, Sovereign and ESTC are registered broker/dealers under the Securities
Exchange Act of 1934 ("1934 Act"). Advisors and Westwood are registered
investment advisors under the Investment Advisors Act of 1940. All significant
intercompany balances and transactions have been eliminated.
The consolidated financial statements as of September 26, 1997, and for the
three month periods ended September 26, 1997 and September 27, 1996, are
unaudited; however, in the opinion of management, these interim statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position, results of
operations and cash flows. These financial statements should be read in
conjunction with the consolidated financial statements and related notes in the
Company's annual audited report as of June 27, 1997. Amounts included for June
27, 1997 are from the audited financial statements as filed on Form 10-K.
CASH FLOW REPORTING
Cash paid for interest was $23,233,000 and $18,012,000 for the periods ended
September 26, 1997 and September 27, 1996, respectively. Cash paid for income
taxes was $2,400,000 and $1,774,000 in 1997 and 1996, respectively.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (REVERSE REPURCHASE AGREEMENTS)
Southwest, from time to time, enters into reverse repurchase agreements
(collateralized by U.S. Government or U.S. Government agency securities), for
the purpose of segregating assets for the exclusive benefit of its customers.
Under a master repurchase agreement ("Agreement") with Trust, securities
purchased under the reverse repurchase agreement are identified and segregated
by Trust on its books and records as subject to the Agreement. Management
regularly monitors the market value of the underlying securities relating to
outstanding reverse repurchase agreements.
ASSETS SEGREGATED FOR REGULATORY PURPOSES
At September 26, 1997, the Company had cash of $5,291,000, reverse repurchase
agreements of $78,580,000, and U.S. Treasury securities with a market value of
$80,820,000 segregated in a special reserve bank account for the exclusive
benefit of customers under Rule 15c3-3 of the 1934 Act, at Trust Company. The
reverse repurchase agreements were collateralized by U.S. Government securities
with a market value of approximately $79,865,000. At June 27, 1997, the Company
had cash of $90,000, reverse repurchase agreements of $232,123,000, and U.S.
Treasury securities with a market value of $119,984,000 in this account. The
reverse repurchase agreements were collateralized by U.S. Government securities
with a market value of approximately $234,372,000 at June 27, 1997.
<PAGE>
RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
At September 26, l997 and June 27, l997, the Company had receivables from and
payables to brokers, dealers and clearing organizations relating to the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER June
---------------------- ---------------------
Receivables:
<S> <C> <C>
Securities failed to deliver $ 30,772 $ 15,213
Securities borrowed 2,100,498 2,159,204
Correspondent broker/dealers 67,643 62,235
Clearing organizations 6,705 7,355
Other 45,392 38,297
---------------------- ---------------------
$ 2,251,010 $ 2,282,304
====================== =====================
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER June
---------------------- ---------------------
Payables:
<S> <C> <C>
Securities failed to receive $ 25,914 $ 17,889
Securities loaned 2,075,249 2,102,972
Correspondent broker/dealers 10,512 9,013
Other 11,350 9,737
---------------------- ---------------------
$ 2,123,025 $ 2,139,611
====================== =====================
</TABLE>
SHORT-TERM BORROWINGS
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $207,000,000. These lines of credit are used primarily to
finance securities owned, securities held for correspondent broker/dealer
accounts, and receivables in clients' margin accounts. These lines may also be
used to release pledged collateral against day loans. These credit arrangements
are provided on an "as offered" basis and are not committed lines of credit.
These arrangements can be terminated at any time by the lender. Any outstanding
balance under these credit arrangements is due on demand and bears interest at
rates indexed to the federal funds rate. There were no amounts outstanding at
September 26, 1997 or June 27, 1997 on these credit arrangements.
In addition to the broker loans lines, the Parent has a $10,000,000 unsecured
line of credit which is due on demand and bears interest at rates indexed to the
federal funds rate. The amount outstanding under this secured line of credit
was $4,000,000 at September 26, 1997 and June 27, 1997.
At September 26, 1997 and at June 27, 1997, the Company had no repurchase
agreements outstanding.
