<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-19483
SOUTHWEST SECURITIES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2040825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Elm Street, Suite 3500, Dallas, Texas 75270
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 859-1800
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of February 7, 1999, there were 10,697,959 shares of the registrant's common
stock, $.10 par value, outstanding.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
December 31, l998 and June 26, l998
Consolidated Statements of Income and Comprehensive Income
For the three and six months ended December 31, l998 and December 31,
l997
Consolidated Statements of Cash Flows
For the six months ended December 31, l998 and December 31, l997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, l998 and June 26, l998
(In thousands, except par values and share amounts)
<TABLE>
<CAPTION>
December June
(Unaudited)
----------- ----------
Assets
<S> <C> <C>
Cash $ 15,148 $ 13,706
Assets segregated for regulatory purposes 312,716 130,728
Marketable equity securities, at market value 40,092
Receivable from brokers, dealers and clearing organizations 2,116,948 2,365,635
Receivable from clients, net 545,458 648,464
Securities owned, at market value 52,034 32,144
Other assets 32,895 29,429
----------- ----------
$3,115,291 $3,220,106
=========== ==========
Liabilities and Stockholders' Equity
Short-term borrowings $ 14,900 $
Payable to brokers, dealers and clearing organizations 2,012,582 2,293,731
Payable to clients 821,693 720,813
Securities sold not yet purchased, at market value 5,553 1,662
Drafts payable 50,041 41,688
Other liabilities 49,871 36,745
----------- ----------
2,954,640 3,094,639
Minority interest in consolidated subsidiary 100 -
Stockholders' equity:
Preferred stock of $1.00 par value. Authorized 100,000
shares; none issued - -
Common stock of $.10 par value. Authorized 20,000,000 shares;
issued 10,687,583 and outstanding 10,678,406 shares at
December 31, 1998 and June 26, 1998 1,069 1,069
Additional paid-in capital 69,462 69,462
Unrealized holding gain, net of tax 25,778 -
Retained earnings 64,351 55,022
Receivable from employees under the Employee Stock Purchase Plan (35) (12)
Treasury stock (9,177 shares, at cost) (74) (74)
----------- ----------
Total stockholders' equity 160,551 125,467
----------- ----------
Commitments and contingencies
$3,115,291 $3,220,106
=========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and six months ended December 31, 1998 and December 31, 1997
(In thousands, except per share and share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues from clearing operations $ 9,415 $ 6,374 $ 17,509 $ 13,081
Commissions 16,109 15,367 30,518 29,254
Interest 35,816 36,535 71,663 70,913
Investment banking, advisory and administrative fees 7,237 6,552 14,821 10,928
Net gains on principal transactions 7,166 3,174 10,928 6,312
Other 3,553 2,463 7,054 5,273
---------------------------------------------------------------
79,296 70,465 152,493 135,761
---------------------------------------------------------------
Commissions and other employee compensation 28,223 21,703 54,086 42,029
Interest 24,111 25,679 48,140 49,987
Occupancy, equipment and computer service costs 4,805 4,107 9,544 7,995
Communications 3,451 2,975 6,363 6,133
Floor brokerage and clearing organization charges 1,354 1,206 2,819 2,461
Other 8,001 6,390 14,834 10,966
---------------------------------------------------------------
69,945 62,060 135,786 119,571
---------------------------------------------------------------
Income before income taxes 9,351 8,405 16,707 16,190
Income taxes 3,209 3,015 5,882 5,755
---------------------------------------------------------------
Net income 6,142 5,390 10,825 10,435
Other comprehensive income - unrealized holding
gains arising during period, net of tax 15,921 - 25,778 -
---------------------------------------------------------------
Comprehensive income $ 22,063 $ 5,390 $ 36,603 $ 10,435
===============================================================
Earnings per share - basic $.58 $.50 $1.01 $.98
===============================================================
Earnings per share - diluted $.57 $.50 $1.01 $.98
===============================================================
Weighted average shares outstanding - basic 10,678,406 10,678,485 10,678,406 10,671,870
===============================================================
Weighted average shares outstanding - diluted 10,687,169 10,693,913 10,687,858 10,684,655
===============================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended December 31, 1998 and December 31, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,825 $ 10,435
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,681 1,591
Provision for doubtful accounts (307) 711
Deferred income taxes (205) (531)
Decrease (increase) in assets segregated for regulatory purposes (181,988) 236,733
Net change in broker, dealer and clearing organization accounts (32,462) 24,281
Net change in client accounts 204,405 (218,548)
Increase in securities owned (19,890) (2,215)
Decrease (increase) in other assets (4,203) 41
Increase (decrease) in securities sold not yet purchased 3,891 (2,670)
Increase in drafts payable 8,353 17,055
Increase (decrease) in other liabilities (359) 5,086
--------- ---------
Net cash provided by (used in) operating activities (10,259) 71,969
--------- ---------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (1,169) (1,066)
--------- ---------
Net cash used in investing activities (1,169) (1,066)
--------- ---------
Cash flows from financing activities:
Proceeds from (payments on) short term borrowings 14,900 (4,000)
Payment on liabilities subordinated to the claims of general creditors - (1,400)
Net change in receivable from employees for Employee
Stock Purchase Plan (23) 30
Net proceeds from exercise of stock options - 225
Payment of cash dividend on common stock (2,107) (1,221)
Proceeds from issuance of stock of consolidated subsidiary 100 -
--------- ---------
Net cash provided by (used in) financing activities 12,870 (6,366)
--------- ---------
Net increase in cash 1,442 64,537
Cash at beginning of period 13,706 10,745
--------- ---------
Cash at end of period $ 15,148 $ 75,282
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
GENERAL AND BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of Southwest
Securities Group, Inc. ("Parent") and its consolidated subsidiaries listed below
(collectively, the "Company"):
Southwest Securities, Inc. "Southwest"
Brokers Transaction Services, Inc. "BTS"
Southwest Investment Advisors, Inc. "Advisors"
Westwood Trust "Trust"
Westwood Management Corporation "Westwood"
SW Capital Corporation "Capital"
SWS Technologies Corporation "Technologies"
(formerly SWST Computer Corporation)
Sovereign Securities, Inc. "Sovereign"
NorAm Investment Services, Inc. "NorAm"
SWS Clearing Corporation "Clearing"
Southwest, BTS, Sovereign and NorAm are registered broker/dealers under the
Securities Exchange Act of 1934 ("1934 Act"). Advisors and Westwood are
registered investment advisors under the Investment Advisors Act of 1940.
