<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 December 31, 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 office) (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 February 12, 1998, 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
December 31, 1997 and June 27, l997
Consolidated Statements of Income
For the three and six months ended December 31, l997 and December 31, 1996
Consolidated Statements of Cash Flows
For the six months ended December 31, 1997 and December 31, 1996
Notes to Consolidated Financial Statements
December 31, 1997
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
December 31, l997 and June 27, l997
(In thousands, except par values and share amounts)
<TABLE>
<CAPTION>
December June
(Unaudited)
--------------------------- ----------------------
ASSETS
<S> <C> <C>
Cash $ 75,282 $ 10,745
Assets segregated for regulatory purposes 115,464 352,197
Receivable from brokers, dealers and clearing organizations 2,362,669 2,282,304
Receivable from clients, net 624,332 570,461
Securities owned, at market value 34,136 31,921
Other assets 28,736 28,764
--------------------------- ----------------------
$3,240,619 $3,276,392
=========================== ======================
Liabilities and stockholders' equity
Short-term borrowings $ --- $ 4,000
Payable to brokers, dealers and clearing organizations 2,244,257 2,139,611
Payable to clients 799,586 963,552
Drafts payable 48,091 31,036
Other liabilities 32,288 29,865
--------------------------- ----------------------
3,124,222 3,168,064
Liabilities subordinated to claims of general creditors --- 1,400
--------------------------- ----------------------
3,124,222 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 at
December 31, 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 58,885 49,984
Receivable from employees under the Employee Stock Purchase Plan (107) (137)
Treasury stock (9,177 shares, at cost) (74) (74)
--------------------------- ----------------------
Total stockholders' equity 116,397 106,928
Commitments and contingencies
$3,240,619 $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 and six months ended December 31, 1997 and December 31, 1996
(In thousands, except per share and share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues from clearing operations $ 6,374 $ 5,693 $ 13,081 $10,418
Commissions 15,367 9,552 29,254 17,800
Interest 36,535 28,159 70,913 53,720
Investment banking, advisory and administrative fees 6,552 2,931 10,928 6,600
Net gains on principal transactions 3,174 3,209 6,312 6,300
Other 2,463 2,175 5,273 4,585
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70,465 51,719 135,761 99,423
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Commissions and other employee compensation 21,703 15,072 42,029 29,851
Interest 25,679 19,176 49,987 37,178
Occupancy, equipment and computer service costs 4,107 3,195 7,995 5,740
Communications 2,975 2,943 6,133 5,116
Floor brokerage and clearing organization charges 1,206 994 2,461 1,971
Other 6,390 4,392 10,966 7,606
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62,060 45,772 119,571 87,462
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Income before income taxes 8,405 5,947 16,190 11,961
Income taxes 3,015 2,088 5,755 4,174
--------------------------------------------------------------
Net income $ 5,390 $ 3,859 $ 10,435 $ 7,787
==============================================================
Earnings per share - basic and diluted $.53 $.40 $1.03 $.81
==============================================================
Weighted average shares outstanding - basic 10,169,986 9,661,993 10,163,686 9,661,993
==============================================================
Weighted average shares outstanding - diluted 10,184,679 9,669,597 10,175,862 9,668,878
==============================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended December 31, 1997 and December 31, 1996
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,435 $ 7,787
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,591 1,471
Provision for doubtful accounts 711 25
Deferred income taxes (531) (521)
Decrease (increase) in assets segregated for regulatory purposes 236,733 (76,469)
Net change in broker, dealer and clearing organization accounts 24,281 17,923
Net change in client accounts (218,548) 118,521
Increase in securities owned (2,215) (1,680)
Decrease in other assets 41 3,756
Increase in drafts payable 17,055 10,253
Increase in other liabilities 2,416 3,488
----------------------- ------------------------
Net cash provided by operating activities 71,969 84,554
----------------------- ------------------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (1,066) (5,668)
----------------------- ------------------------
Net cash used in investing activities (1,066) (5,668)
----------------------- ------------------------
Cash flows from financing activities:
Payments on short term borrowings (4,000) (74,009)
Payments on liabilities subordinated to claims of general creditors (1,400) ---
Proceeds from employees for Employee Stock Purchase Plan 30 108
Net proceeds from exercise of stock options 225 ---
Payment of cash dividend on common stock (1,221) (790)
----------------------- ------------------------
Net cash used in financing activities (6,366) (74,691)
----------------------- ------------------------
Net increase in cash 64,537 4,195
Cash at beginning of period 10,745 5,284
----------------------- ------------------------
Cash at end of period $75,282 $9,479
======================= ========================
</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 December 31, 1997, and for the three
and six month periods ended December 31, 1997 and December 31, 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 $49,120,000 and $36,645,000 for the six months ended
December 31, 1997 and December 31, 1996, respectively. Cash paid for income
