<PAGE>
Filed pursuant to Rule 424(b)(1)
SEC File No. 333-79081
$50,000,000
882,028 Derivative Adjustable Ratio SecuritiesSM (DARTSSM)
[SOUTHWEST SECURITIES LOGO]
5% Exchangeable Subordinated Notes due 2004
Subject to Exchange into Class A Common Stock of
[KNIGHT/TRIMARK GROUP, INC. LOGO]
Southwest Securities Group, Inc. is offering $50,000,000 of 5% Exchangeable
Subordinated Notes (each, a "DARTS"). The principal amount of each DARTS will
be $56.6875, which represents the closing bid price of Knight/Trimark Group,
Inc. Class A common stock on June 10, 1999. At maturity, the principal of the
DARTS will be paid by delivery of shares of Knight/Trimark Group, Inc. Class A
common stock. Alternatively, at maturity Southwest may pay cash in an amount
equal to the value of the Knight/Trimark common stock it would otherwise have
to deliver, or it may pay a combination of cash and Knight/Trimark common
stock. The number of shares of Knight/Trimark common stock or cash deliverable
at maturity to pay the principal of the DARTS will be based on the value of
the Knight/Trimark common stock at the time the DARTS mature.
The DARTS will mature on June 30, 2004. The DARTS will bear interest at the
rate of 5% per year. Interest on the DARTS will be paid quarterly in arrears
on March 31 , June 30, September 30 and December 31 of each year, commencing
September 30, 1999.
The DARTS will be general unsecured obligations of Southwest. The DARTS are
generally subordinated to all current and future indebtedness of Southwest and
its subsidiaries. The DARTS will rank equal to certain other obligations.
Knight/Trimark will not receive any proceeds from the sale of the DARTS, and
it will not have any obligations with respect to the DARTS.
We do not expect to list the DARTS on any securities exchange. The
Knight/Trimark common stock is listed on the Nasdaq National Market under the
symbol "NITE." On June 10, 1999, the closing bid price for the Knight/Trimark
common stock was $56.6875.
---------------
This investment involves risk. See "Risk Factors" beginning on page 7.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
Per DARTS Total
--------- -----------
<S> <C> <C>
Initial public offering price...................... $56.6875 $49,999,962
Underwriting discount.............................. $ 1.9841 $ 1,750,032
Proceeds to us (before expenses)................... $54.7034 $48,249,930
</TABLE>
Interest on the DARTS will accrue from June 16, 1999 to the date of
delivery.
The underwriters may, under certain circumstances, purchase up to an
additional $7,500,000 of DARTS at the initial public offering price less the
underwriting discount.
---------------
The underwriters are offering the DARTS subject to various conditions. The
underwriters expect to deliver the DARTS to purchasers on or about June 16,
1999.
Raymond James & Associates, Inc. Forum Capital Markets LLC
The date of this prospectus is June 11, 1999
"Derivative Adjustable Ratio SecuritiesSM" and "DARTSSM" are service marks
owned by Forum Capital Markets LLC.
<PAGE>
CERTAIN INTRODUCTORY MATTERS
Unless otherwise stated, all of the information in this prospectus assumes
that the underwriters do not exercise their over-allotment option. References
to "we," "our" and "Southwest" generally refer to Southwest Securities Group,
Inc. and its subsidiaries on a consolidated basis. Reference to "SSG" means
Southwest Securities Group, Inc., exclusive of its subsidiaries. All references
in this prospectus to Knight/Trimark common stock and the related per share
prices reflect a two-for-one stock split effected May 17, 1999.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking statements. In
addition, we may make forward-looking statements in future filings with the
Securities and Exchange Commission and in written material, press releases and
oral statements issued by us or on our behalf. Forward-looking statements
include statements regarding the intent, belief or current expectations of us
or our officers (including statements preceded by, followed by or including
forward-looking terminology such as "may," "will," "should," "believe,"
"expect," "anticipate," "estimate," "continue" or similar expressions or
comparable terminology) with respect to various matters.
It is important to note that our actual results could differ materially from
those anticipated in the forward- looking statements, depending on various
important factors. These important factors include, but are not limited to (1)
transaction volume in the securities markets; (2) volatility of the securities
markets; (3) fluctuations in interest rates; (4) changes in regulatory
requirements that could affect the cost of doing business; (5) status of
implementation of technology solutions; (6) general economic conditions, both
domestic and foreign; (7) changes in the rate of inflation and related impact
on securities markets; (8) competition from existing financial institutions and
other new participants in the securities markets; (9) legal developments
affecting the litigation experience of the securities industry; and (10)
changes in federal and state tax laws that could affect the popularity of
products sold by us. See "Risk Factors" beginning on page 7 for more
information on these and other risks we face.
All forward-looking statements in this prospectus are based on information
available to us on the date of this prospectus. We do not undertake to update
any forward-looking statements that may be made by us or on our behalf in this
prospectus or otherwise. In addition, please note that matters set forth under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to the forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
2
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information you should consider
before investing in the DARTS. You should read the entire prospectus carefully.
In addition, you should review our consolidated financial statements and the
other information that we have publicly filed with the Securities and Exchange
Commission and that are incorporated into this prospectus by reference.
Southwest Securities Group, Inc.
SSG is a Dallas-based holding company offering a broad range of investment
and related financial services through our operating subsidiary companies to
individual and institutional clients or their financial intermediaries,
primarily in the United States. We have engaged in securities clearing and
related financial market activities for over 25 years. Clearing involves
maintaining our correspondent clients' accounts, processing securities
transactions, extending margin loans, and performing a variety of
administrative services as agent for our correspondent broker/dealers. We
provide clearing and related services to over 200 correspondent broker/dealers
and 700 independent contract brokers, as well as full-service brokerage and
online discount brokerage services to individual investors. Our clearing
business is complemented by our securities trading, securities lending,
investment banking and asset management businesses. As we have grown, we have
expanded our business platform by adding products and services complementary to
our core clearing business.
For a description of our securities holdings in Knight/Trimark Group, Inc.,
see "Relationship Between Southwest and Knight/Trimark."
Knight/Trimark Group, Inc.
According to publicly available documents, Knight/Trimark Group, Inc. is the
leading market maker in Nasdaq securities and in the Third Market, which is the
over-the-counter market in exchange-listed equity securities, primarily those
listed on the New York Stock Exchange (NYSE) and the American Stock Exchange
(AMEX). Market makers hold themselves out to execute trades by offering to buy
or sell securities for their own account. Through its wholly-owned subsidiary,
Knight Securities, Inc., it makes markets in approximately 6,700 equity
securities in Nasdaq and on the OTC Bulletin Board of the NASD. Through its
wholly-owned subsidiary, Trimark Securities, Inc., it makes markets in all
NYSE- and AMEX-listed equity securities in the Third Market.
Knight/Trimark will have no obligations with respect to the DARTS.
The Offering
Securities Offered........ $50,000,000 of 5% Exchangeable Subordinated Notes
of SSG, consisting of 882,028 DARTS.
Initial Price............. $56.6875 per DARTS, reflecting the closing bid
price of Knight/Trimark common stock on the Nasdaq
National Market on June 10, 1999.
Maturity Date............. June 30, 2004
Interest Rate............. 5% per year ($2.83 for each DARTS per year).
Interest Payment Dates.... March 31, June 30, September 30 and December 31,
commencing September 30, 1999.
3
<PAGE>
Exchange at Maturity...... At maturity, SSG will pay the principal amount of
each DARTS in shares of Knight/Trimark Group, Inc.
Class A common stock (the "Knight/Trimark common
stock") in an amount described below.
Alternatively, SSG may pay cash in an amount equal
to the value of the Knight/Trimark common stock it
would otherwise be required to deliver, or it may
pay a combination of cash and Knight/Trimark
common stock.
The number of shares of Knight/Trimark common
stock that will be delivered to pay the principal
of a DARTS will be determined by reference to the
Maturity Price of the Knight/Trimark common stock
at the time the principal of the DARTS is to be
paid. The Maturity Price will be equal to the
average closing price per share of Knight/Trimark
common stock for the 20 trading days ending on the
business day prior to the maturity date.
. We will issue 0.8333 shares of Knight/Trimark
common stock for each DARTS if the Maturity
Price is greater than or equal to $68.03.
. We will issue a fractional share of
Knight/Trimark common stock for each DARTS
equal to:
. the initial price per DARTS in this
offering divided by
. the Maturity Price
if the Maturity Price is less than $68.03 but
is greater than the initial price per DARTS in
this offering.
. We will issue one share of Knight/Trimark
common stock for each DARTS if the Maturity
Price is less than or equal to the initial
price per DARTS in this offering.
The amount of Knight/Trimark common stock
delivered at maturity may be adjusted as a result
of certain distribution and recapitalization
events involving Knight/Trimark.
No Early Redemption or The DARTS are not redeemable or exchangeable for
Exchange.................. Knight/Trimark common stock until their maturity.
Obligations only of SSG... The DARTS are obligations of SSG and are not
obligations of Knight/Trimark.
4
<PAGE>
Ranking................... The DARTS are subordinated unsecured general debts
of SSG. The DARTS are subordinate to all existing
and future indebtedness of SSG (other than trade
payables and obligations designated as junior to
the DARTS) and all liabilities of SSG's
subsidiaries, except the DARTS will rank equal to:
. all future debt of SSG for money borrowed that
is not designated as senior to the DARTS; and
. any future debt of SSG and its subsidiaries
that is convertible or exchangeable for capital
stock.
If SSG had completed this offering on March 26,
1999 and applied the proceeds as it intends, then
on that date the DARTS would have been
subordinated to $7.5 million of indebtedness.
Investment in DARTS....... The terms of the DARTS differ from those of
ordinary debt securities because the value that a
holder of a DARTS will receive at maturity is not
fixed, but is based on the market price of the
Knight/Trimark common stock at maturity.
Listing................... We do not expect to list the DARTS on any
securities exchange.
The Knight/Trimark common stock trades on the
Nasdaq National Market under the symbol "NITE."
Use of Proceeds........... The net proceeds from the sale of the DARTS will
be added to SSG's general corporate funds and will
be used for general corporate purposes. See "Use
of Proceeds."
Risk Factors.............. An investment in the DARTS involves a high degree
of risk. Therefore, each potential buyer should
carefully consider the matters set forth in the
section "Risk Factors," which begins on page 7.
SSG's address is 1201 Elm Street, Suite 3500 Dallas, Texas 75270, and our
telephone number is (214) 859-1800.
5
<PAGE>
Summary Historical Consolidated Financial Information
The summary historical financial information presented below for, and as of
the end of, each of the fiscal years in the five-year period ended June 26,
1998 is derived from our audited consolidated financial statements, which
financial statements have been audited by KPMG LLP, independent certified
public accountants. The summary consolidated financial information for the nine
months ended March 26, 1999 and March 27, 1998 is derived from our unaudited
consolidated financial statements. In the opinion of management, the unaudited
results of operations for the nine months ended March 26, 1999 and March 27,
1998 include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information. The unaudited
consolidated results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full fiscal year. The
following financial information should be read in conjunction with our
consolidated financial statements and related notes thereto incorporated by
reference in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
(unaudited) Fiscal Year Ended
--------------------- ------------------------------------------------------
March 26, March 27, June 26, June 27, June 28, June 30, June 24,
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except return, ratio and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Revenues:
Net revenues from
clearing operations... $ 28,030 $ 19,324 $ 26,607 $ 22,693 $ 17,897 $ 10,818 $ 14,062
Commissions............ 46,946 44,045 59,401 38,882 36,896 26,617 32,913
Interest............... 106,286 104,738 143,121 119,176 95,956 63,629 44,746
Investment banking,
advisory and
administrative fees... 21,193 19,071 27,850 16,031 12,533 9,107 10,914
Net gains on principal
transactions.......... 29,508 8,625 12,576 11,856 8,735 4,877 4,977
Other.................. 10,572 8,799 16,203 9,766 9,791 5,133 6,143
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 242,535 $ 204,602 $ 285,758 $ 218,404 $ 181,808 $ 120,181 $ 113,755
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Commissions and other
employee
compensation.......... $ 90,268 $ 64,878 $ 91,817 $ 65,062 $ 53,433 $ 40,416 $ 44,347
Interest............... 71,736 73,599 100,704 83,238 69,092 42,308 28,524
Other expenses......... 52,118 42,566 61,339 44,361 37,526 28,702 28,231
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 214,122 $ 181,043 $ 253,860 $ 192,661 $ 160,051 $ 111,426 $ 101,102
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. $ 28,413 $ 23,559 $ 31,898 $ 25,743 $ 21,757 $ 8,755 $ 12,653
Income taxes............ 10,055 8,261 11,268 8,760 7,717 3,087 4,461
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 18,358 $ 15,298 $ 20,630 $ 16,983 $ 14,040 $ 5,668 $ 8,192
========== ========== ========== ========== ========== ========== ==========
Earnings per share,
basic (1).............. $ 1.56 $ 1.30 $ 1.76 $ 1.51 $ 1.26 $ 0.55 $ 0.78
Earnings per share,
diluted (1)............ $ 1.56 $ 1.30 $ 1.75 $ 1.51 $ 1.26 $ 0.55 $ 0.78
Weighted average shares
outstanding -
basic (1).............. 11,752 11,741 11,744 11,270 11,161 10,393 10,549
Weighted average shares
outstanding -
diluted (1)............ 11,798 11,765 11,763 11,283 11,167 10,393 10,549
Statement of Financial Condition
Data-
At Period End:
Receivables from
clients, net........... $ 689,861 $ 684,146 $ 648,464 $ 570,461 $ 475,195 $ 309,684 $ 292,554
Total assets............ 3,693,219 3,556,402 3,220,106 3,276,392 2,196,397 1,535,979 1,271,556
Total stockholders'
equity................. 203,659 120,690 125,467 106,928 84,449 71,541 63,866
Tangible book value per
share (1).............. 16.68 9.62 10.04 8.44 7.30 6.16 5.78
Other Data:
Transactions cleared.... 13,860 4,514 6,771 3,322 2,040 825 793
Assets under management,
at period end.......... $3,788,000 $3,435,000 $2,944,000 $2,048,000 $1,354,000 $1,095,000 $ 354,000
Return on beginning
equity (2)............. 20% 19% 19% 20% 20% 9% 15%
Ratio of earnings to
fixed charges (3) ..... 1.4x 1.3x 1.3x 1.3x 1.3x 1.2x 1.4x
</TABLE>
- --------
(1) Adjusted for the 10% stock dividend declared on May 6, 1999 and payable on
August 2, 1999 to shareholders of record on July 15, 1999.