Although not yet active, Clearing was incorporated in the State of Delaware on
September 30, 1998 and is a fully consolidated subsidiary. All significant
intercompany balances and transactions have been eliminated.
The consolidated financial statements as of December 31, 1998, and for the three
and six month periods ended December 31, 1998 and December 31, 1997, are
unaudited; however, in the opinion of management, these interim statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position, results of
operations and cash flows. These financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
as of and for the year ended June 26, 1998 filed on Form 10-K. Amounts included
for June 26, 1998 are from the audited consolidated financial statements as
filed on Form 10-K.
CASH FLOW REPORTING
Cash paid for interest was $49,114,000 and $49,120,000 for the six month periods
ended December 31, 1998 and December 31, 1997, respectively. Cash paid for
income taxes was $7,425,000 and $4,700,000 in 1998 and 1997, respectively.
In a non-cash transaction, the Parent received approximately 1.7 million common
shares of Knight/Trimark Group, Inc. ("Knight") subsequent to Knight's initial
public offering completed July 10, 1998.
ASSETS SEGREGATED FOR REGULATORY PURPOSES
At December 31, 1998, the Company had a certificate of deposit of $890,000,
reverse repurchase agreements of $237,566,000 and U.S. Treasury securities with
a market value of $74,260,000 segregated in a special reserve bank account for
the exclusive benefit of customers under Rule 15c3-3 of the 1934 Act. The
reverse repurchase agreements were collateralized by U.S. Government securities
with a market value of approximately $240,955,000. At June 26, 1998, the
Company had
<PAGE>
U.S. Treasury securities with a market value of $59,515,000 and reverse
repurchase agreements of $71,213,000 in this account. The reverse repurchase
agreements were collateralized by U.S. Government securities with a market value
of approximately $71,871,000 at June 26, 1998.
MARKETABLE EQUITY SECURITIES
The investment in Knight is classified as marketable equity securities available
for sale, and the unrealized holding gains, net of tax, are recorded as a
separate component of stockholders' equity on the consolidated statements of
financial condition. The Knight shares are subject to the provisions of
Securities and Exchange Commission Rule 144. Realized gains and losses, if any,
are recorded using the specific identification method. The following table
summarizes the cost and market value of the investment in Knight at December 31,
1998 (in thousands):
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------
Marketable equity securities $ 432 39,660 - $40,092
===========================================
RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
At December 31, l998 and June 26, l998, the Company had receivable from and
payable to brokers, dealers and clearing organizations related to the following
(in thousands):
December June
---------- ----------
Receivable
Securities failed to deliver $ 26,730 $ 18,880
Securities borrowed 2,006,285 2,229,587
Correspondent broker/dealers 49,968 62,673
Clearing organizations 1,176 1,245
Other 32,789 53,250
---------- ----------
$2,116,948 $2,365,635
========== ==========
Payable
Securities failed to receive $ 19,787 $ 45,956
Securities loaned 1,970,197 2,227,874
Correspondent broker/dealers 13,063 11,300
Other 9,535 8,601
---------- ----------
$2,012,582 $2,293,731
========== ==========
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Marketable securities are carried at quoted market value. The increase or
decrease in net unrealized appreciation or depreciation of securities owned is
credited or charged to operations and is included in net gains on principal
transactions in the consolidated statements of income and comprehensive income.
At the Company's election, the market value of these securities will be
determined on a trade date basis rather than a settlement date basis beginning
December 31, 1998.
<PAGE>
At December 31, l998 and June 26, 1998, the Company held securities owned and
securities sold, not yet purchased as follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 26,
1998 1998
------------ ------------
<S> <C> <C>
Securities owned
Corporate equity securities $11,653 $ 5,220
Municipal obligations 20,894 13,633
U.S. Government and Government agency obligations 8,323 8,696
Corporate obligations 5,010 1,479
Commercial paper 763 446
Other 5,391 2,670
------------ ------------
$52,034 $32,144
============ ============
Securities sold not yet purchased
Corporate equity securities $ 1,536 $ 1,208
Municipal obligations 38 124
U.S. Government and Government agency obligations 2,942 175
Corporate obligations 703 98
Commercial paper 253 50
Other 81 7
------------ ------------
$ 5,553 $ 1,662
============ ============
</TABLE>
SHORT-TERM BORROWINGS
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $192,500,000. These lines of credit are used primarily to
finance securities owned, securities held for correspondent broker/dealer
accounts and receivables in customers' margin accounts. These lines may also be
used to release pledged collateral against day loans. These credit arrangements
are provided on an "as offered" basis and are not committed lines of credit.
These arrangements can be terminated at any time by the lender. Any outstanding
balance under these credit arrangements is due on demand and bears interest at
rates indexed to the federal funds rate. At December 31, 1998, the amount
outstanding under these secured arrangements was $14,900,000 which was
collateralized by securities held for correspondent broker/dealer accounts
valued at $57,336,000. There were no amounts outstanding at June 26, 1998 on
these credit arrangements.
In addition to the broker loans lines, the Company has a $20,000,000 unsecured
line of credit that is due on demand and bears interest at rates indexed to the
federal funds rate. There were no amounts outstanding under this secured line
of credit at December 31, 1998 and June 26, 1998.
At December 31, 1998 and June 26, 1998, the Company had no repurchase agreements
outstanding.
NET CAPITAL REQUIREMENTS
The broker/dealer subsidiaries are subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (the "Rule"), which requires the
maintenance of minimum net capital. Southwest has elected to use the
alternative method, permitted by the Rule, which requires that it maintain
minimum net capital, as defined in Rule 15c3-1 under the 1934 Act, equal to the
greater of $1,500,000 or 2% of aggregate debit balances, as defined in Rule
15c3-3 under the 1934 Act. At December 31, 1998, Southwest had net capital of
$82,140,000, or approximately 12% of aggregate debit balances, which is
$68,495,000 in excess of its minimum net capital requirement of $13,645,000 at
that date. Additionally, the net capital rule of the New York Stock Exchange,
Inc.
<PAGE>
(the "Exchange") provides that equity capital may not be withdrawn or cash
dividends paid if resulting net capital would be less than 5% of aggregate debit
items. At December 31, 1998, Southwest had net capital of $48,028,000 in excess
of 5% of aggregate debit items.