taxes was $4,700,000 and $5,155,000 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 December 31, 1997, the Company had reverse repurchase agreements of
$73,318,000, U.S. Treasury securities with a market value of $41,846,000 and
cash of $300,000 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 $74,121,000. At June 27, 1997, the Company
had reverse repurchase agreements of $232,123,000, U.S. Treasury securities with
a market value of $119,984,000 and cash of $90,000 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 December 31, 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>
December June
--------------------- ---------------------
<S> <C> <C>
Receivables:
Securities failed to deliver $ 14,478 $ 15,213
Securities borrowed 2,209,416 2,159,204
Correspondent broker/dealers 78,465 62,235
Clearing organizations 1,554 7,355
Other 58,756 38,297
--------------------- ---------------------
$2,362,669 $2,282,304
===================== =====================
</TABLE>
<TABLE>
<CAPTION>
December June
--------------------- ---------------------
<S> <C> <C>
Payables:
Securities failed to receive $ 18,469 $ 17,889
Securities loaned 2,204,388 2,102,972
Correspondent broker/dealers 10,261 9,013
Other 11,139 9,737
--------------------- ---------------------
$2,244,257 $2,139,611
===================== =====================
</TABLE>
SHORT-TERM BORROWINGS
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $197,000,000. 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
December 31, 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. There was no amount outstanding under this secured line of
credit at December 31, 1997. The amount outstanding was $4,000,000 at June 27,
1997.
At December 31, 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 December 31, 1997, Southwest had net capital of
$71,229,000 or approximately 10% of aggregate debit balances, which is
$56,633,000 in excess of its minimum net capital requirement of $14,596,000 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 December 31, 1997, Southwest had net capital of $34,739,000 in excess
of 5% of aggregate debit items.
ESTC has also elected to use the alternative method, permitted by the Rule. At
December 31, 1997, ESTC had net capital of $960,000, which is $710,000 in excess
of its minimum net capital requirement of $250,000 at that date. Additionally,
at December 31, 1997, ESTC had net capital of $660,000 in excess of 120% of the
minimum net capital requirement.
<PAGE>
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
$259,000 which is $159,000 in excess of its minimum net capital requirement at
December 31, 1997.
Sovereign also follows the primary (aggregate indebtedness) method under Rule
15c3-1, which requires it to maintain minimum net capital of $250,000. At
December 31, 1997, Sovereign had net capital of $350,000 which is $100,000 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 $2,565,000, which is $1,565,000 in excess of its minimum
capital requirement at December 31, 1997.
LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
There were no subordinated notes outstanding at December 31, 1997. At June 27,
1997, 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. At June 27, 1997, subordinated
notes include the following (in thousands):
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
Due to officer, due 8/31/97, interest at prime + 1/2% 500
---------------
$1,400
===============
/(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 $9,457,000 at June 27, 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 (5.86%
at December 31, 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 December 31, 1997 was $107,000.
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 197,300 shares of common stock were
outstanding under the Option Plan at December 31, 1997. 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 December 31, 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 directors are not eligible to receive options under the 1997 Option
Plan. No options have been granted under the 1997 Option Plan. No options have
been granted under the 1997 Option Plan as of December 31, 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.
<PAGE>
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, and weighted average
shares outstanding as of December 31, 1996 have been restated in the
accompanying financial statements, as have issued and outstanding shares as of
June 27, 1997.
EARNINGS PER SHARE
Earnings Per Share ("EPS") has been calculated in conformity with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" and all prior
periods have been restated. A reconciliation between the weighted average
shares outstanding used in the basic and diluted EPS computations is as follows
(in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 5,390 $ 3,859 $ 10,435 $ 7,787
=========================================================================
Weighted average shares outstanding - basic 10,169,986 9,661,993 10,163,686 9,661,993
Effect of dilutive securities:
Assumed exercise of stock options 14,693 7,604 12,176 6,885
-------------------------------------------------------------------------
Weighted average shares outstanding - diluted 10,184,679 9,669,597 10,175,862 9,668,878
=========================================================================
Earnings per share - basic and diluted $ .53 $ .40 $ 1.03 $ .81
=========================================================================
</TABLE>
Options to purchase 190,300 shares of common stock at $23.625, granted on August
28, 1997, were outstanding in the first quarter of fiscal 1998, but were not
included in the computation of six months diluted EPS because the options'
exercise price was greater than the average market price of the common share in
the first quarter of fiscal 1998. 189,300 of these options were still
outstanding at December 31, 1997.