(2) Annualized for the nine month periods.
(3) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of income before the provision for income taxes and fixed
charges, and fixed charges consist of interest expense and one-third of
rental expense which is deemed representative of an interest factor.
6
<PAGE>
RISK FACTORS
An investment in the DARTS involves a high degree of risk. You should
carefully consider the specific factors listed below and the other information
included in this prospectus before investing in the DARTS.
Risks Associated with Knight/Trimark
The amount of principal paid at maturity of the DARTS will depend on the value
of the Knight/Trimark common stock
The value of the principal payment a holder of a DARTS will receive at
maturity is not fixed, but is based on the price of Knight/Trimark common stock
at maturity. This is different from ordinary debt securities, which pay a fixed
amount at maturity. We cannot assure you that the value of the Knight/Trimark
common stock (or at our option, the cash equivalent) we deliver in payment of
principal of a DARTS will be equal to or greater than the initial price of the
DARTS in this offering because the price of Knight/Trimark common stock is
subject to market fluctuations. For example, if the Maturity Price is less than
the initial price of the DARTS in this offering, an investment in the DARTS
will result in a loss because the value of the Knight/Trimark common stock (or,
at our option, the cash equivalent) that we deliver in payment of principal of
a DARTS will be less than the initial price paid for a DARTS in this offering.
The DARTS are not principal protected and, accordingly, investors in the DARTS
may lose their entire investment.
The value of the Knight/Trimark common stock is subject to a number of factors
We cannot assure you that Knight/Trimark will be a successful or profitable
company or that the value of the Knight/Trimark common stock will not be
adversely affected by market conditions prevailing from time to time. If
Knight/Trimark is not a successful company, the value of the Knight/Trimark
common stock will be adversely affected. Knight/Trimark's success is subject to
all of the risks related to operations in the securities industry, as well as
management, regulatory, financing, litigation, technology, competitive and
other risks. The value of the Knight/Trimark common stock will also be affected
by prevailing economic, political and financial conditions, both in the U.S.
and internationally, as well as the liquidity and other attributes of the
trading market for the Knight/Trimark common stock. If the value of the
Knight/Trimark common stock is adversely affected by any of these risks or
market conditions, the value of the DARTS and value of the payment made to
holders of the DARTS at maturity will also be adversely affected.
The value of the DARTS will be affected by the trading price of Knight/Trimark
common stock
We anticipate that the trading prices of the DARTS in the secondary market
will be directly affected by the trading price of Knight/Trimark common stock
in the secondary market. It is impossible to predict whether the price of
Knight/Trimark common stock will rise or fall. The trading price of
Knight/Trimark common stock has been volatile. The future trading price of the
Knight/Trimark common stock will be influenced by factors related to
Knight/Trimark directly and by economic, financial and other factors and market
conditions that can affect the capital markets generally, including the level
of, and fluctuations in, the trading prices of stocks generally and sales of
substantial amounts of Knight/Trimark common stock in the market subsequent to
the offering of the DARTS or the perception that such sales could occur.
We do not control Knight/Trimark; Knight/Trimark has no obligations with
respect to the DARTS
As of the date of this prospectus, we own approximately 3.3 million shares
of Knight/Trimark common stock. We are a minority investor in, and are not
affiliated with, Knight/Trimark. As such, we have no ability to control,
directly or indirectly, the affairs or management of Knight/Trimark.
Knight/Trimark has no obligations with respect to the DARTS and is under no
obligation to take our needs or the needs of holders of the DARTS into
consideration for any reason. Knight/Trimark will not receive any of the
proceeds of this offering and is not responsible for, and has not participated
in, the determination or calculation of the amount receivable by holders of the
DARTS at maturity. Knight/Trimark is not involved with the administration or
trading of the DARTS and has no obligation with respect to the amount
receivable by holders of the DARTS at maturity.
7
<PAGE>
We are not responsible for Knight/Trimark disclosure
The information contained in this prospectus concerning Knight/Trimark has
come solely from information made publicly available by Knight/Trimark. See
"Knight/Trimark Group, Inc." A subsidiary of SSG acted as an underwriter in
connection with the public offerings of Knight/Trimark common stock, but has
not made any "due diligence" inquiry of Knight/Trimark subsequent to those
offerings. Neither SSG nor any underwriter has participated in the preparation
of Knight/Trimark's publicly available documents and they have not made any
"due diligence" inquiry into the accuracy or completeness of the information in
those documents. Neither SSG nor any underwriter assumes any responsibility for
the accuracy or completeness of that information, and neither SSG nor the
underwriters guarantee the accuracy or completeness of that information. You
are urged to make your own investigation into the business and affairs of
Knight/Trimark. We do not intend to, and are under no obligation to, provide
information to the holders of the DARTS with respect to future developments in
the business and affairs of Knight/Trimark.
Knight/Trimark common stock is subject to dilution
The amount that holders of the DARTS are entitled to receive at maturity is
subject to adjustment for certain events arising from stock splits and
combinations, stock dividends and certain other actions of Knight/Trimark that
affect Knight/Trimark's capital structure. See "Description of the DARTS--Anti-
Dilution Adjustments." No adjustment to the number of shares (or the cash
equivalent) will be made for certain other events, such as an issuer tender or
exchange offer at a premium to the market price or a third party tender or
exchange offer for shares of Knight/Trimark common stock, and offerings of
Knight/Trimark common stock for cash or in connection with acquisitions, that
may adversely affect the price of the Knight/Trimark common stock and the
trading price of the DARTS. We cannot assure you that Knight/Trimark will not
make offerings of Knight/Trimark common stock or take other action in the
future that may adversely affect the trading price of the DARTS.
Risks Associated with the DARTS
Investors in the DARTS will not fully participate in an increase in the value
of Knight/Trimark common stock
The DARTS provide less ability to benefit from equity appreciation in the
Knight/Trimark common stock than is provided by a direct investment in the
Knight/Trimark common stock. This is because the amount received by investors
at maturity of the DARTS will only exceed the initial price paid for the DARTS
in this offering if the Maturity Price exceeds the Threshold Appreciation
Price, which represents an appreciation of 20% over the initial price of the
DARTS in this offering. In addition, the DARTS provide investors with only
83.33% of any appreciation of the Knight/Trimark common stock over the
Threshold Appreciation Price.
We do not have to hold Knight/Trimark common stock for delivery at maturity of
the DARTS and we are not required to deliver Knight/Trimark common stock at
maturity
The Indenture relating to the DARTS does not contain any restriction on our
ability to sell, pledge or otherwise convey all or any portion of our
Knight/Trimark common stock, and no shares of Knight/Trimark common stock will
be pledged or otherwise held in escrow for delivery at maturity of the DARTS.
As a result, if we become bankrupt or insolvent or we are liquidated, then any
Knight/Trimark common stock we own will be subject to the claims of our
creditors. In addition, we have the option to pay the principal of the DARTS at
maturity either in shares of Knight/Trimark common stock or cash in an amount
equal to the value of the Knight/Trimark common stock we are otherwise required
to deliver or a combination of cash and Knight/Trimark common stock. We cannot
provide assurance that we will elect to deliver Knight/Trimark common stock at
maturity of the DARTS.
Our sales of Knight/Trimark common stock may affect the value of the DARTS and
the Maturity Price
The Indenture does not restrict our ability to buy or sell shares of
Knight/Trimark common stock. Sales of Knight/Trimark common stock by us may
adversely affect the price of the Knight/Trimark common stock and,
8
<PAGE>
therefore, the DARTS. If we sell Knight/Trimark common stock during the period
used to determine the Maturity Price, the Maturity Price may be lower than it
would otherwise be. Also, since we may sell our Knight/Trimark common stock
prior to maturity, it is possible for us to make a substantial profit from our
sales of Knight/Trimark common stock even though investors in the DARTS lose
some or all of their investment.
Investors in the DARTS have no rights as Knight/Trimark stockholders
Holders of the DARTS will not be entitled to any rights with respect to
Knight/Trimark common stock, including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect of such
stock. Holders of DARTS will only become entitled to these rights at the time,
if any, we exchange shares of Knight/Trimark common stock for the DARTS at
maturity and then only if the applicable record date, if any, for the exercise
of such rights occurs after such date. For example, in the event that an
amendment is proposed to the Certificate of Incorporation or Bylaws of
Knight/Trimark and the record date for determining the stockholders of record
entitled to vote on the amendment occurs prior to our delivery of
Knight/Trimark common stock at maturity, holders of the DARTS will not be
entitled to vote on the amendment, and we would be entitled to vote on the
amendment without notifying or taking into account the interests of the holders
of the DARTS.
The federal income tax consequences relating to the DARTS are uncertain
Neither the IRS nor any court has decided how the DARTS or similar
securities should be treated for United States federal income tax purposes. As
a result, significant aspects of their tax treatment are uncertain. We will not
ask the IRS to rule on how the DARTS should be treated. The IRS may disagree
with the description of tax consequences of owning the DARTS that is described
under "Certain United States Federal Income Tax Considerations."
It is possible that the secondary market for the DARTS will be illiquid
The DARTS are new securities, and there is currently no secondary market for
the DARTS. We do not intend to apply to have the DARTS listed on any securities
exchange. Because the DARTS will not be listed or traded on any securities
exchange, pricing information for the DARTS will be more difficult to obtain,
and the liquidity of the DARTS may be adversely affected. We cannot assure you
that an active market for the DARTS will develop. If an active market does not
develop, Southwest has been advised by the underwriters that they intend to
make a market in the DARTS in the over-the-counter market. However, they are
not obligated to do so and they may discontinue such market making at any time
without notice. There can be no assurance that an active secondary market for
the DARTS will develop or, if a secondary market does develop, that it will
continue for the life of the DARTS.
The DARTS will be subordinate to our future and existing indebtedness
The DARTS will be unsecured obligations of SSG and will be subordinate to
all existing and future debt of SSG that by its terms is designated as senior
to the DARTS. At March 26, 1999, SSG had no outstanding indebtedness. In
addition, the DARTS will be structurally subordinated to all of the
indebtedness of our subsidiaries. At March 26, 1999, SSG's subsidiaries had
$55.5 million of outstanding indebtedness. The Indenture that will govern the
DARTS will not restrict the ability of SSG or its subsidiaries to incur
additional debt. By reason of this subordination, if (1) SSG becomes insolvent
or bankrupt or liquidates its business or (2) there is a payment default or
acceleration of payment with respect to indebtedness of SSG, then assets of SSG
(including its Knight/Trimark common stock) will be available to pay the DARTS
only after all of the obligations to which the DARTS are subordinated are paid
in full.
We will depend on payments from our subsidiaries to fund our cash payment
obligation
SSG does not have any business operations or source of income of its own,
and it conducts substantially all of its operations through its subsidiaries.
Therefore, SSG depends on the cash flow from its subsidiaries and payment of
funds by them to meet its debt service obligations. Many of SSG's subsidiaries
are engaged in regulated industries and have statutory capital requirements.
These regulations may restrict the ability of the subsidiaries to make payments
to SSG. In addition, future indebtedness of SSG's subsidiaries may impose
limitations on their ability to make cash payments and distributions to SSG.
9
<PAGE>
Risks Associated with Southwest
We are subject to risks inherent in the securities industry
The securities industry generally is, by its nature, volatile. We are
subject to numerous and substantial risks, many of which are beyond our
control, as a result of our activities in the securities industry, including:
. the risk of declines in price levels of securities and volumes of
transactions,
. losses resulting from our ownership, trading or underwriting of
securities,
. the failure of counterparties to meet commitments,
. customer, employee or issuer fraud,
. litigation,
. customer claims alleging improper sales practices,
. errors or misconduct by brokers, traders, employees or agents, and
. errors or failures in connection with the processing of securities
transactions.