BTS, Sovereign and NorAm follow the primary (aggregate indebtedness) method
under Rule 15c3-1, which requires the maintenance of minimum net capital of
$250,000. At December 31, 1998, the net capital and excess net capital of these
companies was as follows:
Net Capital Excess Net Capital
--------------------------------------
BTS $317,000 $ 67,000
Sovereign 803,000 553,000
NorAm 617,000 367,000
Trust is subject to the capital requirements of the Texas Department of Banking,
and has a minimum capital requirement of $1,000,000. Trust had total
stockholder's equity of approximately $2,627,000, which is $1,627,000 in excess
of its minimum capital requirement at December 31, 1998.
EARNINGS PER SHARE
A reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computations is as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net income $ 6,142 $ 5,390 $ 10,825 $ 10,435
======================== ========================
Weighted average shares outstanding - basic 10,678,406 10,678,485 10,678,406 10,671,870
Effect of dilutive securities:
Assumed exercise of stock options 8,763 15,428 9,452 12,785
------------------------ ------------------------
Weighted average shares outstanding - diluted 10,687,169 10,693,913 10,687,858 10,684,655
======================== ========================
Earnings per share - basic $ .58 $ .50 $ 1.01 $ .98
======================== ========================
Earnings per share - diluted $ .57 $ .50 $ 1.01 $ .98
======================== ========================
</TABLE>
At December 31, 1998, the Company had two stock option plans, the Southwest
Securities Group, Inc. Stock Option Plan (the "1996 Plan") and the Southwest
Securities Group, Inc. 1997 Stock Option Plan (the "1997 Plan"). At December
31, 1998, there were approximately 440,000 options outstanding under the 1996
Plan and approximately 20,000 options outstanding under the 1997 Plan. The
Company also has approximately 17,000 options outstanding that were granted in
conjunction with the acquisition of Barre & Company, Inc. ("Barre Options"). As
of December 31, 1998, 29,000 options issued under the 1996 Plan, 5,500 options
issued under the 1997 Plan and all outstanding Barre Options were dilutive and
were included in the calculation of weighted average shares outstanding
diluted. All other outstanding options were anti-dilutive at December 31, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
From time to time, Southwest Securities Group, Inc. (the "Parent") and
subsidiaries (collectively, the "Company") may publish "forward-looking
statements" within the meaning of section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
(the "Acts") or make oral statements that constitute forward-looking statements.
These forward-looking statements may relate to such matters as anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company cautions readers that a variety of factors could cause
the Company's actual results to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
These risks and uncertainties, many of which are beyond the Company's control,
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 which could affect the cost of
doing business; (5) general economic conditions, both domestic and foreign; (6)
changes in the rate of inflation and related impact on securities markets; (7)
competition from existing financial institutions and other new participants in
the securities markets; (8) legal developments affecting the litigation
experience of the securities industry; (9) successful implementation of
technology solutions; and (10) changes in federal and state tax laws which could
affect the popularity of products sold by the Company. The Company does not
undertake any obligation to publicly update or revise any forward-looking
statements.
The Company's discussion of the issues surrounding the Year 2000 contain
forward-looking statements as defined in the Acts. These forward-looking
statements could relate to, but are not limited to (1) the financial impact of
the Year 2000 project; (2) the Company's estimated timetables for completion of
each phase of the project; (3) the Company's estimates of the availability of
vendor software upgrades and consulting services; (4) the readiness of third-
party service providers; and (5) contingency plans. The Company cautions that
many factors, including those outside of the control of the Company, could cause
actual results to be materially different than those anticipated and expressed
in the forward-looking statements.
GENERAL
The Company is primarily engaged in securities execution and clearance,
securities brokerage, investment banking, securities lending and borrowing and
trading as a principal in equity and fixed income securities. All of these
activities are highly competitive and are sensitive to many factors outside the
control of the Company, including volatility of securities prices and interest
rates; trading volume of securities; economic conditions in the regions where
the Company does business; income tax legislation; and demand for investment
banking and securities brokerage services. While revenues are dependent upon
the level of trading and underwriting volume, which may fluctuate significantly,
a large portion of the Company's expenses remain fixed. Consequently, net
earnings can vary significantly from period to period.
RESULTS OF OPERATIONS
During the second quarter of fiscal 1999, net income totaled $6,142,000, an
increase of $752,000, or 14%, from the second quarter of fiscal 1998. For the
six months ended December 31, 1998, net income increased 4% to $10,825,000 over
the comparable prior year period.
<PAGE>
The following is a summary of increases (decreases) in categories of net
revenues and operating expenses between for the three and six month periods
ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Three Month Change Six Month Change
Amount Percent Amount Percent
------------------ -------------------
<S> <C> <C> <C> <C>
Net revenues
Net revenues from clearing operations $ 3,041 48% $ 4,428 34%
Commissions 742 5% 1,264 4%
Net interest 849 8% 2,597 12%
Investment banking, advisory and
administrative fees 685 10% 3,893 36%
Net gains on principal transactions 3,992 126% 4,616 73%
Other 1,090 44% 1,781 34%
------------------ -------------------
10,399 23% 18,579 22%
------------------ -------------------
Operating expenses
Commissions and other employee
compensation 6,520 30% 12,057 29%
Occupancy, equipment and computer
service costs 698 17% 1,549 19%
Communications 476 16% 230 4%
Floor brokerage and clearing organization
charges 148 12% 358 15%
Other 1,611 25% 3,868 35%
------------------ -------------------
9,453 26% 18,062 26%
------------------ -------------------
Income before income taxes $ 946 11% $ 517 3%
================== ===================
</TABLE>
Net Revenues from Clearing Operations. Net revenues from clearing increased
primarily as a result of an increase in total transaction volumes in the three
and six month periods ended December 31, 1998 over the same periods in the prior
year. Total transactions processed in the second quarter of fiscal 1999
increased to approximately 4.5 million from approximately 1.6 million in the
second quarter of fiscal 1998. Transactions processed in the first half of
fiscal 1999 totaled 7.6 million versus 2.9 million in the first half of fiscal
1998. Turbulent market conditions thus far during fiscal 1999 and high trading
volumes in the internet and technology sectors lead to heavy trading volume in
securities markets. The rate of increase in transactions processed has outpaced
the increase in revenues from clearing as the Company has increased the number
of high-volume trading Correspondents in its customer base. These customers use
a relatively low level of clearing services and, accordingly, are charged
substantially discounted clearing fees from the Company's standard clearing
schedule.