Options to purchase 8,000 shares of common stock at $23.5, granted on November
5, 1997, were not included in the computation of diluted EPS for either the
three months ended or the six months ended December 31, 1997. These options were
not included because the options' exercise price was greater than the average
market price of the common share in the second quarter of fiscal 1998. All of
these options were still outstanding at December 31, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements under Management's Discussion and Analysis of Financial Condition
and Results of Operations and other statements in this Form 10-Q which are not
historical facts are forward-looking statements. These forward-looking
statements involve risks and uncertainties that could render them materially
different from estimates provided herein. These risks and uncertainties include
but are not limited to the effect of economic conditions, the availability of
technical resources, the ability to develop and implement new software, the
effect of regulatory and legal developments and other risks detailed in the
Company's Securities and Exchange Commission filings.
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
<PAGE>
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE
THREE MONTHS ENDED DECEMBER 31, 1996
Total revenues and net income reached record levels in the second quarter of
fiscal 1998. Total revenues increased by $18,746,000, or 36%, in the second
quarter of fiscal 1998 to $70,465,000 compared to $51,719,000 in the second
quarter of fiscal 1997. Net income increased 40% to $5,390,000 from $3,859,000
in the second quarter of the prior year.
Substantially all of the revenues from Transaction Processing are shown on the
Company's Consolidated Statements of Income as net revenues from clearing
operations. Improved market conditions, as well as an increase in the number of
correspondents, resulted in increased revenues from Transaction Processing of
$681,000, an increase of 12%. The number of correspondents increased to 240 at
December 31, 1997 from 232 at December 31, 1996. Total transactions processed
in the second quarter of fiscal 1998 increased 111% to approximately 1,592,000
from approximately 755,000 in the second quarter of fiscal 1997 compared to the
revenue increase of 12%. This was due to an increase in tickets from several
high volume correspondents who earn substantial discounts.
Commissions from Southwest's client transactions increased $5,815,000 to
$15,367,000, an increase of 61% when compared with revenues in the second
quarter of fiscal 1997 of $9,552,000. This was due to increased commissions from
investment banking transactions managed by the Company, as well as an increase
in the number of brokers in the Company's salesforce and independent contractor
network.
Interest income increased to $36,535,000, an increase of $8,376,000, or 30%,
while interest expense increased 34%, or $6,503,000 to $ 25,679,000. This
resulted in an increase in net interest revenue of $1,873,000, or 21%, due to
increased balances in securities lending and customer margin accounts. The
amounts receivable and payable relating to open positions for securities
borrowed and loaned as of December 31, 1997, were $2,209,416,000 and
$2,204,388,000, respectively. As of December 31, 1996, these amounts were
$1,785,018,000 and $1,751,925,000.
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. Investment banking,
advisory and administrative fees increased $3,621,000, or 124%, to $6,552,000
when compared to $2,931,000 in the second quarter of fiscal 1997 due to
increased volume of transactions in both equity and municipal investment banking
markets.
Total expenses increased $16,288,000, or 36%, to $62,060,000 when compared to
the quarter ended December 31, 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 $6,631,000 or 44% compared
to the same period last year as a result of increased commissions generated by
the Company's salesforce and its independent contractor network, as well as an
increase in the number of employees to 729 at December 31, 1997 compared to 639
at December 31,
<PAGE>
1996. The number of Company salespeople and independent contractors was 122 and
688, respectively, at December 31, 1997. As of December 31, 1996, these
representatives totaled 114 and 529.
Occupancy, equipment and computer service expenses increased $912,000, or 29%,
primarily due to upgrades in computer processing equipment and an increase in
office space. Other expenses increased $1,998,000, or 45%, to $6,390,000,
primarily due to increases in expenses associated with underwriting fixed income
securities, professional services and other expenses.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE
SIX MONTHS ENDED DECEMBER 31, 1996
(The factors impacting substantially all of the variances in the above three
month comparison also apply to the six month comparison. Therefore, this
section is limited to the discussion of additional factors influencing the six
month discussion.)
As discussed above, improved market conditions as well as an increase in the
number of correspondents resulted in increased revenues from Transaction
Processing. Net revenues from clearing operations increased to $13,081,000 an
increase of $2,663,000, or 26%, from a year ago. Total ticket transactions
increased 114% to 2,859,826 over the same six month period in the prior year.
This was due to an increase in tickets from several high volume correspondents
who earn substantial discounts.