NET CAPITAL REQUIREMENTS
The broker/dealer subsidiaries are subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (the "Rule"), which requires the
maintenance of minimum net capital. Southwest has elected to use the alternative
method, permitted by the Rule, which requires that it maintain minimum net
capital, as defined in Rule 15c3-1 under the 1934 Act, equal to the greater of
$1,500,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 under
the 1934 Act. At September 26, 1997, Southwest had net capital of $69,102,000 or
approximately 10% of aggregate debit balances, which is $55,382,000 in excess of
its minimum net capital requirement of $13,720,000 at that date. Additionally,
the net capital rule of the New York Stock Exchange, Inc. (the "Exchange")
provides that equity capital may not be withdrawn or cash dividends paid if
resulting net capital would be less than 5% of aggregate debit items. At
September 26, 1997, Southwest had net capital of $34,801,000 in excess of 5% of
aggregate debit items.
ESTC has also elected to use the alternative method, permitted by the Rule. At
September 26, 1997, ESTC had net capital of $6,965,000, or approximately 10% of
aggregate debit balances, which is $5,493,000 in excess of its
<PAGE>
minimum net capital requirement of $1,472,000 at that date. Additionally, at
September 26, 1997, ESTC had net capital of $3,284,000 in excess of 5% of
aggregate debit items.
BTS follows the primary (aggregate indebtedness) method under Rule 15c3-1, which
requires it to maintain minimum net capital of $100,000. BTS had net capital of
$154,000 which is $54,000 in excess of its minimum net capital requirement at
September 26, 1997.
Sovereign also follows the primary (aggregate indebtedness) method under Rule
15c3-1, which requires it to maintain minimum net capital of $50,000. At
September 26, 1997, Sovereign had net capital of $96,000 which is $46,000 in
excess of its minimum net capital requirement.
Trust is subject to the capital requirements of the Texas Department of Banking,
and has a minimum capital requirement of $1,000,000. Trust Company had total
stockholder's equity of $2,585,000, which is $1,585,000 in excess of its minimum
capital requirement at September 26, 1997.
LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to the claims of general creditors represent loans to
ESTC. The loans are covered by agreements approved by the National Association
of Securities Dealers ("NASD"), and are thus available to the Company in
computing net capital under the Rule. To the extent that such borrowings are
required for the Company's continued compliance with the minimum net capital
requirements, they may not be repaid. Subordinated notes include the following
(in thousands):
<TABLE>
<S> <C>
Due to officer, due 1/31/98, interest at 2% /(1)/ $400
Due to officer, due 2/28/98, interest at prime + 1/2% 500
---------------
$900
===============
</TABLE>
/(1)/This subordinated note is related to secured demand notes receivable
which bear interest at 2% and are collateralized by securities with a
market value of approximately $8,925,000 at September 26, 1997.
EMPLOYEE BENEFITS
The Company adopted an Employee Stock Purchase Plan ("Plan") as of August 30,
1994 to enable employees of the Company to purchase up to 468,227 shares of
common stock of the Company. Substantially all full-time employees were
eligible to purchase a minimum of $2,500 up to a maximum of $50,000 of the
common stock, subject to certain limitations, at a price of $6.89 per share.
The terms of the Plan provide that the Company will loan the full purchase price
of the stock to the employee under a promissory note due in monthly installments
over a five year period bearing interest at the Applicable Federal Rate (6.06%
at September 26, 1997). A total of 61,122 shares were sold under the terms of
the Plan, resulting in loans to employees of $421,000. The amount outstanding
under these notes at September 26, 1997 was $125,000.
On November 6, 1996, the shareholders of the Company approved the Stock Option
Plan ("Option Plan") adopted by the Board of Directors on September 17, 1996,
pursuant to which options may be granted to eligible employees of the Company or
its subsidiaries for the purchase of an aggregate of 1,000,000 shares of common
stock of the Company. Options to purchase 190,300 shares of common stock at
$23.625 were granted on August 28, 1997 under the Option Plan. The options,
which vest in 25% increments, expire ten years after date of grant.
On November 6, 1996, the shareholders of the Company approved the Phantom Stock
Plan ("Phantom Plan") adopted by the Board of Directors on September 17, 1996.
The Phantom Plan allows non-employee directors to receive directors fees in the
form of common stock equivalent units. As of September 26, 1997, 356 units have
been issued under the Phantom Plan.