Commissions. Commissions from the Company's client transactions in the three
and six months ended December 31, 1998 increased when compared with revenues in
the comparable prior year periods. This increase is primarily attributable to
an increase in fixed income sales, which increased 106% and 91% over the three
and six month periods, respectively.
Net Interest Income. Net interest income continues to be a stable source of
earnings. The Company's net interest income is dependent upon the level of
customer and stock loan balances as well as the spread between the rate it earns
on those assets compared with the cost of funds.
<PAGE>
The components of interest earnings are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
--------------------- ---------------------
<S> <C> <C> <C> <C>
Interest revenue
Customer margin accounts $10,931 $10,289 $22,743 $18,201
Assets segregated for
regulatory purposes 3,751 2,479 5,681 5,303
Stock borrowed 19,281 21,073 39,356 41,168
Other 1,853 2,694 3,883 6,241
--------------------- ---------------------
35,816 36,535 71,663 70,913
--------------------- ---------------------
Interest expense
Customer funds on deposit 8,524 7,137 16,026 13,608
Stock loaned 15,375 17,272 31,501 33,031
Other 212 1,270 613 3,348
--------------------- ---------------------
24,111 25,679 48,140 49,987
--------------------- ---------------------
Net interest $11,705 $10,856 $23,523 $20,926
===================== =====================
</TABLE>
In the three and six month periods ended December 31, 1998, net interest income
accounted for 21% and 23% of the Company's net revenue, respectively. Net
interest income was 24% of net revenue in both the three and six month periods
ended December 31, 1997.
Interest revenue from customer margin balances and interest expense from
customer funds on deposit have fluctuated in relation to average balances over
the three and six month periods ended December 31, 1998. Net interest revenue
generated from securities lending activities has remained relatively stable in
the current fiscal year versus the prior fiscal year. Average customer balances
and average balances from securities lending activities are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Average customer margin balances $ 523,000 $ 479,000 $ 561,000 $ 440,000
Average customer funds on deposit 684,000 539,000 641,000 511,000
Average stock borrowed 2,030,000 2,032,000 2,044,000 2,051,000
Average stock loaned 1,990,000 2,007,000 2,015,000 2,020,000
</TABLE>
Rates on customer margin balances and funds on deposit are influenced by changes
in leading market interest rates and competitive factors. Securities lending
activities are conducted out of the Company's New York office using a highly
specialized sales force. Competition for these individuals is intense and there
can be no assurance that the Company will be able to retain these individuals.
Investment Banking, Advisory and Administrative Fees. Investment banking,
advisory and administrative fees include revenues derived from the underwriting
and distribution of corporate and municipal securities, unit trusts and money
market and other mutual funds. Investment banking, advisory and administrative
fees increased in fiscal 1999 when compared to the same periods in fiscal 1998
due to increases in fees from both municipal finance and investment advisory
<PAGE>
businesses. The number of municipal finance offerings in which the Company
participated increased 10% and 8%, respectively, for the three and six month
periods ended December 31, 1998 over the comparable periods of the prior year.
Advisory fees earned on investment management increased as assets under
management at December 31, 1998 were approximately $3.4 billion versus $2.7
billion at December 31, 1997.
Net Gains on Principal Transactions. Net gains on principal transactions have
experienced significant growth over prior year in both the three and six month
periods ended December 31, 1998. This growth is due to the expansion of the
Company's equity trading area. Headcount in this area has increased 43% from
December 31, 1997 to December 31, 1998, while coverage from market making
activities has increased 66% to 522 over-the-counter securities in which the
Company makes a market.
Commissions and Other Employee Compensation. Commissions and other employee
compensation are generally affected by the level of operating revenues, earnings
and the number of employees. During the three and six months ended December 31,
1998, commissions and other employee compensation expense increased over the
same periods in the prior year. This was principally due to (1) increased
commissions and benefits paid to revenue-producing employees generating higher
levels of operating revenues; (2) increased headcount among the Brokers
Transaction Services ("BTS") independent contractor network; and (3) the
addition of 97 full-time employees. The number of employees increased to 826 at
December 31, 1998 compared to 729 at December 31, 1997. The number of BTS
independent contractor sales representatives increased to 695 at December 31,
1998 from 688 at December 31, 1997.
Occupancy, Equipment and Computer Service Expenses. Occupancy, equipment and
computer service expenses increased for both three and six months periods
presented primarily due to upgrades in computer processing equipment.
Other Expenses. Other expenses have increased primarily due to increases in
contract labor, professional services and promotional expenses. Contract labor
and professional service expenses relate to, among other things, the Company's
involvement in developing Year 2000 compliant software (see YEAR 2000 discussion
below).
FINANCIAL CONDITION
The Parent owned a minority interest in Roundtable Partners, LLC, the
predecessor of Knight/Trimark Group, Inc. ("Knight"), which filed an S-1
registration statement with the U.S. Securities and Exchange Commission on May
1, 1998 for an initial public offering of stock. Subsequent to the offering,
which closed on July 10, 1998, the Parent owned approximately 1.7 million shares
of Knight. The shares are classified as marketable equity securities available
for sale, and the unrealized holding gain, net of tax, is recorded as a separate
component of stockholders' equity on the consolidated statements of financial
condition in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Knight filed an S-1 registration statement for a secondary offering on February
1, 1999. The Parent will not sell any of its shares in conjunction with the
offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are substantially liquid in nature and consist mainly of
cash or assets readily convertible into cash. These assets are financed by the
Company's equity capital, short-term bank borrowings, interest bearing and non-
interest bearing client credit balances, Correspondent deposits and other
payables. The Company maintains an allowance for doubtful accounts which
represents
<PAGE>
amounts, in the judgment of management, that are necessary to adequately absorb
losses from known and inherent risks in receivables from clients, clients of
Correspondents and Correspondents.
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $192,500,000. These lines of credit are used primarily to
finance securities owned, securities held for Correspondent broker/dealer
accounts and receivables in customers' margin accounts. These credit
arrangements are provided on an "as offered" basis and are not committed lines
of credit. Outstanding balances under these credit arrangements are due on
demand, bear interest at rates indexed to the federal funds rate and are
collateralized by securities of the Company and its clients. At December 31,
1998, the amount outstanding on under these secured arrangements was $14,900,000
which was collateralized by securities held for correspondent broker/dealer
accounts valued at $57,336,000. In the opinion of management, these credit
arrangements are adequate to meet the short-term operating capital needs of the
Company.