Many of these risks may increase in periods of market volatility or reduced
liquidity.
Also, several fundamental changes are affecting the securities industry.
These changes include the emergence of online discount brokers, the increased
prominence of online retail investors, consolidation among firms in the
securities industry, new regulations at the federal and state level and the
increased use of technology. These changes could result in increased
competition from larger broker/dealers, a need for increased investment in
technology or potential loss of customers. These trends or future changes could
have a material adverse effect on our business, financial condition, results of
operations or cash flows.
We depend on untested, non-proprietary information systems
Our business strategy depends upon our implementation of a new client-server
based information system to support our correspondent clearing and brokerage
business. We expect to be the first firm to fully implement this system,
portions of which are still in the development stage. There is significant risk
in migrating to an untried software system, and we may not be able to use the
new system within our planned time frame, or the system may not function
properly when it is installed. A significant delay in our use of the new system
or serious or chronic malfunctions of the system after installation could lead
to unanticipated service disruptions, slower response times, impaired quality
and speed of order fulfillment, degradation in customer service, and delays in
reporting accurate financial information. Any of these events could have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
The new information system is not proprietary to us. It has been developed
by an entity in which we and other securities firms own interests. Each of the
other securities firms that have participated in the development effort have
rights to use the system in their operations. In addition, the system will be
marketed to other securities firms. Any competitive advantage that we may gain
from use of the new system will be lessened or eliminated if other firms
successfully implement the same system, as we expect they will.
We currently use a legacy system similar to that in place at many of our
competitors. Our in-house programmers perform all maintenance and enhancement
of this legacy system. Until the new system is successfully implemented, we
will continue to rely on our own ability to modify and maintain the older
system to accommodate our current levels of processing. Our inability to do so
could have a material adverse effect on our business, financial condition,
results of operations or cash flows.
10
<PAGE>
Our revenues would decrease if securities transaction volumes decline
Our business depends upon the general volume of investing and securities
trading in the United States securities markets. If the volume of securities
transactions should decline, revenues from our securities brokerage, securities
lending and clearing businesses would decrease and our business, financial
condition, results of operations and cash flows would be materially impacted.
Our business is subject to credit risk
As part of margin lending, executing transactions and securities lending, we
extend credit to our own clients and to our correspondents and their clients.
We could suffer material losses if these borrowers fail to honor their
commitments to us and we do not hold adequate collateral.
Our business is subject to the risk involved in margin lending for the
purchase of securities and short sales. Agreements with margin and short
account clients permit us to liquidate or buy securities if the amount of our
collateral becomes insufficient. However, we may be unable to liquidate or buy
securities for various reasons, including:
. the securities may not be actively traded,
. the securities might be a large block of securities that exceeds current
market demand, or
. trading might be halted in a security for various reasons, including the
issuance of a stop order.
In addition, in securities transactions we are subject to credit risk during
the period between the execution of a trade and the settlement of such
transaction by the customer. While our correspondents guarantee all obligations
of their clients, our correspondents may not be able to satisfy their
obligations under these guarantees.
Our securities lending business also is subject to credit risk. When we
borrow securities, we make a cash deposit with the counterparty, and when we
lend securities, we receive a cash deposit from the counterparty. If a
counterparty fails to perform and our collateral or cash deposit is not
adequate, we are subject to risk of loss. Credit risk in all areas of the
business increases if prices decline rapidly because the value of our
collateral could fall below the amount of indebtedness it secures. In rapidly
appreciating markets, credit risk also increases due to short positions.
Market fluctuations could adversely impact our business
We are subject to risks as a result of fluctuations in the securities
markets. Our securities trading, market-making and underwriting activities
involve the purchase and sale of securities as a principal, which subjects our
capital to significant risks. Market conditions could limit our ability to sell
securities purchased or to purchase securities sold in such transactions. If
price levels for equity securities decline generally, the market value of
equity securities that we hold in our inventory could decrease. In addition, if
interest rates increase, the value of debt securities we hold in our inventory
would decrease. If securities prices decline generally, the value of assets
that we manage also could decline. Because we generally receive fees based on
the value of assets under management, our revenues from asset management
services could decline if securities prices decline.
In addition, fluctuations in securities markets might have the following
results, any of which could negatively impact us:
. markets might become less liquid, resulting in lower trading volumes,
. buyers and sellers of securities might become unable to fulfill their
settlement obligations to us, and
. litigation and other claims against us could increase.
11
<PAGE>
We depend on the services of certain of our key personnel
We depend on the highly skilled, and often specialized, individuals we
employ, particularly certain personnel in our asset management, securities
lending and trading businesses. Competition for the services of these employees
is intense. Although we have taken steps designed to retain our employees,
including adopting various incentive compensation plans, we cannot guarantee
that our efforts to retain such personnel will be successful. We generally do
not enter into employment agreements or noncompetition agreements with our
employees. We might lose such professionals due to increased competition or
other factors in the future. Our business, financial condition and operating
results could be materially impacted if we were to lose the services of certain
of our asset management, securities lending, or trading professionals,
particularly senior professionals with broad industry experience.
We depend significantly on our computer and communications systems
Our clearing, brokerage and trading businesses depend heavily on the
integrity and performance of our computer and communications systems. Some of
these systems utilize aging technology. Extraordinary trading volumes or other
events could cause our computer systems to operate at an unacceptably low speed
or even fail. Customers could suffer delays in trading if there were any
significant malfunctions or failure of our computer systems or any other
systems in the trading process (e.g., online service providers, record
retention and data processing functions performed by third parties, and third-
party software, such as Internet browsers). Such delays could cause substantial
losses for customers and could subject us to claims from customers for losses,
including litigation claiming fraud or negligence. In addition, if our computer
and communications systems fail to operate properly, regulations would restrict
our ability to conduct business. Any such failure could prevent us from
collecting funds relating to customer transactions, which would materially
impact our cash flow. Our network may not work appropriately and we could
suffer an extended computer system failure. Any computer or communications
system failure or decrease in computer system performance that causes
interruptions in our operations could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Our computer systems are subject to security risks
Our computer systems and network infrastructure could be vulnerable to
security problems. Hackers may attempt to penetrate our network security. Such
actions could have a material adverse effect on our business. A party who is
able to penetrate our network security could misappropriate proprietary
information. We rely on encryption and authentication technology licensed from
third parties to provide the security and authentication necessary to effect
secure transmission of confidential information. Advances in computer
capabilities, discoveries in the field of cryptography and other discoveries,
events or developments could lead to a compromise or breach of the algorithms
that our licensed encryption and authentication technology uses to protect such
confidential information. If such a compromise or breach of our licensed
encryption and authentication technology occurs, it could have a material
adverse effect on our business, results of operations and financial condition.
We may be required to expend significant capital and resources and engage the
services of third parties to protect against the threat of such security,
encryption and authentication technology breaches or to alleviate problems
caused by such breaches. Security breaches or the inadvertent transmission of
computer viruses could expose us to a risk of loss or litigation and possible
liability.
We are subject to regulatory risks
We are subject to extensive federal and state laws, rules and regulations
designed to protect the interests of investors. We are also regulated by self-
regulatory organizations such as the NYSE, the NASD and the Municipal
Securities Rulemaking Board. If we fail to comply with any of these laws, rules
or regulations, we could be subject to fines, suspensions or expulsion, which
would have a material adverse effect upon our business, financial condition,
results of operations or cash flows.
12
<PAGE>
Recently, there has been an increased focus by regulatory organizations on
the responsibility of clearing and online brokerage firms. Additional
legislation or regulations, or changes in the methods of enforcement of
existing regulations by governmental entities may have a material adverse
effect on our business, financial condition, results of operations or cash
flows.
The SEC, the NYSE and various other regulatory agencies have stringent rules
regarding the maintenance of specified levels of net capital by securities
firms. A significant operating loss or any material charge against net capital
could adversely affect our ability to expand or even maintain our present level
of business.
Our business is highly competitive
All aspects of our business are highly competitive. We compete with numerous
other securities firms, commercial banks, investment banking firms, life
insurance companies, asset management firms, trust companies and others. Many
of our competitors have substantially greater access to capital and other
resources not available to us.
The clearing business has become considerably more competitive over the past
few years and there are numerous large, highly visible and well-financed
securities firms that either have begun offering clearing services or have
attempted to increase their share of the market. Despite our efforts to remain
competitive, our customers may decide to discontinue using our services. In
addition, there has been consolidation within the financial services industry
by securities firms and other financial institutions having financial resources
far greater than us. These developments have increased competition from firms
with greater capital resources and possibly greater operating efficiencies than
ours.
The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business. In addition, an increasing number of specialized firms now focus
their services on the individual investor, which enables them to execute trades
without the assistance of a broker. These firms generally effect transactions
for their clients on a discounted commission basis without offering other
services such as portfolio evaluation, investment recommendations and research.
This could result in lower brokerage revenues and profit margins to us.
Commercial banks and other financial institutions are offering their clients
certain corporate and individual financial services traditionally provided by
securities firms. The current trend toward consolidation in the commercial
banking industry could further increase competition in all aspects of our
business and could affect the opportunities for us to expand or maintain
business. We cannot predict the type and extent of competing services that
commercial banks and other financial institutions may offer. We would be
adversely affected by increased competition from other financial institutions.
Our business may be affected by year 2000 issues
The widespread use of computer programs that rely on two-digit date programs
to perform computations and decision-making functions may cause information
technology systems to malfunction in the year 2000 and may lead to significant
business delays. The year 2000 problem has the potential to significantly
impact the securities industry since information is moved to and from the
exchanges and trading partners on a real-time basis from computer system to
computer system with little human interaction. In addition to potential
problems from computer systems, potential problems could arise from equipment
with embedded chips, such as vaults, elevators and other non-information
technology systems. Not all of our systems are year 2000 compliant. If we fail
to properly recognize and address the year 2000 problem in our systems, our
business, financial condition, results of operations and cash flows could be
materially and adversely affected.
The year 2000 problem also affects some of our major suppliers of computers,
software and other equipment. We have discussed the year 2000 problem with all
of our major suppliers, but we cannot assure you that these suppliers will
resolve any or all year 2000 problems. If our suppliers fail to resolve year
2000 problems, our business could be materially disrupted.
We expect to identify and resolve all year 2000 problems that could
materially adversely affect our business operations. We cannot determine with
complete certainty that all year 2000 problems affecting us or
13
<PAGE>
our clients have been identified or corrected. The number of devices that could
be affected and the interactions among these devices are simply too numerous.
In addition, no one can accurately predict how many year 2000 problem-related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. Moreover, our failure to address adequately
year 2000 issues in our main trading-related, communications or data processing
systems could result in litigation, which could be costly and time-consuming to
defend.
We are subject to risks relating to litigation and potential securities law
liabilities
Many aspects of our business involve substantial risks of liability. In
recent years, there has been an increasing incidence of litigation involving
the securities industry. In the normal course of our business, we have been
subject to claims by clients dealing with matters such as unauthorized trading,
churning, mismanagement and breach of fiduciary duty, which are made against
most broker/dealers and clearing companies. We are frequently brought into
lawsuits based on actions of our correspondents. Underwriters are subject to
substantial potential liability for material misstatements and omissions in
prospectuses and other communications with respect to underwritten offerings of
securities. A substantial settlement by or judgment against us could have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
We are a party to several lawsuits and arbitrations and are subject to the
risk of litigation and claims. As we intend to defend actively such litigation,
significant legal expenses may be incurred.
We are dependent on web infrastructure in conducting our business
The successful implementation of our business strategies that use the
internet will depend in large part upon the continued development of a web
infrastructure, such as a reliable network backbone with the necessary speed,
data capacity and security, and timely development of complementary products
such as high speed modems for providing reliable web access and services.
Because global commerce and online exchange of information on the web and other
similar open wide area networks are new and evolving, we cannot predict with
any assurance whether the web will support increasing use or will prove to be a
viable commercial marketplace. The web has experienced, and is expected to
continue to experience, significant growth in the number of users and the
amount of content. To the extent that the web continues to experience increased
number of users, frequency of use or increased bandwidth requirements of users,
we cannot assure you that the web infrastructure will continue to be able to
support the demands placed on it. Furthermore, the performance or reliability
of the web could be adversely affected by this continued growth. In addition,
the web could lose its viability or effectiveness due to delays in the
development or adoption of new standards and protocols to handle increased
levels of activities or due to increased governmental regulation. We cannot
assure you that the infrastructure or complementary products or services
necessary to make the web a viable commercial marketplace will be developed,
or, if they are developed, that the web will achieve broad acceptance. If the
necessary infrastructure standards, protocols or complementary products,
services or facilities are not developed, our business, results of operations
and financial condition will be materially and adversely affected. Even if such
infrastructure, standards or protocols or complementary products, services or
facilities are developed and the web becomes a viable commercial marketplace,
we may incur substantial expenditures in order to adapt our services to
changing web technologies, which could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Our management has discretion in use of proceeds
We intend to use a significant portion of the net proceeds from the offering
for general corporate purposes. Accordingly, our management has discretion in
how the net proceeds of the offering are utilized in our business.