On August 20, 1997, the Board of Directors approved the 1997 Stock Option Plan
("1997 Option Plan"), pursuant to which non-qualified options may be granted to
eligible employees or potential employees of the Company or its subsidiaries for
the purchase of an aggregate of 150,000 shares of Common Stock of the Company.
Officers and
<PAGE>
directors are not eligible to receive options under the 1997 Option Plan. No
options have been granted under the 1997 Option Plan as of September 26, 1997.
On August 20, 1997, the Board of Directors adopted a Stock Purchase Plan ("Stock
Purchase Plan") to enable employees of the Company and its subsidiaries to
purchase up to 1,000,000 shares of common stock of the Company. The effective
date of the Stock Purchase Plan is January 1, 1998.
AUTHORIZED COMMON STOCK
On November 6, 1996, the shareholders of the Company approved the authorization
of an additional 10,000,000 shares of common stock. This brings the total
common shares authorized to 20,000,000.
STOCK DIVIDEND
On August 28, 1997, the Board of Directors declared a ten percent stock dividend
payable on October 1, 1997 to shareholders of record at the close of business on
September 15, 1997. Per share amounts, shares outstanding as of September 26,
1997, and weighted average shares outstanding have been restated in the
accompanying financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Southwest Securities Group, Inc. and subsidiaries (the "Company"), through its
principal subsidiary, Southwest Securities, Inc. ("Southwest"), provides
securities transaction processing and other related services and operates a
full-service brokerage, investment banking and asset management firm. Its
primary business is delivering a broad range of securities transaction
processing services to broker/dealers. Transaction processing services include
cost-effective integrated trade execution, clearing, client account processing
and other customized services ("Transaction Processing"). Southwest provides
services that are directly related to Transaction Processing, including margin
lending and stock loan services. The Company also provides securities brokerage
and investment services to individuals and institutions, provides investment
banking services to municipal and corporate clients and trades fixed income and
equity securities. Brokers Transaction Services, Inc. ("BTS"), a wholly owned
subsidiary of the Company, and a National Association of Securities Dealers
("NASD") registered broker/dealer, contracts with independent registered
representatives for the administration of their securities business. Sovereign
Securities, Inc. ("Sovereign") is a discount brokerage firm and NASD
broker/dealer. Based in Minneapolis, Equity Securities Trading Company, Inc.
("ESTC") is an NASD broker/dealer which operates a regional securities clearing
business.
SW Capital Corporation, a wholly owned subsidiary of the Company, houses the
Local Government Investment Cooperative ("LOGIC") program. The LOGIC program is
targeted to the needs of cities, counties, schools and other local governments
across Texas. This program allows participants to pool their available funds,
resulting in increased economies of scale, and allows higher returns while
maintaining a high degree of safety and liquidity. In addition, the Company
offers asset management and trust services through its wholly owned
subsidiaries, Westwood Management Corporation ("Westwood") and Westwood Trust
("Trust"), formerly The Trust Company of Texas. Southwest Investment Advisors,
Inc. ("Advisors"), a wholly owned subsidiary of the Company is a registered
investment advisor. Advisors has been inactive since April 11, 1994. SWST
Computer Corporation ("Computer Corp.") provides computer processing and
programming to affiliates as well as third parties.
One of the most important facets of the Company's operations is Transaction
Processing and related services. Substantially all of the revenues from
Transaction Processing are shown on the Company's Consolidated Statements of
Income as net revenues from clearing operations. Increased Transaction
Processing and related services have resulted in increases in certain revenues,
including net revenues from clearing operations, interest revenue from margin
loans to clients of Southwest's Correspondents and to Correspondents for their
own security inventory positions and money market administrative fees. The
resultant increases in retained earnings have increased the capital of the
Company which in turn has permitted the Company to expand all areas of its
operations.
<PAGE>
Other major sources of revenues are commissions from Southwest's client
transactions and interest revenue from margin loans to its own clients, stock
loan transactions and other interest-bearing assets. Investment banking,
advisory and administrative fees include revenues derived from the underwriting
and distribution of corporate and municipal securities, unit trusts and money
market and other mutual funds. The major expenses incurred by the Company
relate to payment of commissions, overall compensation and benefits for both
sales and administrative personnel and the costs of funds to finance the
Company's securities operations, including short-term borrowings, stock loan
transactions and other interest-bearing obligations.