In addition to the broker loan lines, the Company also has a $20,000,000
unsecured line of credit which is due on demand and bears interest at rates
indexed to the federal funds rate. There were no amounts outstanding at December
31, 1998 under this unsecured line of credit.
Net cash used in operating activities during the six month period ended December
31, 1998 was $10,259,000. The use of cash was due to the increase in securities
owned and was adequately financed by the short term borrowings mentioned above.
The Company's broker/dealer subsidiaries are subject to the requirements of the
Securities and Exchange Commission relating to liquidity, capital standards and
the use of client funds and securities. The Company has historically operated
in excess of the minimum net capital requirements.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates, equity prices, and changes in credit ratings of the issuer.
The Company's exposure to market risk is directly related to its role as a
financial intermediary in customer-related transactions and to its proprietary
trading activities.
Interest Rate Risk. Interest rate risk is a consequence of maintaining
inventory positions and trading in interest-rate-sensitive financial
instruments. The Company does not maintain material positions in interest rate
sensitive financial instruments. The Company's fixed income activities also
expose it to the risk of loss related to changes in credit spreads. Credit
spread risk arises from the potential that changes in an issuers credit rating
or credit perception could affect the value of financial instruments.
Equity Price Risk. The Company is exposed to equity price risk as a result of
making markets in equity securities. Equity price risk results from changes in
the level or volatility of equity prices, which affect the value of equity
securities or instruments that derive their value from a particular stock, a
basket of stocks or a stock index.
Credit Risk. Credit risk arises from the potential nonperformance by
counterparties, customers or debt security issuers. The Company is exposed to
credit risk as a trading counterparty to dealers and customers, as a holder of
securities and as a member of exchanges and clearing organizations.
Managing Risk Exposure. The Company manages risk exposure through the
involvement of various levels of management. Position limits in trading and
inventory accounts are well established and monitored on an ongoing basis.
Current and proposed underwriting, banking and other commitments are subject to
due diligence reviews by senior management, as well as professionals in
<PAGE>
the appropriate business and support units involved. Credit risk related to
various financing activities is reduced by the industry practice of obtaining
and maintaining collateral. The Company monitors its exposure to counterparty
risk through the use of credit exposure information, the monitoring of
collateral values and the establishment of credit limits.
Market Risk Analysis. The Company has performed an analysis of the Company's
financial instruments and has assessed the related risk and materiality in
accordance with the rules. Based on this analysis, in the opinion of
management, the market risk associated with the Company's financial instruments
at December 31, 1998 will not have a material adverse effect on the consolidated
statements of financial position or operating results of the Company.
YEAR 2000
The widespread use of computer programs that rely on two-digit date programs to
perform computations and decision-making functions may cause information
technology ("IT") systems to malfunction in the Year 2000 and may lead to
significant business delays in the U.S. and internationally. The Year 2000
problem has the potential to 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-IT
systems.
The Company has defined a Year 2000-compliant system as one capable of correct
identification, manipulation and calculation when processing data in connection
with the year change from December 31, 1999 to January 1, 2000. A Year 2000-
compliant system is also capable of correct identification, manipulation and
calculation using leap years both alone and in conjunction with other dates.
Not all of the Company's systems are compliant under the above definition;
however, the Company is addressing the issues with this problem in the following
manner.
In the first stage, the Company prepared an inventory of all IT and non-IT
systems, as well as equipment that could have embedded chips, whether or not
critical to the operation of the business. The Company also compiled a listing
of material relationships with third parties. These relationships include
various exchanges, clearing houses, banks, telecommunications companies and
public utilities. This stage of the Year 2000 process is 100% complete. The
Company continues to review various areas of the business to identify any items
overlooked in the initial inventories.
In stage two, results from the inventory discussed above are being assessed to
determine the Year 2000 impact and what actions need to be taken to obtain Year
2000 compliance. For the Company's internal systems, actions needed range from
obtaining vendor certification of Year 2000 compliance, remediation of internal
systems or replacement of systems and equipment that cannot be remediated. This
stage is 95% complete with respect to internal systems with the major
outstanding items being receipt of vendor certifications and installation of
Year 2000 upgrades for certain non-critical systems. The Company has determined
a course of action for remediation or replacement of all critical internal
systems. The Company is surveying and obtaining information about Year 2000
readiness of its material third-party relationships. Contingency plans will be
developed by March 31, 1999 for those third parties who cannot satisfactorily
demonstrate Year 2000 compliance.
The third stage includes the repair, replacement or retirement of systems. This
stage of the Year 2000 process is ongoing and is dependent upon the availability
of upgrades from our IT vendors, technician time to implement the upgrades and
notification from other third parties of Year 2000 compliance. The Company has
been upgrading packaged software throughout the organization. Desktop system
updates are complete and upgrade of the communications infrastructure is
ongoing.
<PAGE>
The primary financial system used for financial reporting purposes for the
Company was replaced during fiscal 1998 to prepare for Year 2000 as well as to
derive other benefits from the financial reporting system. Updates to this
system were installed in the second quarter of fiscal 1999 and testing of the
system is continuing. The financial system itself is certified by the vendor as
Year 2000 compliant.
The Company's primary operational system is the Securities Industry Software
("SIS") application, which provides both front and back office services to
Correspondents, customers and our internal users. For several years, the
Company has self-supported the SIS application. The Company is pursuing a
replacement strategy for SIS and is implementing a family of new applications
provided by Comprehensive Software Systems, Ltd. ("CSS"). CSS is a venture made
up of several securities firms (including the Company, which owns 8.18% of CSS).
The Company currently anticipates receiving all of the modules necessary to
replace SIS functionality before the end of fiscal 1999.
While replacement of the SIS system with CSS is our primary solution for Year
2000 issues associated with the SIS system, in September 1998 the Company
engaged an independent consulting firm to begin remediation of the SIS system.
As of December 31, 1998, the remediation was 18% complete. Currently,
remediation is 60% complete. The Company expects remediation and testing to be
complete by June 30, 1999.
The Company has been working on the CSS project since 1992, as implementation of
this system was in process before the Company began assessment of critical Year
2000 issues. In fiscal 1997, the Company accelerated the pace of the CSS project
so that it would be available as the Year 2000 solution for the SIS system.
Through fiscal 1997 and 1998, costs associated with the joint venture, including
personnel, hardware, software and related costs, were approximately $4 million.