Communications expense increased $1,017,000, or 20%, to $6,133,000 from
$5,116,000 when compared to the period ended December 31, 1996 due to expanded
computer networking.
FINANCIAL CONDITION
Regulations governing broker/dealers require securities firms to maintain assets
in a special bank account for the exclusive benefit of its customers (called
"assets segregated for regulatory purposes" in the accompanying Statements of
Financial Condition) approximately equal to the net amount of cash on deposit
from clients. During the first six months of fiscal 1998, the net cash on
deposit from clients decreased $218 million as customers' cash on deposit was
invested in money market funds and other securities. The decrease in the net
payable to clients caused a corresponding decrease in the assets segregated for
regulatory purposes.
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 $197,000,000. 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. 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.
There were no amounts outstanding at December 31, 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.
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.
<PAGE>
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.
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" and has restated all prior periods presented in conformity
with the new standard.
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.
YEAR 2000
The widespread use of computer programs that rely on two-digit date programs to
perform computations and decision-making functions may cause computer systems to
malfunction in the Year 2000, and may lead to significant business delays in the
U.S. and internationally.
The impact of the Year 2000 problem on the securities industry as a whole will
be material, as virtually every aspect of the sales of securities and processing
of transactions will be affected. Due to the size of the task facing the
securities industry, and the interdependent nature of securities transactions,
the Company may be adversely affected by this problem in the Year 2000 depending
on whether it and the entities with which it does business address this issue
successfully.
The Company has identified areas in which such computer programs affect our
operations, the most significant of which is the Company's securities processing
software. The Company participates with other broker/dealers in a joint venture,
Comprehensive Software Systems, Ltd. ("CSS"), which is developing the next
generation of software for the securities industry. The CSS system will
automate front- and back-office processes and will be Year 2000 compliant. The
system is expected to begin testing January 1, 1999 and to be fully operational
by January 1, 2000. The ultimate cost of developing and implementing CSS is
inestimable at this time; however management does not believe these costs will
have a material impact on the Company's operations in fiscal 1998.
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)
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on November 5, 1997. The following
directors were elected at the meeting:
<TABLE>
<CAPTION>
Nominees For Withheld
- ----------------------- --------- --------
<S> <C> <C>
Don A. Buchholz 8,127,807 5,028
Raymond E. Wooldridge 8,127,707 5,128
David Glatstein 8,127,807 5,028
Allen B. Cobb 8,127,807 5,028
J. Jan Collmer 8,126,307 6,528
R. Jan LeCroy 8,125,457 7,378
Frederick R. Meyer 8,127,807 5,028
Jon L. Mosle, Jr. 8,127,707 5,128
</TABLE>
There were no abstentions.
Item 5. Other Information
The Company's common stock began trading on the New York Stock Exchange, Inc. 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.
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)
February 12, 1998 /S/ David Glatstein
- ----------------- --------------------------------
Date (Signature)
David Glatstein
President
February 12, 1998 /S/ Kenneth R. Hanks
- ----------------- --------------------------------
Date (Signature)
Kenneth R. Hanks
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-26-1998 JUN-26-1998
<PERIOD-START> SEP-27-1997 JUN-28-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 75,282 75,282
<RECEIVABLES> 2,987,001 2,987,001
<SECURITIES-RESALE> 73,106 73,106
<SECURITIES-BORROWED> 2,209,416 2,209,416
<INSTRUMENTS-OWNED> 34,136 34,136
<PP&E> 9,514 9,514
<TOTAL-ASSETS> 3,240,619 3,240,619
<SHORT-TERM> 0 0
<PAYABLES> 3,043,843 3,043,843
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 2,204,388 2,204,388
<INSTRUMENTS-SOLD> 2,632 2,632
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 1,018 1,018
<OTHER-SE> 115,379 115,379
<TOTAL-LIABILITY-AND-EQUITY> 3,240,619 3,240,619
<TRADING-REVENUE> 3,174 6,312
<INTEREST-DIVIDENDS> 36,535 70,913
<COMMISSIONS> 15,367 29,254
<INVESTMENT-BANKING-REVENUES> 6,552 10,928
<FEE-REVENUE> 6,374 13,081
<INTEREST-EXPENSE> 25,679 49,987
<COMPENSATION> 21,703 42,029
<INCOME-PRETAX> 8,405 16,190
<INCOME-PRE-EXTRAORDINARY> 8,405 16,190
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,390 10,435
<EPS-PRIMARY> .53 1.03
<EPS-DILUTED> .53 1.03
</TABLE>