In August 1994, the Company authorized an employee stock purchase plan available
to eligible employees. The shares available for purchase were those purchased
in the Company's series of treasury stock acquisitions. At September 26, 1997,
the amount receivable from employees under the Employee Stock Purchase Plan was
$125,000.
On August 20, 1997, the Board of Directors approved the 1997 Stock Option Plan
("1997 Option Plan"), pursuant to which non-qualified options may be granted to
eligible employees or potential employees of the Company or its subsidiaries for
the purchase of an aggregate of 150,000 shares of Common Stock of the Company.
Officers and directors are not eligible to receive options under the 1997 Option
Plan.
On August 20, 1997, the Board of Directors adopted a Stock Purchase Plan ("Stock
Purchase Plan") to enable employees of the Company and its subsidiaries to
purchase up to 1,000,000 shares of common stock of the Company. The effective
date of the Stock Purchase Plan is January 1, 1998.
On August 28, 1997, the Board of Directors declared a ten percent stock dividend
payable on October 1, 1997 to shareholders of record at the close of business on
September 15, 1997. Per share amounts, shares outstanding as of September 26,
1997, and weighted average shares outstanding have been restated in the
accompanying financial statements.
THREE MONTHS ENDED SEPTEMBER 26, 1997 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 27, L996
Total revenues increased by $17,592,000, or 37%, in the first quarter of fiscal
1998 to $65,296,000 compared to $47,704,000 in the first quarter of fiscal 1997.
Improved market conditions, as well as an increase in the number of
correspondents, resulted in increased revenues from Transaction Processing of
$1,982,000, an increase of 42%. Commissions increased $5,639,000 to
$13,887,000, an increase of 68% when compared with revenues in the first quarter
of fiscal 1997 of $8,248,000. Interest income increased to $34,378,000, an
increase of $8,817,000, or 34%, while interest expense increased 35%, or
$6,306,000 to $24,308,000. This resulted in an increase in net interest revenue
of $2,511,000 or 33% due to higher average balances in securities lending and
customer margin accounts. The amounts receivable and payable relating to open
positions for securities borrowed and loaned as of September 26, 1997, were
$2,100,498,000 and $2,075,249,000, respectively. As of September 27, 1996, these
amounts were $1,589,345,000 and $1,548,308,000. Investment banking, advisory
and administrative fees increased $707,000 or 19% to $4,376,000 primarily due to
increased deal flow. Net gains on principal transactions increased 2% or
$47,000 to $3,138,000, principally due to an increase in trading and
underwriting income.
Total expenses increased $15,821,000 or 38% to $57,511,000 when compared to the
quarter ended September 27, 1996 primarily as the result of increased interest
expense, as discussed above, and increased commission and employee compensation
expense. Commissions and other employee compensation increased $5,547,000 or
38% compared to the same period last year as a result of increased commissions
generated by Southwest and BTS registered representatives and an increase in the
number of employees to 725 at September 26, 1997 compared to 639 at September
27, 1996. Occupancy, equipment and computer service costs increased $1,343,000,
or 53%, to $3,888,000 for the first quarter due to upgrades of computer
equipment and an increase in office space. Communications expenses increased
45% to $3,158,000 for the quarter ended September 26, 1997 compared to the same
period last year, due to expanded computer networking. Floor brokerage and
clearing organization charges increased $278,000, or 28%, to $1,255,000 for the
period ended September 26, 1997. Other expenses increased $1,362,000, or 42%,
to $4,576,000, primarily due to increases in expenses associated with
underwriting fixed income securities and promotional expense.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Approximately 99% of the Company's assets consist of cash, marketable securities
and receivables from clients, clients of Correspondents and Correspondents
themselves (representing borrowings from Southwest to finance the purchase of
securities on margin, which are secured by marketable securities);
broker/dealers; and clearing organizations. All assets are financed by the
Company's equity capital, short-term bank borrowings, interest bearing and
non-interest bearing client credit balances, Correspondent deposits, and other
payables. Southwest maintains an allowance for doubtful accounts which
represents amounts, in the judgment of management, that are necessary to
adequately absorb losses from known and inherent risks in receivables from
clients, clients of Correspondents and Correspondents.