During fiscal 1997 and 1998, the Company incurred an additional $1 million in
costs related to the Year 2000 project primarily related to compensation and
benefits, software upgrades and hardware replacement for financial and other
systems. In the second quarter of fiscal 1999, the Company has incurred an
additional $1.6 million in expenses related to the CSS project and other Year
2000 initiatives, bringing the total spent in fiscal 1999 to $2.9 million.
The Company expects to incur additional costs in the remainder of fiscal 1999
for the implementation of the CSS software, as well as costs to remediate and
replace other systems. These costs will be funded out of working capital and
substantially all will be expensed. The total costs for remediation of systems
are not expected to exceed $4.1 million. The budgeted expenditures include
compensation and benefits for IT and other operational staff, consulting
services, software purchases and other remediation costs. Implementation of the
CSS system should result in the reduction of certain existing hardware and
software lease, maintenance and licensing costs.
The Company is also heavily dependent upon the power and telecommunications
infrastructure within the United States and would be subject to business
interruptions as a result of the failure of those systems. Additionally, the
Company would experience disruption in certain of its businesses if the various
exchanges, clearing houses or banks used by the Company reported a system
failure. The Company is communicating with these third parties in order to
obtain assurances regarding Year 2000 readiness.
The last stage of the implementation process includes testing all of the changes
implemented individually and integrating those changes with all of the Company's
systems and those of its customers and trading partners. Testing takes on
various forms depending on the type of change implemented. Each upgrade, to the
extent economically feasible, is run through a test environment before it is
implemented. It is then tested to see how well it integrates into the Company's
overall IT environment. The Company is also engaging in point-to-point testing
with various exchanges, clearing houses and utilities and has established a
future date environment for testing the CSS
<PAGE>
application. All of the Company's correction and testing activities are targeted
towards participating in the Tier One securities industry test being coordinated
by the Securities Industry Association, which begins in March 1999. At the
current time, the Company is not employing any independent verification
processes of its systems' tests.
Contingency plans related to the Company's financial systems, embedded chip
technology and third-party relationships are expected to be complete by the end
of the third fiscal quarter, with continual refinement to the plans ongoing
until all of the Company's critical systems and all critical third-party
relationships have demonstrated Year 2000 compliance.
The potential impact of the Year 2000 problem on the securities industry as a
whole could be material, as virtually every aspect of the sales of securities
and processing of transactions will be affected. Due to the size of the task
facing the securities industry and the interdependent nature of securities
transactions, the Company may be adversely affected by this problem, depending
on whether it and the entities with which it does business address this issue
successfully.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated in Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption Market Risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None Reportable (229.103)
Item 2. Changes in Securities and Use of Proceeds
None Reportable (Per Instructions to Form 10-Q)
Item 3. Defaults upon Senior Securities
None Reportable (Per Instructions to Form 10-Q)
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on November 4, 1998. The following
directors were elected at the meeting:
Nominees For Withheld
------------------------------------------------------------------------
Don A. Buchholz 9,824,656 8,912
Raymond E. Wooldridge 9,824,656 8,912
David Glatstein 9,824,446 9,122
Allen B. Cobb 9,823,501 10,067
J. Jan Collmer 9,824,656 8,912
R. Jan LeCroy 9,813,631 19,937
Frederick R. Meyer 9,823,501 10,067
Jon L. Mosle, Jr. 9,824,656 8,912
Item 5. Other Information
A shareholder who wishes to make a proposal at the 1999 Annual Meeting of
Shareholders without complying with the requirements of the SEC's Rule 14a-8
(and therefore without including the proposal in the Company's proxy materials)
should notify Barbara Hart, Corporate Secretary, at the Company's principal
executive offices, of that proposal by August 10, 1999. If a shareholder fails
to give notice by that date, then the persons named as proxies in the proxy
cards solicited by the Company's Board of Directors for that meeting will be
entitled to vote the proxy cards held by them regarding that proposal, if
properly raised at that meeting, in their discretion.
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
10.1 Executive Compensation
The information required by this item regarding Executive compensation is
incorporated by reference to pages 8 through 11 of the Company's Proxy Statement
dated September 24, 1998 which was filed with the Commission pursuant to
Regulation 240.14a-6 (c) prior to October 24, 1998.
10.7 Stock Purchase Plan (Restated)
27 Financial Data Schedule
REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southwest Securities Group, Inc.
------------------------------------------
(Registrant)
February 12, 1999 /S/ David Glatstein
- ----------------- ---------------------------------------------
Date (Signature)
David Glatstein
President and Chief Executive Officer
(Principal Executive Officer)
February 12, 1999 /S/ Stacy M. Hodges
- ----------------- ---------------------------------------------
Date (Signature)
Stacy M. Hodges
Treasurer and Chief Financial Officer
(Principal Financial Officer)
February 12, 1999 /S/ Laura Leventhal
- ----------------- ---------------------------------------------
Date (Signature)
Laura Leventhal
Controller
(Principal Accounting Officer)
<PAGE>
SOUTHWEST SECURITIES GROUP, INC.
STOCK PURCHASE PLAN
(RESTATED)
ARTICLE I
PURPOSE AND ESTABLISHMENT
-------------------------
1.01 Purpose. The Southwest Securities Group, Inc. Stock Purchase Plan,
-------
as restated herein (the "Plan"), is intended to provide a method whereby
Eligible Participants will have an opportunity to acquire a proprietary interest
in the Company through the purchase of shares of Common Stock of the Company.
1.02 Shares Reserved. There shall be reserved for issuance and purchase
---------------
by Participants under the Plan an aggregate of 1,000,000 shares of Common Stock
of the Company.
ARTICLE II
DEFINITIONS
-----------
The following words when used in this Plan have the respective meanings set
forth below unless the context clearly indicates otherwise:
2.01 Account means the account or record established and maintained by the
-------
Committee reflecting the value of the cash and Company Stock, if any, of each
Participant attributable to his payroll deductions. Within each such Account,
the Committee shall establish and maintain a cash subaccount, representing a
Participant's payroll deductions awaiting investment in Company Stock and a
Company Stock subaccount, representing shares of Company Stock purchased on
behalf of the Participant by the Committee.
2.02 Affiliated Company means the Company and any subsidiary of the
------------------
Company, as defined in section 424(f) of the Code.
2.03 Committee shall mean the individuals described in Article V.
---------
2.04 Company means Southwest Securities Group, Inc., a Delaware
-------
corporation.