14
<PAGE>
Forward-looking statements
Certain of the statements contained in documents incorporated by reference
into this Prospectus may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, that are based on management's beliefs, as well as assumptions made by,
and information currently available to, management. When used in these
documents, words such as "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal," or similar words are intended to identify
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance
that such expectations will prove to have been correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated, projected or expected. Important factors that could cause future
results to differ include, but are not limited to (1) transaction volume in the
securities markets; (2) volatility of the securities markets; (3) fluctuations
in interest rates; (4) changes in regulatory requirements that could affect the
cost of doing business; (5) status of implementation of technology solutions;
(6) general economic conditions, both domestic and foreign; (7) changes in the
rate of inflation and related impact on securities markets; (8) competition
from existing financial institutions and other new participants in the
securities markets; (9) legal developments affecting the litigation experience
of the securities industry; and (10) changes in federal and state tax laws that
could affect the popularity of products sold by us.
15
<PAGE>
SOUTHWEST SECURITIES GROUP, INC.
We are a full-service securities firm using technology to deliver a broad
range of investment and related financial services to our clients, which
include individual and institutional investors, broker/dealers, corporations,
governmental entities and financial intermediaries.
We provide clearing and related services to over 200 correspondent
broker/dealers and 700 independent contract brokers, as well as full-service
and online discount brokerage services to individual investors. Clearing
involves maintaining our correspondent clients' accounts, processing securities
transactions, extending margin loans, and performing a variety of
administrative services as agent for our correspondent broker/dealers. Our
clearing business is complemented by our securities trading, securities
lending, investment banking and asset management businesses.
Our principal subsidiary, Southwest Securities, Inc., is a registered
securities broker/dealer and a member of the NYSE and other major exchanges.
Southwest Securities, Inc. provides correspondent clearing services to
securities broker/dealers and other financial institutions in 30 states, Canada
and Europe. Southwest Securities, Inc. serves individual investors through its
Private Client Group offices in Texas, New Mexico and California and
institutional investors nationwide from its Dallas, New York and Chicago
offices. Clients of these offices gain access to Southwest Securities, Inc.'s
investment research that focuses on corporations primarily in the southwestern
United States.
We operate three other broker/dealer subsidiaries engaged in certain aspects
of the securities brokerage business. All three are NASD-registered
broker/dealers and correspondents of Southwest Securities, Inc. SWS Financial
Services, Inc. contracts with independent registered representatives for the
administration of their securities business. We offer online discount brokerage
services through Mydiscountbroker.com, Inc., which began operations in 1997.
NorAm, formerly Equity Securities Trading Company, Inc., contracts with
Canadian Securities brokers on an independent contractor basis for the
administration of their U.S. securities business.
We offer investment management, advisory and trust services through three
subsidiaries. Westwood Management Corporation, a registered investment advisor,
manages the Gabelli-Westwood Family of Mutual Funds as well as equity and fixed
income investments for a diverse clientele including corporate plan sponsors,
charitable institutions, educational endowments and public funds. Westwood
Trust provides trust, custodial and other management services to high net worth
individuals and corporations throughout Texas and the Southwest. SW Capital
Corporation administers the Local Government Investment Cooperative fund for
cities, counties, schools and other local governments across Texas.
SWS Technologies, Inc., incorporated in 1997, provides internet services,
network design and engineering and disaster recovery services to us, our
clients and other customers primarily in the southwestern United States.
We were incorporated in Delaware in 1972 and completed our initial public
offering on October 11, 1991. Our principal executive offices are located at
1201 Elm Street, Suite 3500, Dallas, Texas 75270 and our telephone number is
(214) 859-1800.
16
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the DARTS in this
offering (after payment of underwriting discounts and commissions and estimated
expenses of the offering) will be $48,019,930 ($55,257,409 if the underwriters
exercise their over-allotment option in full). We intend to use the net
proceeds for general corporate purposes, including potential expansion (through
internal growth or by acquisition) of our correspondent clearing, brokerage,
investment banking, trading, securities lending, asset management or technology
businesses. We continually review possible acquisitions and are in preliminary
discussions with respect thereto. Except as disclosed in SSG's Form 8-K dated
June 7, 1999, incorporated by reference herein, we have no commitment with
respect to any possible acquisition. Pending use of the net proceeds of the
offering, we may use a portion of the net proceeds to reduce short-term bank
borrowings incurred for working capital to finance our securities inventories
and securities inventories of our correspondents. These short-term bank
borrowings bear interest at a floating rate of 1/4% above the Federal Funds
rate and are due and payable on demand.
CAPITALIZATION
The following table sets forth our consolidated capitalization at March 26,
1999 and the pro forma consolidated capitalization as adjusted to give effect
to the consummation of the offering of $50,000,000 of DARTS, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
March 26, 1999
(unaudited)
-------------------------
As
Actual(1) Adjusted(1)(2)
--------- --------------
(in thousands)
<S> <C> <C>
Indebtedness:
Short-term borrowings.............................. $ 55,500 $ 7,500
5.0% Exchangeable Subordinated Notes Due 2004...... -- 50,000
--------- ---------
Total indebtedness............................... 55,500 57,500
Stockholders' equity:
Preferred stock, $1.00 par value, 100,000 shares
authorized; none issued........................... -- --
Common stock, $0.10 par value, 20,000,000 shares
authorized; 11,771,295 issued and outstanding .... 1,177 1,177
Additional paid-in capital ........................ 124,678 124,678
Unrealized holding gain, net of tax................ 61,636 61,636
Retained earnings ................................. 16,179 16,179
Receivable from employees under the employee stock
purchase plan..................................... (11) (11)
--------- ---------
Total stockholders' equity....................... 203,659 203,659
--------- ---------
Total capitalization................................. $ 259,159 $ 261,159
========= =========
</TABLE>
- --------
(1) As adjusted for the 10% stock dividend declared on May 6, 1999 and payable
on August 2, 1999 to shareholders of record on July 15, 1999.
(2) As adjusted to reflect the sale of $50,000,000 of DARTS, and application of
the net proceeds as set forth under "Use of Proceeds."
17
<PAGE>
RELATIONSHIP BETWEEN SOUTHWEST AND KNIGHT/TRIMARK
Southwest owned a minority interest in Roundtable Partners, LLC, the
predecessor of Knight/Trimark. In connection with the initial public offering
of Knight/Trimark common stock in July 1998, our interest in Roundtable
Partners, LLC was converted into approximately 3.3 million shares of
Knight/Trimark. In our financial statements we classify the Knight/Trimark
common stock as marketable equity securities available for sale, and our
unrealized holding gain, net of tax, is recorded as a separate component of
stockholders' equity.
KNIGHT/TRIMARK GROUP, INC.
This prospectus relates only to the DARTS offered hereby and does not relate
to the Knight/Trimark common stock. All disclosures contained in this
prospectus regarding Knight/Trimark are derived from the publicly available
documents of Knight/Trimark described below. A subsidiary of SSG acted as an
underwriter in connection with the public offerings of Knight/Trimark common
stock, but has not made any "due diligence" inquiry of Knight/Trimark
subsequent to those offerings. However, SSG and the underwriters did not
participate in the preparation of those documents and have not made any "due
diligence" inquiry with respect to the information provided in those documents.
Neither SSG nor any underwriter assumes any responsibility for the accuracy or
completeness of that information. Neither Southwest nor the underwriter are
obligated to provide holders of the DARTS with supplemental information
regarding future developments affecting Knight/Trimark. There can be no
assurance that all events occurring prior to the date of this prospectus
(including events that would affect the accuracy or completeness of
Knight/Trimark's publicly available documents) that would affect the trading
price of the Knight/Trimark common stock have been publicly disclosed. Because
the amount receivable by a holder of a DARTS at maturity is related to the
trading price of the Knight/Trimark common stock, such events, if any, would
most likely also affect the trading price of the DARTS. Investors are urged to
conduct their own investigation into the business and affairs of
Knight/Trimark.
According to publicly available documents, Knight/Trimark is the leading
market maker in Nasdaq securities and in the Third Market, which is the over-
the-counter market in exchange-listed equity securities, primarily those listed
on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
Market makers hold themselves out to execute trades by offering to buy or sell
securities for their own account. Through its wholly-owned subsidiary, Knight
Securities, Inc. ("Knight"), they make markets in approximately 6,700 equity
securities in Nasdaq and on the OTC Bulletin Board of the NASD. Through its
wholly-owned subsidiary, Trimark Securities, Inc. ("Trimark"), they make
markets in all NYSE- and AMEX-listed equity securities in the Third Market.
Since its inception in 1995, Knight/Trimark has significantly increased its
market share of trading volume in the markets in which it participates:
. Based on data from The AutEx Group, a widely recognized industry
reporting service that publishes daily trading volume and market share
statistics reported by broker/dealer market makers, Knight achieved a #1
market share ranking of volume in Nasdaq in February 1998. Additionally,
Knight has further increased its volumes and its market share since that
time. The volume of Nasdaq shares traded by Knight increased from 614.7
million shares in January 1997 to 3.2 billion shares in December 1998.
During the same period, Knight's market share more than tripled from
4.4%, or a rank of 6th overall, to 15.6%, or a rank of 1st overall.
. According to the NASD, Trimark has held the #1 market share ranking in
the trading of NYSE-listed securities for over two years. Additionally,
Trimark has increased its volumes and its market share over the same
period. Trimark's trading volume of NYSE-listed securities has increased
from 234.3 million shares in January 1997 to 644.0 million shares in
December 1998. During the same period, Trimark's market share
approximately doubled from 21.2% to 40.4%.
18
<PAGE>
. According to the NASD, Trimark has also held the #1 market share ranking
in the trading of AMEX-listed securities for over two years.
Additionally, Trimark has further increased its volumes and its market
share over the same period. Trimark's trading volume of AMEX-listed
securities has increased from 40.3 million shares in January 1997 to
65.7 million shares in December 1998. During this same period, Trimark
increased its market share from 51.4% to 61.7%.
Knight/Trimark is subject to the informational requirements of the Exchange
Act. Accordingly, Knight/Trimark files reports, proxy statements and other
information with the Commission under Commission File Number 1-14223. Copies of
Knight/Trimark's registration statements, reports, proxy statements and other
information may be inspected and copied at certain offices of the Commission at
the addresses listed under "Available Information" and through the Commission's
home page on the internet.
PRICE RANGE OF KNIGHT/TRIMARK COMMON STOCK AND CASH DIVIDENDS
The Knight/Trimark common stock is traded on the Nasdaq National Market
under the symbol "NITE." Public trading of the Knight/Trimark common stock
commenced on July 8, 1998. Before that, no public market for its common stock
existed. The following table sets forth, for the periods indicated, the high
and low closing sales prices per share for the Knight/Trimark common stock in
the Nasdaq National Market. The table reflects a two-for-one stock split
effected May 17, 1999.
<TABLE>
<CAPTION>
High Low
---- ---
<C> <S> <C> <C>
1998 Third Quarter (from July 8, 1998)................. $ 9 1/2 $ 3 5/16
Fourth Quarter.................................... $12 11/16 $ 2 9/16
1999 First Quarter..................................... $33 1/2 $11
Second Quarter (through June 10, 1999)............ $78 15/32 $33 3/32
</TABLE>
According to publicly available documents, Knight/Trimark has never paid a
dividend. They intend to retain future earnings, if any, to finance the
development and expansion of their business and, therefore, do not anticipate
paying any cash dividends in the foreseeable future. The payment of cash
dividends is within the discretion of their board of directors and will depend
on many other factors, including their results of operations, financial
condition and capital requirements, restrictions imposed by financing
arrangements and legal requirements.
19
<PAGE>
DESCRIPTION OF THE DARTS
The DARTS will be issued under an indenture (the "Indenture") between SSG
and Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
The following is a summary of certain provisions of the DARTS, but this summary
is not a complete restatement of the terms of the DARTS and the Indenture.
Potential buyers of the DARTS should read the Indenture because it, and not
this summary description, defines the rights of holders of the DARTS. A copy of
the Indenture is included as an exhibit to the registration statement which
includes this prospectus and is available upon request from SSG.
Nature of Obligation
The DARTS are unsecured general obligations of SSG, and subordinate in right
of payment to certain other obligations of Southwest as described under "--
Subordination." The total principal amount of DARTS to be issued by SSG in this
offering will be limited to $50,000,000 ($57,500,000 if the underwriters' over-
allotment option is exercised in full). The Indenture will permit SSG to issue
up to $150 million total principal amount of DARTS. Accordingly, SSG may
conduct additional offerings of DARTS in the future without the consent of
purchasers of DARTS in this offering and all of the DARTS will constitute a
single class of securities. The DARTS will be issued in fully registered form,
without coupons, in denominations of $56.6875 or multiples of $56.6875.
Maturity and Interest
The scheduled maturity of the DARTS is June 30, 2004. Interest on the DARTS
will be paid in cash and accrue at the rate shown on the cover page of this
prospectus. Accrued interest will be paid quarterly in arrears and the interest
payment dates will be March 31, June 30, September 30 and December 31 of each
year commencing September 30, 1999. If in any year a scheduled interest payment
date is not a business day, then interest will be paid on the next succeeding
business day. The DARTS will bear interest from the date of original issue or,
if any interest has already been paid, from the most recent interest payment
date to which interest has been paid. Interest will be paid to persons who are
holders of DARTS at the close of business on the fifteenth day of the month
preceding the interest payment date. Interest will be computed on the basis of
a 360-day year of twelve 30-day months.