Southwest has credit arrangements with commercial banks, which include broker
loan lines up to $207,000,000. These lines of credit are used primarily to
finance securities owned, securities held for correspondent broker/dealer
accounts, and receivables in customers' margin accounts. These credit
arrangements are provided on an "as offered" basis and are not committed lines
of credit. Outstanding balances under these credit arrangements are due on
demand, bear interest at rates indexed to the Federal Funds rate, and are
collateralized by securities of Southwest and its clients. There were no
amounts outstanding at June 27, 1997 on these credit arrangements. In the
opinion of management, these credit arrangements are adequate to meet the short-
term operating capital needs of Southwest.
In addition to the broker loan lines, the Company has a $10,000,000 unsecured
line of credit which is due on demand and bears interest at rates indexed to the
federal funds rate. The amount outstanding under this unsecured line of credit
was $4,000,000 at September 26, 1997.
Southwest is subject to the requirements of the Securities and Exchange
Commission and the New York Stock Exchange relating to liquidity, capital
standards and the use of client funds and securities. The Company has
historically operated in excess of the minimum net capital requirements.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
On July 1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 will not
have a material impact on the Company's financial position or results of
operations, as the Company does not intend to adopt the value based measurement
concept, but will require extensive disclosures regarding the Company's stock
option plan at fiscal year end.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("FAS
128"). This statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. Basic EPS, which replaces primary EPS
but does not include dilutive securities, should increase the Company's per
share amounts under the new standard. Diluted EPS is replacing fully diluted
EPS, although the computation of the two is similar. Both basic and diluted are
required to be presented on the face of the financial statements. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. This
statement requires prior period restatement.
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("FAS 130") was issued in June 1997 and establishes standards for
reporting and display of comprehensive income and its components in a set of
general-purpose financial statements. FAS 130 is effective for financial
statements issued for periods beginning after December 15, 1997, and
reclassification of financial statements for earlier periods provided for
comparative purposes is required. Initial application of FAS 130 should be as
of the beginning of the fiscal year, but earlier application is permitted. FAS
130 must be applied to all interim periods after initial application.
The FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131") in June
1997. This statement establishes standards for the way that a public business
enterprise reports information about operating segments in the annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports to
<PAGE>
shareholders. FAS 131 is effective for financial statements issued for periods
beginning after December 15, 1997, and comparative information requires
restatement in the initial year of application.
EFFECTS OF INFLATION
Management does not believe that changes in replacement costs of fixed assets
will materially affect the Company's operations. The rate of inflation, however,
affects the Company's expenses, such as employee compensation, rent and
communications. Increases in these expenses may not be readily recoverable in
the price the Company charges for its services. Inflation can have significant
effects on interest rates which, in turn, can affect prices and activities in
the securities markets. These fluctuations may have an adverse impact on the
Company's operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None Reportable (229.103)
Item 2. Changes in Securities
None Reportable (Per Instructions to Form 10-Q)
Item 3. Defaults upon Senior Securities
None Reportable (Per Instructions to Form 10-Q)
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company has been approved to list its common stock on the New York Stock
Exchange, Inc. ("NYSE"). Trading on the NYSE will begin on October 6, 1997
under the symbol "SWS".
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
10.1 Executive Compensation
The information required by this item regarding Executive compensation is
incorporated by reference to pages 7 through 9 of the Company's Proxy Statement
dated September 25, 1997 which was filed with the Commission pursuant to
Regulation 240.14a (6) (c) prior to October 25, 1997.
27 Financial Data Schedule
REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Securities Group, Inc.
--------------------------------
(Registrant)
November 7, 1997 /s/ David Glatestein
- ---------------- --------------------------------
Date (Signature)
David Glatstein
President
November 7, 1997 /s/ Kenneth R. Hanks
- ---------------- --------------------------------
Date (Signature)
Kenneth R. Hanks
Chief Financial Officer
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<PERIOD-START> JUN-28-1997
<PERIOD-END> SEP-26-1997
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