2.05 Company Stock means the common stock of the Company, $.10 par value.
-------------
2.06 Compensation means the total amount paid to a Participant by an
------------
Employer as reported on Form W-2 or 1099 for each calendar year during the term
hereof.
STOCK PURCHASE PLAN page 1
<PAGE>
2.07 Effective Date means January 1, 1998 or such later date as the Board
--------------
of Directors may establish.
2.08 Eligible Participant means all full-time employees of an Employer with
--------------------
at least one year of service; provided, however, that officers and directors of
the Company shall not participate in the Plan.
2.09 Employer means the Company and any other Affiliated Company, provided
--------
such Affiliated Company is designated by the Board of Directors of the Company.
2.10 Grant Shares shall have the meaning set forth in Section 6.01.
------------
2.11 Participant means an Eligible Participant who has executed a
-----------
participation election form pursuant to Section 3.02 hereof and has commenced
participation in the Plan.
2.12 Plan means the stock purchase plan embodied herein, as the same may be
----
amended from time to time, and shall be known as the "Southwest Securities
Group, Inc. Stock Purchase Plan."
2.13 Purchased Shares shall have the meaning set forth in Section 6.01.
----------------
Gender and Number. Except as otherwise indicated by the context, any
-----------------
masculine terminology used herein also includes the feminine and neuter, and
vice versa, and the definition of any term herein in the singular shall also
include the plural, and vice versa.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.01 Eligibility. Each Eligible Participant shall be eligible to
-----------
participate in the plan as of the Effective Date. Each other individual who
becomes an Eligible Participant after the Effective Date shall be eligible to
participate in the Plan as of the first January 1 or July 1 (if he is an
Eligible Participant on that date) that coincides with or next follows the date
such individual becomes an Eligible Participant.
3.02 Commencement of Participation. Subject to the provisions hereof, an
-----------------------------
Eligible Participant may elect to become a Participant by executing and filing
with the Committee a participation election form, in such form and manner as the
Committee may prescribe, on which he elects to participate in the Plan,
authorizes his Employer to make payroll deductions and to transfer such payroll
deductions to the Committee on his behalf, and designates a payroll deduction
rate. Participation in the Plan shall commence on the effective date of the
form in accordance with Section 4.02 hereof, and shall continue in effect until
amended or terminated.
STOCK PURCHASE PLAN page 2
<PAGE>
3.03 Waiver of Participation. Any Eligible Participant who chooses not to
-----------------------
participate in the Plan when he is first eligible to participate shall waive his
right to participate until either the first January 1 or July 1 of any
subsequent calendar year.
ARTICLE IV
PAYROLL DEDUCTIONS
------------------
4.01 Amount of Deduction. At the time an Eligible Participant files his
-------------------
authorization for payroll deduction, he shall elect to have deductions made from
his pay on each payday during the period he is a Participant at the rate of 5%,
10% or 15% of his Compensation.
4.02 Effective Date of Eligible Participant's Participation and Payroll
------------------------------------------------------------------
Deduction Election. The effective date of an Eligible Participant's
- ------------------
participation and payroll deduction election shall be no earlier than the first
day of the payroll period coinciding with or next following the Effective Date
or the first January 1 or July 1 following the date the Eligible Participant's
participation election form is received in executed form by his Employer and by
the Committee (provided such effective date is no earlier than the date the
Eligible Participant first becomes eligible to participate in the Plan).
4.03 Participant's Account. As soon as administratively practicable
---------------------
following the date payroll deductions are made from a Participant's
Compensation, the Committee shall cause such amounts to be credited to the
Participant's Account under the Plan. A Participant may not make any separate
cash payment into his Account except when on leave of absence and then only as
provided in Section 4.05.
4.04 Changes in Payroll Deductions. Prior to any January 1 or July 1, a
-----------------------------
Participant may at any time increase or decrease his payroll deduction by filing
a new payroll deduction election which shall become effective on the first day
of the payroll period coinciding with or next following the such January 1 or
July 1.
4.05 Leave of Absence. If a Participant is absent from work due to a leave
----------------
of absence, such Participant shall have the right to elect (i) to withdraw the
balance in his Account pursuant to Section 7.01 hereof, or (ii) to discontinue
contributions to the Plan but remain a Participant, or (iii) to remain a
Participant in the Plan during such leave of absence, authorizing deductions to
be made from payments, if any, by the Employer to the Participant during such
leave of absence and undertaking to make cash payments directly to the Committee
at the end of each payroll period to the extent that amounts payable by the
Employer to such Participant are insufficient to meet such Participant's
authorized payroll deductions.
4.06 Transfer to Ineligible Participant. A Participant's payroll deduction
----------------------------------
election shall terminate automatically if the Participant is no longer
classified by the Committee as an Eligible Participant. During the period a
Participant is ineligible to participate in the Plan pursuant to this
STOCK PURCHASE PLAN page 3
<PAGE>
Section, the Participant may withdraw those shares of Company Stock which have
vested and cash held in his Account, if any, and may elect to sell shares of
Company Stock held in his Account pursuant to Section 6.04 hereof. Upon return
of the Participant to eligible employment, the Participant shall be permitted to
execute a new participation election form and resume having payroll deductions
paid to the Committee on his behalf under Section 4.03 hereof, provided that the
effective date of the new participation election form shall be no earlier than
the later of (i) January 1 or July 1 of a calendar year following the date the
participation form is received in executed form by the Employer and the
Committee or (ii) the date the individual is deemed an Eligible Participant. In
the event that a Participant ceases to be an employee of the Employer for any
reason before the Vesting Date (as hereafter defined), he will forfeit all
unvested shares. Prior to vesting, any dividends on unvested shares are also
subject to forfeiture, but vested and unvested shares may be voted by the
Participant.
4.07 Registration of Company Stock Distributed to Participant. Stock to be
--------------------------------------------------------
delivered to a Participant under the Plan will be registered in the name of the
Participant, or, if the Participant so directs by written notice to the
Committee prior to distribution, in the names of the Participant and one such
other person as may be designated by the Participant, as joint tenants with
rights of survivorship or as tenants by the entireties, to the extent permitted
by applicable law.
ARTICLE V
ADMINISTRATION
--------------
5.01 Appointment of Committee. The Board of Directors of the Company may
------------------------
appoint a Committee to administer the Plan, which shall consist of no fewer than
three members of the Board of Directors. No member of the Committee shall be
eligible to purchase stock under the Plan. If no Committee is appointed, the
Board of Directors shall perform the functions of the Committee.