Delivery of Payment
Interest on the DARTS will be paid at the office or agency of SSG in New
York, New York or by a corporate check mailed to the holders of the DARTS
entitled to such payment. The principal amount of the DARTS will be paid by
delivery of Knight/Trimark common stock or cash, or both, upon surrender of the
DARTS at the office or agency of Southwest in New York, New York. All cash
payments of principal and interest with respect to the DARTS represented by the
certificate registered in the name of or held by The Depositary Trust Company
or its nominee will be made by wire transfer of immediately available funds to
The Depositary Trust Company or its nominee as the registered owner thereof.
See "--Book Entry, Delivery and Form."
Transfer and Exchange
A holder may transfer DARTS in accordance with the Indenture. The Trustee
may require a holder, among other things, to furnish appropriate endorsements
and transfer documents, and SSG may require a holder to pay any taxes and fees
required by law or permitted by the Indenture.
Maturity; Exchange Ratio
The DARTS will mature on June 30, 2004, except the DARTS may mature earlier
if the payment obligation of the DARTS is accelerated due to a default by SSG.
At maturity, the principal amount of each DARTS will be exchanged by SSG for
shares of Knight/Trimark common stock. Alternatively, instead of delivering
Knight/Trimark common stock, SSG may deliver cash in an amount equal to the
value of the Knight/Trimark common stock it is otherwise required to deliver or
a combination of cash and Knight/Trimark common stock.
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The number of shares of Knight/Trimark common stock that will be delivered
per DARTS at maturity is:
(1) 0.8333 shares of Knight/Trimark common stock per DARTS if the Maturity
Price (as defined in the next sentence) per share of Knight/Trimark
common stock is greater than or equal to the Threshold Appreciation
Price (as defined in the next paragraph);
(2) a fractional share of Knight/Trimark common stock per DARTS equal to:
. the initial price per DARTS in this offering divided by
. the Maturity Price
if the Maturity Price is less than the Threshold Appreciation Price but
is greater than the initial price per DARTS in this offering; and
(3) one share of Knight/Trimark common stock per DARTS if the Maturity
Price is less than or equal to the initial price per DARTS in this
offering.
The Maturity Price is the average closing bid price per share of
Knight/Trimark common stock for the 20 trading days ending on the business day
prior to the maturity date. The Threshold Appreciation Price is $68.03.
The number of shares of Knight/Trimark common stock that will be delivered
to a holder of DARTS at maturity is subject to adjustment if certain events
occur with respect to the Knight/Trimark common stock as described below in
"--Anti-dilution Adjustments." No fractional shares of Knight/Trimark common
stock will be delivered at maturity and a cash payment will be made in lieu of
fractional shares as provided below in "--Fractional Shares."
SSG expects that delivery of Knight/Trimark common stock in payment of
principal of the DARTS at maturity (assuming SSG does not elect to pay the
cash equivalent) will be made from the Knight/Trimark common stock SSG
currently owns. The Knight/Trimark common stock currently owned by SSG will be
freely tradeable when delivered at maturity (except if the recipient is an
affiliate of SSG). However, if SSG defaults on the DARTS and as a result the
maturity of the DARTS is accelerated to a date prior to July 8, 2000, then the
Knight/Trimark common stock delivered at maturity will be subject to the
manner of sale limitations imposed by Rule 144 under the Securities Act.
On or prior to the 30th business day prior to maturity, SSG will notify the
Trustee whether the principal amount of each DARTS will be exchanged for
shares of Knight/Trimark common stock or cash, or both. In addition, on or
prior to that date SSG will publish or cause to be published a notice in a
newspaper of national circulation published at least five days a week, stating
whether the principal amount of each DARTS will be exchanged for shares of
Knight/Trimark common stock or cash, or both. If SSG elects to deliver shares
of Knight/Trimark common stock, holders of the DARTS will be responsible for
the payment of any and all brokerage costs upon the subsequent sale of such
stock. If less than all of the outstanding DARTS are to be exchanged for
Knight/Trimark common stock, the DARTS to be exchanged for Knight/Trimark
common stock will be selected by the Trustee from the outstanding DARTS by lot
or pro rata (as nearly as may be) or by any other method determined by the
Trustee in its sole discretion to be equitable.
There Are No Restrictions on Our Ability to Transfer Knight/Trimark Common
Stock
The Indenture does not restrict SSG's ability to sell, pledge or otherwise
convey all or any portion of the Knight/Trimark common stock held by it, and
none of SSG's Knight/Trimark common stock will be pledged or otherwise held in
escrow for exchange at maturity. Consequently, if SSG becomes bankrupt or
insolvent or if SSG is liquidated, then any Knight/Trimark common stock owned
by SSG will be subject to the claims of the creditors of SSG. In addition, as
described above in "--Maturity; Exchange Ratio," SSG will have the option,
exercisable in its sole discretion, to pay the principal amount of the DARTS
at maturity by delivering to
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holders of the DARTS either the specified number of shares of Knight/Trimark
common stock or cash with an equal value, or a combination of both. There can
be no assurance that SSG will elect at maturity to deliver Knight/Trimark
common stock. Consequently, holders of the DARTS will not be entitled to any
rights with respect to the Knight/Trimark common stock (including, without
limitation, voting rights and rights to receive any dividends or other
distributions on the Knight/Trimark common stock) until such time, if any, as
SSG exchanges shares of Knight/Trimark common stock for DARTS at maturity.
Hypothetical Exchange Rates
The following chart shows the number of shares of Knight/Trimark common
stock or the amount of cash that a holder of DARTS would receive for each DARTS
at various Maturity Prices, assuming that there will be no dilution
adjustments. There can be no assurance that the Maturity Price will be within
the range set forth below. Given the initial sales price in this offering of
$56.6875 and the Threshold Appreciation Price of $68.03, a holder of the DARTS
would receive at maturity the following number of shares of Knight/Trimark
common stock or equivalent amount of cash (at the option of Southwest) per
DARTS:
<TABLE>
<S> <C> <C>
Maturity Price of Number of Shares of
Knight/Trimark Knight/Trimark Equivalent
Common Stock Common Stock Amount of Cash
--------------------------- --------------------------- ---------------------------
$54.0000 1.0000 $54.0000
$56.6875 1.0000 $56.6875
$62.0000 0.9143 $56.6875
$68.0250 0.8333 $56.6875
$70.0000 0.8333 $58.3310
</TABLE>
Fractional Shares
No fractional shares of Knight/Trimark common stock will be issued if SSG
exchanges the DARTS for shares of Knight/Trimark common stock. In lieu of any
fractional share otherwise issuable in respect of a DARTS, the holder will
receive an amount in cash equal to the value of the fractional share at the
Maturity Price.
Redemption
The DARTS are not redeemable or exchangeable for Knight/Trimark common stock
prior to maturity.
Anti-Dilution Adjustments
The number of shares of Knight/Trimark common stock delivered at maturity of
the DARTS (which we refer to as the "Exchange Ratio" in this section) will be
adjusted if certain events occur during the period commencing on the date of
this prospectus and ending on the business day prior to maturity. The Exchange
Ratio will not be adjusted for any event other than those specified below.
These adjustments do not cover all events that could affect the Exchange Ratio,
including, without limitation, an issuer tender or exchange offer at a premium
to the market price or a third party tender or exchange offer for shares of
Knight/Trimark common stock, and offerings of Knight/Trimark common stock for
cash or in connection with acquisitions. See "Risk Factors--Knight/Trimark
common stock is subject to dilution."
If an adjustment event occurs, the Exchange Ratio will not be adjusted
unless the amount of the adjustment is at least 1% of the Exchange Ratio;
provided, however, that any adjustments which are not required to be made for
this reason will be carried forward and taken into account in any subsequent
adjustment. All adjustments to the Exchange Ratio will be calculated to the
nearest 1/10,000th of a share of Knight/Trimark common stock (or if there is
not a nearest 1/10,000th of a share, to the next lower 1/10,000th of a share).
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<PAGE>
SSG is required, within ten business days following the occurrence of an
event that requires an adjustment to the Exchange Ratio or the occurrence of a
Spin-Off (as defined in "--Dividends and Other Distributions" below) or a
Reorganization Event (as defined in "--Consolidation, Merger or Sale of Assets
of Knight/Trimark" below) (or, in any case, if SSG is not aware of such
occurrence, as soon as it becomes aware), to provide written notice to the
Trustee and to the holders of the DARTS of the occurrence of such event. The
notice will be accompanied by a statement setting forth in reasonable detail
(1) the method by which the adjustment to the Exchange Ratio was determined or
(2) the change in the consideration to be received by the holders of the DARTS
following a Spin-Off (if SSG elects not to adjust the Exchange Ratio in
connection with the Spin-Off) or a Reorganization Event, and setting forth the
revised Exchange Ratio or consideration. In connection with a Spin-Off, the
notice will also include an election by Southwest (as described below in "--
Dividends and Other Distributions") to either adjust the Exchange Ratio or to
deliver Spin-Off Securities (as defined under "--Dividends and Other
Distributions" below) to the holders of the DARTS at maturity.
For purposes of the following anti-dilution provisions, all references to
Knight/Trimark common stock include any capital stock of Knight/Trimark
received upon reclassification of the Class A common stock, par value $.01 per
share, of Knight/Trimark.
For purposes of clarity, it is intended that the adjustments for stock
splits, reverse stock splits, stock dividends, cash dividends and other
distributions described below will apply only if the events actually occur.
Stock Splits
If there is a stock split or reverse stock split of the Knight/Trimark
common stock, then the Exchange Ratio will be adjusted at the opening of
business on the day the stock split or reverse stock split is effective. The
adjustment in the Exchange Ratio will be in direct proportion to the stock
split or reverse stock split.
Stock Dividends
If there is a stock dividend on the Knight/Trimark common stock, then the
Exchange Ratio will be adjusted at the opening of business on the first day on
which the Knight/Trimark common stock trades without the right to receive such
dividend (the "ex-dividend date"). The new Exchange Ratio will be calculated as
follows:
A + B
-----
New Exchange Ratio = ER X A
Where:
"ER" is the Exchange Ratio in effect immediately prior to the
adjustment;
"A" is the number of shares of Knight/Trimark common stock
outstanding at the opening of business on the ex-dividend date; and
"B" is the number of shares constituting the stock dividend.
Rights and Warrants
If Knight/Trimark issues rights or warrants to all holders of Knight/Trimark
common stock to subscribe for or purchase shares of Knight/Trimark common stock
at an exercise price per share less than the closing price of the
Knight/Trimark common stock on the record date for determining the holders of
Knight/Trimark common stock entitled to receive such rights and warrants, then
the Exchange Ratio will be adjusted at the record date. No adjustment, however,
will be made with respect to rights to purchase shares of Knight/Trimark
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<PAGE>
common stock pursuant to a plan for the reinvestment of dividends or interest.
The new Exchange Ratio will be calculated as follows:
A + B
-----
New Exchange Ratio = ER X A + C
Where:
"ER" is the Exchange Ratio in effect immediately prior to the
adjustment;
"A" is the number of shares of Knight/Trimark common stock
outstanding at the close of business on the record date;
"B" is the number of shares of Knight/Trimark common stock
underlying the rights or warrants; and
"C" is (1) the number of shares of Knight/Trimark common stock
underlying the rights or warrants; multiplied by (2) the offer or
exercise price of the rights or warrants; divided by (3) the closing
price of the Knight/Trimark common stock on the record date.
If the rights and warrants expire prior to the maturity of the DARTS, the
Exchange Ratio will be readjusted to the Exchange Ratio that would have been in
effect had such adjustments for the issuance of such rights or warrants been
made upon the basis of the number of shares of Knight/Trimark common stock
actually delivered.
Dividends and Other Distributions
There will be no adjustments to the Exchange Ratio to reflect cash dividends
or other distributions paid with respect to Knight/Trimark common stock other
than Extraordinary Dividends. A dividend or other distribution with respect to
Knight/Trimark common stock will be an "Extraordinary Dividend" if it:
(1) is of securities ("Spin-Off Securities") of an issuer other than
Knight/Trimark (a "Spin-Off"); or
(2) exceeds the immediately preceding non-Extraordinary Dividend for
Knight/Trimark common stock by an amount equal to at least 10% of the
closing price of Knight/Trimark common stock on the first business day
immediately preceding the ex-dividend date with respect to such
Extraordinary Dividend.
If an Extraordinary Dividend occurs with respect to Knight/Trimark common
stock, the Exchange Ratio will be adjusted at the opening of business on the
ex-dividend date. The new Exchange Ratio will be calculated as follows:
A
-----
New Exchange Ratio = ER X A - B
Where:
"ER" is the Exchange Ratio in effect immediately prior to the
adjustment.
"A" is the closing price of Knight/Trimark common stock on the
business day immediately preceding such ex-dividend date; and
"B" is
(1) in the case of cash dividends or other distributions that
constitute quarterly dividends, the amount per share of such
Extraordinary Dividend minus the amount per share of the
immediately preceding non-Extraordinary Dividend for
Knight/Trimark common stock; or
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<PAGE>
(2) in the case of cash dividends or other distributions that do
not constitute quarterly dividends, the amount per share of such
Extraordinary Dividend.
To the extent an Extraordinary Dividend is not paid in cash, the value of
the non-cash component will be determined by the Board of Directors of SSG,
whose determination will be conclusive and described in a Board resolution.
Notwithstanding the foregoing, instead of adjusting the Exchange Ratio after
a Spin-Off, SSG can elect to deliver at maturity of the DARTS an amount of
Spin-Off Securities (or cash in equal amount) equal to the product of (1) the
Exchange Ratio and (2) the amount of Spin-Off Securities issued per share of
Knight/Trimark common stock in the Spin-Off. For purposes of delivering cash in
lieu of delivering Spin-Off Securities at maturity, the value of the Spin-Off
Securities would be an amount equal to the average closing price per share of
the Spin-Off Securities attributable to each DARTS for the 20 trading days
ending on the business day prior to the maturity date. If SSG elects to deliver
Spin-Off Securities at maturity, holders of the DARTS will be responsible for
the payment of any and all brokerage and other transaction costs upon any
subsequent sale of the Spin-Off Securities.
Consolidation, Merger or Sale of Assets of Knight/Trimark
In the event of:
(1) any consolidation or merger of Knight/Trimark, or any surviving entity
or subsequent surviving entity of Knight/Trimark (which will be
referred to in this section as a "Knight/Trimark Successor"), with or
into another entity (other than a merger or consolidation in which
Knight/Trimark is the continuing corporation and in which the
Knight/Trimark common stock outstanding immediately prior to the merger
or consolidation is not exchanged for cash, securities or other
property of Knight/Trimark or another entity);
(2) any sale, transfer, lease or conveyance to another corporation of the
property of Knight/Trimark or any Knight/Trimark Successor as an
entirety or substantially as an entirety;
(3) any statutory exchange of securities of Knight/Trimark or any
Knight/Trimark Successor with another corporation (other than in
connection with a merger or acquisition); or
(4) any liquidation, dissolution or winding up of Knight/Trimark or any
Knight/Trimark Successor (any such event described in clause (1), (2),
(3) or (4), a "Reorganization Event"),
the Exchange Ratio used to determine the amount payable upon exchange at
maturity for each DARTS will be adjusted to provide that each holder of DARTS
will receive for each DARTS at maturity cash in an amount equal to:
(a) 0.8333 multiplied by the Transaction Value if the Transaction Value (as
defined below) is greater than or equal to the Threshold Appreciation
Price;
(b) the initial price per DARTS in this offering if the Transaction Value
is less than the Threshold Appreciation Price but greater than the
initial price per DARTS in this offering; and
(c) the Transaction Value if the Transaction Value is less than or equal to
the initial price per DARTS in this offering.
"Transaction Value" means:
(1) for any cash received in any such Reorganization Event, the amount of
cash received per share of Knight/Trimark common stock;
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<PAGE>
(2) for any property other than cash or securities received in a
Reorganization Event, an amount equal to the market value at maturity
of such property received per share of Knight/Trimark common stock,
which market value will be determined by a nationally recognized
independent investment banking firm retained for this purpose; and
(3) for any securities received in a Reorganization Event, an amount equal
to (A) the average closing price per share of such securities on the 20
trading days ending on the business day prior to maturity of the DARTS
multiplied by (B) the number of such securities received for each share
of Knight/Trimark common stock.
Notwithstanding the foregoing, if a Reorganization Event occurs, SSG may, at
its option, in lieu of delivering cash as described above, deliver:
(a) an amount of cash equal to (1) the Exchange Ratio (adjusted as
described above) multiplied by (2) the amount of cash, if any, received
by SSG per share of Knight/Trimark common stock in such Reorganization
Event; plus
(b) property in an amount equal to (1) the Exchange Ratio (adjusted as
described above) multiplied by (2) the amount of property, if any,
received by SSG per share of Knight/Trimark common stock in such
Reorganization Event; plus
(c) securities in a number or amount, as applicable, equal to (1) the
Exchange Ratio (adjusted as described above) multipled by (2) the
number or amount, as applicable, of securities, if any, received by SSG
in such Reorganization Event per share of Knight/Trimark common stock.
If SSG elects to deliver securities or other property, holders of the DARTS
will be responsible for the payment of any and all brokerage and other
transaction costs upon any subsequent sale of such securities or other
property. The kind and amount of securities into which the DARTS shall be
exchangeable after consummation of such transaction shall be subject to
adjustment as described in the immediately preceding paragraph following the
date of consummation of such transaction.
Subordination
Payments under the DARTS will be subordinated to the prior payment in full
of all Senior Indebtedness of Southwest. "Senior Indebtedness" is defined below
in this section. If there is any payment or distribution of assets to creditors
of Southwest upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshalling of assets, then the
holders of Senior Indebtedness will be entitled to receive payment in full of
all amounts due or to become due with respect to the Senior Indebtedness before
any payment is made on the DARTS and before Southwest may acquire any of the
DARTS for any cash, property, assets or securities.
SSG also may not make any payment on the DARTS if:
(1) there occurs and is continuing a default in the payment of all or any
portion of the obligations under any Senior Indebtedness (a payment
default); or
(2) there occurs and is continuing any other default with respect to the
Senior Indebtedness that permits the holders of the Senior Indebtedness
to accelerate the maturity of that Senior Indebtedness, and the Trustee
and SSG have been notified in writing by any authorized holder or
representative of holders of such Senior Indebtedness that no payment
should be made with respect to the DARTS (a covenant default).
Payment on the DARTS will resume:
(1) in the case of a payment default, on the date the default is cured or
waived; and
26
<PAGE>
(2) in the case of a covenant default, the earlier of 120 days or the date
on which such default is cured or waived, unless the maturity of such
Senior Indebtedness has been accelerated.
If any payment to the holders of the DARTS is delayed due to a covenant
default on Senior Indebtedness, payment on the DARTS may not again be delayed
due to a covenant default unless:
(1) at least 360 days have passed since the last delay period commenced;
and
(2) all scheduled payments under the DARTS that have come due since the
last delay period commenced have been paid in full in cash.
Subject to payment in full of all Senior Indebtedness, the holders of the
DARTS will be subrogated to the rights of the holders of the Senior
Indebtedness to the extent of payments made on Senior Indebtedness upon any
distribution of assets in any such proceedings out of the distributive share of
the DARTS.
"Senior Indebtedness" means the principal of (and premium, if any), and
accrued interest on:
(1) indebtedness of SSG (including indebtedness of others guaranteed by
Southwest) other than the DARTS that is existing on the date of the
Indenture, which is:
(a) for money borrowed; or
(b) evidenced by a note or similar instrument given in connection with
the acquisition of any businesses, properties or assets of any
kind;
(2) obligations of SSG as lessee under leases required to be capitalized on
the balance sheet of the lessee under generally accepted accounting
principles and leases of property or assets made as part of any sale
and leaseback transaction to which SSG is a party;
(3) amendments, renewals, extensions, modifications and refundings of any
indebtedness or obligation identified in clauses (1) or (2) above; and
(4) future indebtedness of SSG described in (1) above, and amendments,
renewals, extensions, modifications and refundings thereof, if the
instrument creating or evidencing such future indebtedness provides
that such indebtedness or obligation is senior in right of payment to
the DARTS.
The following obligations will not be Senior Indebtedness, and will rank
equally with the DARTS unless the instruments creating such indebtedness
provide by their terms that such indebtedness is junior in right of payment to
the DARTS:
(1) future indebtedness of Southwest which is, by its terms, convertible or
exchangeable into capital stock; and
(2) indebtedness of SSG or amounts owed by SSG (except to banks and other
financial institutions) for compensation to employees, or for goods or
materials purchased, or services utilized, in the ordinary course of
business of SSG or of any other person from whom such indebtedness or
amount was assumed by SSG or for whom such indebtedness was guaranteed
by SSG.
The DARTS are unsecured obligations of SSG, and will rank equally with all
unsecured trade debt and unsecured obligations of SSG that arise by operation
of law or are imposed by any judicial or governmental authority. The DARTS are
obligations exclusively of SSG, and accordingly, will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of its subsidiaries. The right
of SSG, and, therefore, the right of creditors of SSG (including holders of
DARTS) to receive assets of any of its subsidiaries, as a practical matter,
will be effectively subordinated to the claims of
27
<PAGE>
the subsidiary's creditors, except to the extent SSG is itself recognized as a
creditor of the subsidiary or those other creditors have agreed to subordinate
their claims to the payment of the DARTS, in which case the claims of SSG would
still be subordinate to any secured claim on the assets of the subsidiary and
any indebtedness of the subsidiary senior to that held by SSG.
At March 26, 1999, $55.5 million of Senior Indebtedness was outstanding.
Southwest may from time to time incur additional indebtedness constituting
Senior Indebtedness.
Consolidation, Merger and Sale of Assets
SSG may not, directly or indirectly, consolidate with or merge into any
other entity or convey, transfer, sell or lease its assets (or the collective
assets of it and its subsidiaries) substantially as an entirety to any entity,
unless:
(1) either (a) SSG is the continuing corporation or (b) the entity formed
by or surviving such consolidation or merger or to which such assets
are conveyed, transferred, sold or leased is a corporation organized
under the laws of the United States or any state thereof or the
District of Columbia;
(2) the entity formed by or surviving such consolidation of merger (if
other than SSG) or to which such assets are conveyed, transferred, sold
or leased assumes all obligations of SSG under the DARTS and the
Indenture pursuant to agreements reasonably satisfactory to the
Trustee;
(3) immediately before and immediately after the transaction, no Event of
Default (as defined below in "--Events of Default"), and no event
which, after notice or lapse of time or both, would become an Event of
Default, under the Indenture shall exist;
(4) immediately after giving effect to the transaction, the DARTS and the
Indenture, as supplemented, will be valid and enforceable obligations
of SSG or such successor; and
(5) SSG has delivered to the Trustee an officer's certificate and an
opinion of counsel, each stating that the assumption of SSG's
obligations under the DARTS and the Indenture comply with the
applicable provisions of the Indenture.
Events of Default
The following will be Events of Default under the Indenture:
(1) failure to pay principal of any DARTS when due and payable, regardless
of whether the payment is prohibited by the subordination provisions of
the Indenture;
(2) failure to pay any interest on any DARTS when due, which failure
continues for 30 days, regardless of whether the payment is prohibited
by the subordination provisions of the Indenture;
(3) failure to perform any of the covenants of SSG in the Indenture, which
failure continues for 60 days after written notice of the failure as
provided in the Indenture;
(4) failure to pay when due the principal of and/or any indebtedness for
money borrowed by SSG or any of its subsidiaries in excess of $5
million, individually or in the aggregate, if that indebtedness is not
discharged, or any payment acceleration resulting from the failure is
not annulled, within 10 days after written notice as provided in the
Indenture;
(5) failure by SSG or any of its "significant subsidiaries," as that term
is defined under Regulation S-X under the Securities Act of 1933 as in
effect on the date of the Indenture, to pay final judgments
28
<PAGE>
aggregating more than $1 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and
(6) certain events of bankruptcy, insolvency or reorganization of SSG or
any "significant subsidiary."
Except as provided in the Indenture, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of DARTS, unless such holders shall
have offered to the Trustee reasonable indemnity. Subject to such provisions
for the indemnification of the Trustee, the holders of a majority of the
outstanding DARTS will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee as a result of an Event
of Default.
If an Event of Default under clause (6) above occurs, all unpaid principal
and interest on the DARTS will automatically become immediately due and
payable without any declaration or other act on the part of the Trustee or any
holders of the DARTS. If any other Event of Default occurs and is continuing,
either the Trustee or the holders of at least 25% of the then outstanding
DARTS (by notice to Southwest and the Trustee) may declare the unpaid
principal and interest on the DARTS to become immediately due and payable.
After the acceleration of payment, but before a judgment or decree is issued
based on the acceleration, the holders of a majority of the then outstanding
DARTS may, under certain circumstances, rescind and annul the acceleration if
all Events of Default, other than the nonpayment of accelerated principal,
have been cured or waived as provided in the Indenture. The waiver of defaults
is discussed below in "--Modifications, Amendments and Waivers."
No holder of any DARTS will have any right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy under the Indenture unless:
(1) the holder shall have previously given to the Trustee written notice of
a continuing Event of Default;
(2) holders of at least 25% of the then outstanding DARTS shall have made
written request and offered satisfactory indemnity to the Trustee to
institute the proceeding;
(3) the Trustee shall have failed to institute the proceeding within 60
days after the receipt of such request of and offer of indemnity; and
(4) during such 60-day period, no direction inconsistent with such request
shall have been given to the Trustee by the holders of a majority of
the then outstanding DARTS.