5.02 Authority of the Committee. Subject to the provisions of the Plan,
--------------------------
the Committee shall have plenary authority in its discretion to interpret and
construe any and all of the provisions of the Plan, and to make all other
determinations deemed necessary or advisable for administering the Plan. The
Committee's determination on the foregoing matters shall be conclusive.
5.03 Administration of the Plan by the Committee. The Committee shall
-------------------------------------------
prepare participation election forms and distribute such forms to Eligible
Participants. Upon receipt by the Committee of an Eligible Participant's
executed participation election form, the Committee shall establish an Account
for such Participant to hold the Participant's payroll deductions pending
investment in Company Stock as hereinafter provided. Pending the investment of
amounts held in Participants' Accounts in shares of Company Stock as hereinafter
provided, the Committee is not responsible for any short-term investment of such
amounts and Participants will not earn interest or other income on any funds
held in their Accounts pending investment.
STOCK PURCHASE PLAN page 4
<PAGE>
5.04 Rules Governing Administration of the Committee. The Board of
-----------------------------------------------
Directors may from time to time appoint members of the Committee in substitution
for or in addition to members previously appointed and may fill vacancies,
however caused, in the Committee. The Committee may select one of its members
as its Chairman and shall hold its meetings at such times and places as it shall
deem advisable and may hold telephonic meetings. A majority of its members
shall constitute a quorum. All determinations of the Committee shall be made by
a majority of its members. The Committee may correct any defect or omission or
reconcile any inconsistency in the Plan, in the manner and to the extent it
shall deem desirable. Any decision or determination reduced to writing and
signed by a majority of the members of the Committee shall be fully effective as
if it had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.
ARTICLE VI
PURCHASE OF SHARES
------------------
6.01 Purchase Price. As of the first business day following the end of
--------------
each six month calendar period, or as soon as administratively practicable
thereafter, the Committee shall use the funds accumulated in Participants'
Accounts to purchase from the Company the greatest number of shares of Company
Stock (the "Purchased Shares") that can then be purchased with such funds at the
fair market value of such shares on that date. "Fair market value" shall mean
the six-month average trading price of the Company Stock, determined by
averaging the month-end closing prices of the Company Stock for the preceding
six-month period. The Purchased Shares will be fully vested. As of the
purchase date, each Participant will also be granted an additional number of
shares, subject to vesting (the "Grant Shares"), in an amount equal to 15% of
the accumulated funds divided by said fair market value.
6.02 Allocation of Shares. Shares of Company Stock acquired by the
--------------------
Committee shall be allocated to the Account of each Participant in whole shares,
and any remaining cash shall be retained by the Committee to be used for future
purchases of Company Stock.
6.03 Reporting by the Committee to Participants. As soon as
------------------------------------------
administratively practicable following the end of each calendar year, the
Committee shall prepare and distribute to each Participant a statement
reflecting the cash and shares of Company Stock then held in the Participant's
Account.
6.04 Sales of Company Stock. The Company Stock issued to the Participants
----------------------
under the Plan shall be non-transferrable and shall be held by the Committee in
the Participant's Account until termination of employment occurs or a
permissible sale is directed. Participants will become vested in the Grant
Shares two years after the date of purchase ("Vesting Date"). Each Participant
may direct the Committee to sell all or any portion of each group of Purchased
Shares
STOCK PURCHASE PLAN page 5
<PAGE>
and Grant Shares held in his Account at any time after the Vesting Date for that
group. In addition, for a period of 30 days after the date of purchase, each
Participant will have the right to direct the sale of Purchased Shares in an
amount, determined solely by the Committee, calculated to cover current income
tax withholding requirements resulting from the purchase, including elections
under Section 83(b) of the Internal Revenue Code of 1986, as amended. The
Company may also offset or direct sales of Purchased Shares if other
arrangements are not made by the Participant to satisfy all tax withholding
requirements. The Committee shall establish policies and procedures with
Participants to ensure timely sales of Company Stock pursuant to this Section
6.04. The Committee shall prepare and furnish to Participants tax information
returns required by any taxing authority relating to sales of Company Stock on
behalf of a Participant, but not election or other forms, and shall be
authorized to withhold amounts required to be withheld for federal or state tax
purposes in connection with such sales.
6.05 Payment of Expenses. The Company shall pay the expenses of
-------------------
establishing and maintaining the Plan.
ARTICLE VII
DISTRIBUTIONS
-------------
7.01 Termination of Employment. As soon as administratively practicable
-------------------------
following the Participant's termination of employment for any reason, including
retirement and death, the payroll deductions and the vested shares of Company
Stock credited to his Account will be distributed to him, or in the case of his
death, to the person or persons entitled thereto under Section 8.01.
ARTICLE VIII
MISCELLANEOUS
-------------
8.01 Death of Participant. Upon the death of a Participant, the Committee
--------------------
shall deliver the vested Company Stock and/or cash then credited to the
Participant's Account to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Committee), the Committee shall hold the Participant's Account
pending instructions from a person authorized to direct the disposition of the
Participant's Account under applicable law.
8.02 Amendment and Termination. The Board of Directors of the Company shall
-------------------------
have complete power and authority to terminate or amend the Plan. No
termination, modification, or amendment of the Plan may, without the consent of
a Participant, adversely affect the rights of such Participant to Company Stock
and cash then credited to his Account.
STOCK PURCHASE PLAN page 6
<PAGE>
8.03 No Employment Rights. The Plan does not, directly or indirectly,
--------------------
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company or
any Affiliated Company, and it shall not be deemed to interfere in any way with
the Company's or an Affiliated Company's right to terminate, or otherwise
modify, an employee's employment at any time.
8.04 Effect of Plan. The provisions of the Plan shall, in accordance with
--------------
its terms, be binding upon, and inure to the benefit of, all successors of each
Participant, including, without limitation, such Participant's estate and the
executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
8.05 Governing Law. The law of the State of Texas will govern all matters
-------------
relating to this Plan except to the extent it is superseded by the laws of the
United States.
IN WITNESS WHEREOF, the Company has executed this restated Plan as of the
1st day of January, 1998.
SOUTHWEST SECURITIES GROUP, INC.
By: /S/ Stacy M. Hodges
__________________________
Stacy M. Hodges
Chief Financial Officer
STOCK PURCHASE PLAN page 7
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<PERIOD-END> DEC-31-1998 DEC-31-1998
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