Modifications, Amendments and Waivers
Modifications and amendments of the Indenture may be made by SSG and the
Trustee with the consent of the holders of at least a majority of the then
outstanding DARTS held by persons other than affiliates of Southwest, except
that no modification or amendment may be made without the consent of the
holder of each outstanding DARTS affected thereby if the modification or
amendment would:
(1) change the stated maturity of, or any installment of interest on, or
waive a default in the payment of, any DARTS;
(2) reduce the principal amount of any DARTS or reduce the rate or extend
the time of payment of interest on any DARTS;
(3) reduce the number of shares of Knight/Trimark common stock (or other
assets) deliverable by SSG at maturity of the DARTS;
(4) change the place or means of payment of principal of or interest on any
DARTS;
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(5) impair the right to institute suit for the enforcement of any payment
on or with respect to any DARTS;
(6) reduce the vote of the holders necessary to waive certain defaults or
compliance with certain provisions of the Indenture, consent to any
merger, consolidation or conveyance, sale, transfer or lease of assets,
or modify or amend the Indenture;
(7) modify the provisions of the Indenture with respect to the
subordination of the DARTS in a manner adverse to the holders; or
(8) except as permitted by the Indenture, consent to the assignment or
transfer by SSG of any of its rights and obligations under the
Indenture.
The holders of a majority of the then outstanding DARTS held by persons
other than affiliates of SSG may, on behalf of all holders, waive any past
default under the Indenture or Event of Default, except a unanimous vote is
necessary to waive a default in the payment of principal of or interest on any
of the DARTS or in respect of a provision which under the Indenture cannot be
amended without the consent of the holder of each outstanding DARTS.
Amendments and supplements of the Indenture may be made by SSG and the
Trustee without the consent of any holder to:
(1) cure any ambiguity, defect or inconsistency (which does not adversely
affect the rights of any holder of the DARTS);
(2) comply with the restriction on mergers, consolidations and asset sales;
(3) to provide for uncertificated DARTS in addition to or instead of
certificated DARTS;
(4) add to the covenants of SSG further covenants, restrictions, conditions
or provisions for the protection of the holders of the DARTS;
(5) make any change that does not adversely affect the rights of any holder
of the DARTS under the Indenture;
(6) comply with requirements of the Securities and Exchange Commission in
order to effect or maintain qualification of the Indenture under the
Trust Indenture Act; or
(7) to provide for the issuance of additional DARTS from time to time up to
a total of $150 million principal amount of DARTS.
Governing Law
The Indenture and the DARTS will be governed by, and construed in accordance
with, the laws of the State of New York, without giving effect to such State's
conflict of law principles.
Concerning the Trustee
SSG may maintain deposit accounts and conduct other banking transactions
with the Trustee or its affiliates in the ordinary course of business, and the
Trustee and its affiliates may from time to time in the future provide SSG with
banking and financial services in the ordinary course of their business.
Book-Entry, Delivery and Form
Except as set forth in the next paragraph, the DARTS will initially be
issued in the form of one or more Global DARTS (collectively, the "Global
DARTS"). The Global DARTS will be deposited on the date of the closing of the
sale of the DARTS with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary.
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DARTS that are issued as described below in "--Certificated Securities" will
be issued in the form of registered definitive certificates (the "Certificated
Securities"). Upon the transfer of Certificated Securities, such Certificated
Securities may, unless all Global DARTS have previously been exchanged for
Certificated Securities, be exchanged for an interest in the Global DARTS
representing the number of DARTS being transferred, subject to the transfer
restrictions set forth in the indenture.
The Depositary has advised SSG that it is:
(1) a limited-purpose trust company organized under the laws of the State
of New York;
(2) a member of the Federal Reserve System;
(3) a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
(4) a "clearing agency" registered pursuant to Section 17A of the
Securities Exchange Act.
The Depositary was created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance in accounts of its Participants. The Depositary's Participants
include securities brokers and dealers, banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's system
is also available to other entities such as bank's, dealers and trust companies
(collectively, the "Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through Participants or Indirect Participants.
Southwest expects that pursuant to procedures established by the Depositary:
(1) upon deposit of the Global DARTS, the Depositary will credit the
accounts of Participants designated by the underwriters with an interest in the
Global DARTS; and
(2) ownership of the DARTS evidenced by Global DARTS will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of Participants),
the Participants and the Indirect Participants. Prospective purchasers are
advised that the laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that security
interests in negotiable instruments can only be perfected by delivery of
certificates representing the instruments. Consequently, the ability to
transfer DARTS or to pledge the DARTS as collateral will be limited to such
extent.
So long as the Depositary or its nominee is the registered owner of the
Global DARTS, the Depositary or such nominee, as the case may be, will be
considered the holder under the Indenture of the DARTS represented by the
Global DARTS. Except as provided below, owners of beneficial interests in a
Global DARTS will not be entitled to have DARTS represented by such Global
DARTS registered in their names, will not receive or be entitled to receive
physical delivery of the Certificated Securities, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a person having a beneficial
interest in DARTS represented by a Global DARTS to pledge such interest to
persons or entities that do not participate in the Depositary's system, or to
otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Payments with respect to any DARTS represented by a Global DARTS registered
in the name of the Depositary or its nominee on the applicable record date will
be payable by the Trustee to or at the direction of the Depositary or its
nominee in its capacity as the registered holder under the Indenture. Under the
terms of the Indenture, Southwest and the Trustee may treat the persons in
whose names the DARTS, including the Global DARTS, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither Southwest nor the Trustee has or
will have
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<PAGE>
responsibility or liability for the payment of such amounts to beneficial
owners of DARTS, or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global DARTS as
shown on the records of the Depositary, Payments by the Participants and the
Indirect Participants to the beneficial owners of DARTS will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in a
Global DARTS may, upon request to the Trustee, exchange such beneficial
interest for DARTS in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof).
In addition, Certificated Securities will be issued in exchange for the
Global DARTS if:
(1) Southwest notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and Southwest is unable
to locate a qualified successor within 90 days; or
(2) Southwest, at its option, notifies the Trustee in writing that it
elects to cause the issuance of DARTS in definitive form under the
Indenture.
Certificated Securities will be issued upon surrender by the Depositary of
its Global DARTS to each person that the Depositary identifies as the
beneficial owner of the DARTS represented by the Global DARTS. In addition,
subject to certain conditions, any person having a beneficial interest in a
Global DARTS may, upon request to the Trustee, exchange such beneficial
interest for Certificated Securities. Upon any such issuance, the Trustee is
required to register the Certificated Securities in the name of such person or
persons (or a designated nominee), and cause the same to be delivered to such
person or persons or their nominees.
Neither SSG nor the Trustee shall be liable for any delay by the Depositary
or any Participant or Indirect Participant in identifying the beneficial owners
of the related DARTS. Each of them may conclusively rely on, and shall be
protected in relying on instructions from the Depositary for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the DARTS to be issued).
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that SSG believes
to be reliable. SSG has no responsibility for the performance by the Depositary
or its Participants of their respective obligations as described hereunder or
under the rules and procedures governing their respective operations.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences resulting from the purchase, ownership and disposition of the
DARTS. As the law is technical and complex, the discussion below necessarily
represents only a general summary. This summary only addresses the tax
consequences to a person that acquires the DARTS on their original issuance at
the initial price per DARTS in this offering and that is (1) an individual
citizen or resident of the United States, (2) a corporation that is created or
organized under the laws of the United States or any state thereof or the
District of Columbia, (3) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (4) a trust which
is subject to the supervision of a court within the United States and which has
one or more United States persons who have the authority to control all
substantial decisions of the trust (a "United States Person"). This summary
does not address all the possible tax consequences that may be applicable to a
particular holder in light of the holder's individual investment circumstances,
nor does it address the tax consequences to (A) persons that are not United
States Persons, (B) persons that may be subject to special treatment under
United States federal income tax law, such as banks, insurance companies,
thrift institutions, regulated investment companies, real estate investment
trusts, traders in securities or commodities electing to mark to market, tax-
exempt organizations, and dealers in securities or currencies, (C) persons that
will hold the DARTS as part of a position in a "straddle" or as part of a
"hedging," "conversion," "synthetic security" or other integrated investment
transaction for federal income tax purposes, (D) persons whose functional
currency is not the United States dollar, (E) persons that do not hold the
DARTS and, if applicable, the Knight/Trimark common stock as capital assets, or
(F) persons that acquire a DARTS at other than the initial price per DARTS in
this offering.
This summary is based upon the Internal Revenue Code, Treasury Regulations,
rulings and pronouncements of the IRS, and judicial decisions in effect on the
date of this prospectus, all of which are subject to change at any time
(possibly with retroactive effect). Southwest will not be seeking an IRS ruling
with respect to the correct tax treatment of the DARTS. In addition, no
existing statutory, judicial or administrative authority directly addresses the
characterization of the DARTS or instruments similar to DARTS for U.S. federal
income tax purposes. As a result, significant uncertainty exists concerning the
proper tax treatment of the DARTS. There can be no assurance that the IRS or a
court will agree with the conclusions expressed in this section. This summary
does not include any description of the tax laws of any state or local
government, or of any foreign government, that may be applicable to the DARTS
or holders thereof.
Persons considering an investment in the DARTS should consult their own tax
advisors concerning the application of the United States federal tax laws to
their particular situations, as well as any consequences arising under the laws
of any other taxing jurisdiction.
Pursuant to the terms of the Indenture, SSG and every holder of the DARTS
will be obligated (in the absence of an administrative determination or
judicial ruling to the contrary) to characterize the DARTS for all tax purposes
as a forward purchase contract to purchase Knight/Trimark common stock (and
Spin-Off Securities, if any) at maturity (including as a result of acceleration
or otherwise), under the terms of which contract (1) at the time of issuance of
the DARTS the holder deposits irrevocably with SSG a fixed amount of cash equal
to the purchase price of the DARTS to assure the fulfillment of the holder's
purchase obligation described in clause (3) below, which deposit will
unconditionally and irrevocably be applied at maturity to satisfy such
obligation, (2) until maturity SSG will be obligated to pay interest on such
deposit at a rate equal to the stated rate of interest on the DARTS as
compensation to the holder for SSG's use of such cash deposit during the term
of the DARTS, and (3) at maturity such cash deposit unconditionally and
irrevocably will be applied by SSG in full satisfaction of the holder's
obligation under the forward purchase contract, and SSG will deliver to the
holder the number of shares of Knight/Trimark common stock (and Spin-Off
Securities, if any) that the holder is entitled to receive at maturity pursuant
to the terms of the DARTS (subject to SSG's right to deliver cash in lieu of
the shares of Knight/Trimark common stock (and Spin-Off Securities, if any)).
Prospective investors should note that cash proceeds of this offering will not
be segregated by SSG during the term of the DARTS, but instead will be
commingled with SSG's other assets and applied in a manner consistent with the
"Use of Proceeds" discussion above. Consistent with the above characterization,
(A)
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amounts paid to SSG in respect of the original issue of the DARTS will be
treated as allocable in their entirety to the amount of the cash deposit
attributable to such DARTS and (B) amounts denominated as interest that are
payable with respect to the DARTS will be characterized as interest payable on
the amount of such deposit, includible annually in the income of the holder as
interest income in accordance with such holder's method of accounting.
Under the above characterization of the DARTS, a holder's tax basis in the
DARTS generally will equal the holder's cost for the DARTS. Upon the sale or
other taxable disposition of a DARTS, a holder generally will recognize gain or
loss equal to the difference between the amount realized on the sale or other
taxable disposition and the holder's tax basis in the DARTS. Such gain or loss
generally will be long-term capital gain or loss if the holder has held the
DARTS for more than one year at the time of disposition.
Under the above characterization of the DARTS, if SSG delivers shares of
Knight/Trimark common stock (and Spin-Off Securities, if any) at maturity, a
holder will recognize no gain or loss on the purchase of the shares of
Knight/Trimark common stock (and Spin-Off Securities, if any) against
application of the monies received by SSG in respect of the DARTS. A holder
will have a tax basis in such interest in the shares of Knight/Trimark common
stock (and Spin-Off Securities, if any) equal to the holder's tax basis in the
DARTS (less the portion of the tax basis of the DARTS allocable to any
fractional interest in shares of Knight/Trimark common stock (and Spin-Off
Securities, if any), as described in the next sentence). A holder will
recognize gain or loss (which will be short-term capital gain or loss) with
respect to cash received in lieu of a fractional interest in a share of
Knight/Trimark common stock (and Spin-Off Securities, if any) equal to the
difference between the cash received for the fractional interest and the
portion of the basis of the DARTS allocable to the fractional interest (based
on the relative number of fractional shares and full shares delivered to the
holder). If SSG delivers solely cash to the holder at maturity, a holder will
recognize capital gain or loss equal to any difference between the cash
received from SSG and the holder's tax basis in the DARTS at that time. Such
gain or loss generally will be long-term capital gain or loss if the holder has
held the DARTS for more than one year at maturity. The receipt of any accrued
and unpaid interest at maturity will be includible in the income of the holder
as ordinary interest income.
Due to the absence of authority as to the proper characterization of the
DARTS, no assurance can be given that the IRS will accept, or that a court will
uphold, the characterization and tax treatment described above. In particular,
the IRS could seek to analyze the federal income tax consequences of owning
DARTS under Treasury regulations promulgated in June 1996 governing contingent
payment debt instruments (the "Contingent Payment Regulations"). The Contingent
Payment Regulations are complex, but very generally apply the original issue
discount rules of the Internal Revenue Code to a contingent payment debt
instrument by requiring that original issue discount be accrued every year at a
"comparable yield" for the issuer of the instrument, determined at the time of
issuance of the obligation. In addition, the Contingent Payment Regulations
require that a projected payment schedule, which results in such a "comparable
yield," be determined, and the adjustments to income accruals be made to
account for differences between actual payments and projected amounts. To the
extent that the comparable yield as so determined exceeds the interest actually
paid on a contingent debt instrument, the owner of that instrument will
recognize ordinary interest income in excess of the cash the owner receives. In
addition, any gain realized on the sale, exchange or redemption of a contingent
payment debt instrument will be treated as ordinary income. Any loss realized
on such sale, exchange or redemption will be treated as an ordinary loss to the
extent the holder's original issue discount inclusions with respect to the
obligation exceed prior reversals of such inclusions required by the adjustment
mechanism described above. Any loss realized in excess of such amount generally
will be treated as a capital loss.
We believe that the Contingent Payment Regulations do not apply to the
DARTS, because those Regulations apply only to debt instruments that provide
for contingent payments. The DARTS are payable by the delivery of shares of
Knight/Trimark common stock (and Spin-Off Securities, if any) (unless SSG
exercises its option to deliver cash to the holders at maturity) and provide
economic returns that are based upon the value
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of the Knight/Trimark common stock (and Spin-Off Securities, if any) at
maturity. The DARTS therefore offer no assurance that a holder's investment
will be returned to the holder at maturity.
Accordingly, we believe that the DARTS properly are characterized for tax
purposes, not as debt instruments, but as forward purchase contracts in respect
of which holders have deposited a fixed amount of cash with SSG, on which
interest is payable at a fixed rate. If, however, the IRS were successfully to
maintain that the Contingent Payment Regulations applied to the DARTS, then,
among other matters, (1) gain realized by a holder on the sale or other taxable
disposition of a DARTS would be characterized as ordinary income, rather than
as short- or long-term capital gain (depending on whether the DARTS had been
held for more than one year at the time of such disposition) and (2) a holder
would recognize ordinary income, or ordinary or capital loss (as the case may
be, under the rules of the Contingent Payment Regulations summarized above) on
the receipt of the shares of Knight/Trimark common stock (and Spin-Off
Securities, if any), rather than capital gain or loss upon the ultimate sale of
such DARTS.
Even if the Contingent Payment Regulations do not apply to the DARTS, it is
possible that the IRS could seek to characterize the DARTS in a manner that
results in tax consequences to initial holders of the DARTS different from
those reflected in the Indenture and described above. Under alternative
characterizations of the DARTS, it is possible, for example, that the DARTS
could be treated as including a forward contract and one or more options.
Possible Treasury Regulations
Section 1259 of the Code requires a taxpayer to recognize taxable gain at
the time of a "constructive sale" with respect to any appreciated position in
stock. A "constructive sale" is deemed to occur with respect to an appreciated
position in stock if the owner engages in certain specified transactions which
generally eliminate substantially all risk of loss and all opportunity for gain
with respect to such position. We do not believe the issuance of the DARTS will
constitute a "constructive sale" under Section 1259 of the Code because under
the terms of the DARTS we will retain the dividends and an opportunity for gain
with respect to the underlying Knight/Trimark Common Stock. The legislative
history to Section 1259 of the Code addresses the treatment of "collar"
transactions which, as in the case of the DARTS, imposes some limits on the
owner's risk of loss and opportunity for gain with respect to the underlying
appreciated position in stock. The legislative history further indicates that
the determination regarding whether the terms of a particular "collar"
constitute a constructive sale will be made in the Regulations that generally
would be applicable only on a prospective basis, except in cases to prevent
abuses.
A bill pending in Congress that was introduced on May 5, 1999 would treat
some or all of the net long-term capital gain arising from "constructive
ownership" transactions involving certain derivative financial instruments as
short-term capital gain, and would impose an interest charge on such short-term
capital gain. The proposed legislation would be effective with respect to gain
recognized after the date the legislation is enacted into law, generally
without regard to when the constructive ownership transaction was entered into.
If enacted in its current form, the legislation does not appear to apply to the
DARTS (and, even if the legislation in its current form were extended to cover
the DARTS, it is not expected to have any material effect on the DARTS). It is
not possible to predict whether legislation addressing constructive ownership
transactions will be enacted, or what form any such legislation might take
(including with respect to effective dates).
Non-U.S. Holders
Payments which are made with respect to the DARTS to any holder who is a
nonresident alien individual or foreign corporation ("Non-U.S. Holder") will
generally not be subject to United States federal withholding tax (except as
discussed below with respect to backup withholding), provided that such holder
complies with applicable certification requirements (including, in general the
furnishing of IRS Forms W-8 or 1001, or successor forms thereto).
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A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale, exchange or redemption of
the DARTS, unless (1) the gain is effectively connected with a trade or
business of the Non-U.S. Holder within the United States, (2) subject to
certain exceptions, in the case of a Non-U.S. Holder who is a nonresident alien
individual and holds the DARTS as a capital asset, such holder is present in
the United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met or (3) the Non-U.S. Holder is
subject to tax pursuant to the provisions of U.S. tax law applicable to certain
U.S. expatriates (including certain former citizens and resident of the United
States).
Backup Withholding and Information Reporting
In general, payments of principal, premium and interest with respect to a
DARTS, and the proceeds of a sale of a DARTS within the United States (1) will
be subject to information reporting and (2) will be subject to backup
withholding at a rate of 31% if the holder fails to provide its taxpayer
identification number on IRS Form W-9, fails to establish an exemption from
backup withholding, or is otherwise subject to backup withholding under Section
3406 of the Code. Any amounts withheld under the backup withholding rules will
be allowed as a refund or a credit against such holder's U.S. federal income
tax liability, provided the required information is furnished to the IRS.
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UNDERWRITING
Subject to the terms and conditions stated in an underwriting agreement,
each underwriter named below has severally agreed to purchase, and Southwest
has agreed to sell to such underwriter, the number of DARTS set forth opposite
the name of such underwriter.
<TABLE>
<CAPTION>
Name Number of DARTS
---- ---------------
<S> <C>
Raymond James & Associates, Inc. ........................ 441,014
Forum Capital Markets LLC................................ 441,014
-------
Total 882,028
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the DARTS included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all of the DARTS (other than those
covered by the over-allotment option described in the next paragraph) if they
purchase any of the DARTS.
Southwest has granted the underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to $7,500,000 of newly-issued
DARTS to cover over-allotments, if any, in this offering. If the option is
exercised, each underwriter will be obligated, subject to certain conditions,
to purchase a number of additional DARTS approximately proportionate to its
initial purchase commitment.
Southwest has been advised by the underwriters that they propose to offer
some of the DARTS directly to the public at the public offering price set forth
on the cover of this prospectus. After the initial offering of the DARTS to the
public, the underwriters may change the public offering price and the other
selling terms.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Southwest in connection with this offering.
<TABLE>
<CAPTION>
Paid by Southwest
-----------------
<S> <C>
Per DARTS $1.9841
</TABLE>
Southwest estimates that its total expenses in connection with this offering
will be $230,000.
The DARTS will constitute a new class of securities with no established
trading market. The initial public offering price for the DARTS is equal to the
last bid price of the Knight/Trimark common stock on June 10, 1999, as reported
on the Nasdaq National Market. Southwest does not intend to apply to have the
DARTS listed on any securities exchange. Southwest has been advised by the
underwriters that, following the completion of this offering, they intend to
make a market in the DARTS in the over-the-counter market. However, they are
not obligated to do so and any market-making activities with respect to the
DARTS may be discontinued at any time without notice. Accordingly, no assurance
can be given as to the liquidity of or the trading market for the DARTS. The
lack of a trading market could adversely affect investors, as described in the
"Risk Factors" section under the caption "-- It is possible that the secondary
market for the DARTS will be illiquid ."
In connection with this offering, the underwriters may purchase and sell
DARTS in the open market. These transactions may include over-allotment,
stabilizing transactions and syndicate covering transactions. Over-allotments
involve syndicate sales of DARTS in excess of the number of DARTS to be
purchased by the underwriters in this offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of DARTS in the
open market after the distribution of the DARTS has been completed in order to
cover syndicate short positions. Stabilizing transactions consist of certain
bids or purchases of DARTS made for the purpose of preventing or retarding a
decline in the market price of the DARTS while this offering is in progress.
Such stabilizing transactions and syndicate covering transactions may cause the
price of the DARTS to be higher than it otherwise would be in the absence of
such transactions.
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These transactions may be effected in the over-the-counter market, or
otherwise and, if commenced, may be discontinued at any time.
Southwest has agreed to indemnify the underwriters against certain
liabilities in connection with the offer and sale of the DARTS, including
liabilities under the Securities Act of 1933, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
LEGAL MATTERS
The validity of the DARTS offered hereby is being passed upon for Southwest
by Gardere & Wynne, L.L.P., Dallas, Texas. Certain legal matters will be passed
upon for the Underwriters by Kelley Drye & Warren LLP.
EXPERTS
The consolidated financial statements and schedule of SSG and its
subsidiaries as of June 26, 1998 and June 27, 1997, and for each of the years
in the three-year period ended June 26, 1998, have been incorporated herein by
reference in this Registration Statement in reliance on the reports of KPMG
LLP, independent certified public accountants, incorporated herein by
reference, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT SOUTHWEST
We are subject to the information requirements of the Exchange Act, and in
accordance therewith we file periodic reports, proxy statements and other
information with the SEC. Reports, proxy statements and other information may
be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Suite 1400, Northwestern
Atrium Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material may also be obtained at prescribed rates by writing to
the Commission, Public Reference Section, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and such information may also be inspected at
the offices of the National Association of Securities Dealers, Inc., Listing
Section, 1735 K Street, Washington, D.C. 20006. The Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
Such reports, proxy and information statements and other information may be
found on the Commission's web site address, http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-3
(together with all exhibits, schedules, amendments and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the DARTS
offered hereby. This prospectus does not contain all the information set forth
or incorporated by reference in the Registration Statement (certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission). Statements contained in this prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and
each such statement is qualified in all respects by reference to the copy of
such contract or document filed as an exhibit to the Registration Statement.
For further information with respect to the Company and the DARTS reference is
made to the Registration Statement and the exhibits and schedules filed as a
part thereof, which may be inspected and copied at the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 1024, Judiciary Plaza,
Washington, D. C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois at prescribed rates.
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<PAGE>
The following documents or portions thereof filed by the Company with the
Commission (Commission File No. 0-19483) pursuant to the Exchange Act are
hereby incorporated by reference in this prospectus:
1. Annual Report on Form 10-K for the fiscal year ended June 26, 1998.
2. Quarterly Reports, including any amendments to these reports, on Form
10-Q for the quarters ended September 25, 1998, December 31, 1998 and
March 26, 1999.
3. Current Report on Form 8-K dated June 7, 1999.
All reports and documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and prior to the termination of the offering of the DARTS made
hereby shall be deemed to be incorporated by reference into this prospectus and
to be a part hereof from the filing of such documents. Any statement contained
in this prospectus or in a document incorporated or deemed to be incorporated
by reference in this prospectus shall be deemed to be modified or superseded
for the purposes of this prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of the Registration Statement or
this prospectus.
The Company will provide without charge to each person to whom a copy of
this prospectus is delivered, upon oral or written request of such person, a
copy of any and all of the documents incorporated by reference herein (other
than exhibits and schedules to such documents, unless such exhibits or
schedules are specifically incorporated by reference into such documents). Such
requests should be directed to Barbara A. Hart, Secretary, Southwest Securities
Group, Inc., 1201 Elm Street, Suite 3500, Dallas, Texas 75270, or by telephone
at (214) 859-1800.
39
<PAGE>
Prospective investors may rely only on the information contained in this
prospectus. Neither Southwest Securities Group, Inc. nor any underwriter has
authorized anyone to provide prospective investors with different or
additional information. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Certain Introductory Matters................................................ 2
Cautionary Statement Regarding Forward-Looking Statements................... 2
Prospectus Summary.......................................................... 3
Risk Factors................................................................ 7
Southwest Securities Group, Inc. ........................................... 16
Use of Proceeds............................................................. 17
Capitalization.............................................................. 17
Relationship Between Southwest and Knight/Trimark........................... 18
Knight/Trimark Group, Inc. ................................................. 18
Price Range of Knight/Trimark Common Stock and Cash Dividends............... 19
Description of the DARTS.................................................... 20
Certain United States Federal Income Tax Considerations..................... 33
Underwriting................................................................ 37
Legal Matters............................................................... 38
Experts..................................................................... 38
Where You Can Find More Information About Southwest......................... 38
</TABLE>
$50,000,000
882,028 Derivative Adjustable Ratio Securities SM (DARTS SM)
[Logo of Southwest Securities Group, Inc.]
Subject to Exchange into Class A Common Stock of
[Logo of KNIGHT/TRIMARK GROUP, INC.]
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PROSPECTUS
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Raymond James & Associates, Inc.
Forum Capital Markets LLC
June 11, 1999
