<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 March 31, 2000
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 May 8, 2000, there were 14,431,005 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
March 31, 2000 (unaudited) and June 25, l999
Consolidated Statements of Income and Comprehensive Income
For the three and nine months ended March 31, 2000 and March 26, 1999
(unaudited)
Consolidated Statements of Cash Flows
For the nine months ended March 31, 2000 and March 26, 1999 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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
March 31, 2000 and June 25, l999
(In thousands, except par values and share amounts)
<TABLE>
<CAPTION>
March June
(Unaudited)
------------- -------------
Assets
<S> <C> <C>
Cash $ 22,952 $ 11,334
Assets segregated for regulatory purposes 209,691 225,736
Marketable equity securities, at market value 82,309 172,928
Receivable from brokers, dealers and clearing organizations 3,755,962 3,088,005
Receivable from clients, net 1,283,376 679,652
Securities owned, at market value 123,915 74,486
Other assets 73,248 41,133
------------- -------------
$ 5,551,453 $ 4,293,274
============= =============
Liabilities and Stockholders' Equity
Short-term borrowings $ 262,664 $ 2,700
Payable to brokers, dealers and clearing organizations 3,538,060 3,000,096
Payable to clients 1,177,535 812,559
Securities sold, not yet purchased, at market value 26,516 24,350
Drafts payable 51,521 37,013
Other liabilities 163,514 104,222
Exchangeable subordinated notes 57,500 50,000
------------- -------------
5,277,310 4,030,940
Minority interest in consolidated subsidiary 100 50
Stockholders' equity:
Preferred stock of $1.00 par value. Authorized 100,000
shares; none issued - -
Common stock of $.10 par value. Authorized 60,000,000 shares,
11,842,690 issued and 11,827,016 outstanding shares at
March 31, 2000; authorized 20,000,000 shares,
11,805,925 issued and outstanding at June 25, 1999 1,184 1,180
Additional paid-in capital 128,818 127,278
Accumulated other comprehensive income - unrealized
holding gain, net of tax of $28,736 at March 31, 2000
and $60,374 at June 25, 1999 53,625 112,123
Retained earnings 90,517 21,896
Receivable from employees under the Employee Stock Purchase Plan - (7)
Deferred compensation, net 538 (186)
Treasury stock (15,674 shares, at cost) (639) -
------------- -------------
Total stockholders' equity 274,043 262,284
Commitments and contingencies
------------- -------------
$ 5,551,453 $ 4,293,274
============= =============
</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 nine months ended March 31, 2000 and March 26, 1999
(In thousands, except per share and share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
2000 1999 2000 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues from clearing operations $ 20,332 $ 10,521 $ 45,086 $ 28,030
Commissions 21,925 16,428 55,778 46,946
Interest 67,161 34,623 165,385 106,286
Investment banking, advisory and administrative fees 6,863 6,372 21,976 21,193
Net gains on principal transactions 85,474 18,580 115,506 29,508
Other 4,670 3,518 12,126 10,572
------------------------------------------------------
206,425 90,042 415,857 242,535
------------------------------------------------------
Commissions and other employee compensation 46,501 36,182 113,307 90,268
Interest 48,766 23,596 117,555 71,736
Occupancy, equipment and computer service costs 6,364 5,605 18,627 15,149
Communications 4,142 3,405 12,137 9,768
Floor brokerage and clearing organization charges 2,242 1,572 6,233 4,391
Advertising and promotional 2,432 1,484 11,125 3,698
Other 14,761 6,492 26,682 19,112
------------------------------------------------------
125,208 78,336 305,666 214,122
------------------------------------------------------
Income before income taxes 81,217 11,706 110,191 28,413
Income taxes 28,330 4,173 38,385 10,055
------------------------------------------------------
Net income 52,887 7,533 71,806 18,358
Other comprehensive income (loss) - unrealized
holding gain (loss) arising during period, net of tax (31,711) 35,858 (58,497) 61,636
------------------------------------------------------
Comprehensive income $ 21,176 $ 43,391 $ 13,309 $ 79,994
======================================================
Earnings per share - basic $ 4.07 $ .58 $ 5.52 $ 1.42
======================================================
Earnings per share - diluted $ 4.02 $ .58 $ 5.46 $ 1.41
======================================================
Weighted average shares outstanding - basic 12,990,197 12,942,415 12,997,012 12,927,578
======================================================
Weighted average shares outstanding - diluted 13,140,194 13,038,138 13,141,513 12,977,301
======================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended March 31, 2000 and March 26, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 71,806 $ 18,358
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,252 2,316
Provision for doubtful accounts 1,915 355
Deferred income taxes (2,981) (1,242)
Deferred compensation expense 761 31
Gain on sale of marketable equity securities (80,853) -
Decrease (increase) in assets segregated for regulatory purposes 16,045 (147,424)
Net change in broker, dealer and clearing organization accounts (129,993) (21,676)
Net change in client accounts (240,663) 103,968
Increase in securities owned (49,169) (37,007)
Increase in other assets (27,777) (10,665)
Increase in securities sold, not yet purchased 2,166 26,523
Decrease in drafts payable 14,508 3,912
Increase in other liabilities 91,144 7,746
--------- ---------
Net cash used in operating activities (330,839) (54,805)
--------- ---------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold improvements (3,247) (2,044)
Proceeds from sale of marketable equity securities 81,077 -
--------- ---------
Net cash provided by (used in) investing activities 77,830 (2,044)
--------- ---------
Cash flows from financing activities:
Proceeds from short term borrowings 259,964 55,500
Proceeds from issuance of exchangeable subordinated notes 7,500 -
Debt issue costs (242) -
Net change in receivable from employees for Employee
Stock Purchase Plan 7 1
Proceeds from employees for Stock Purchase Plan 575 100
Proceeds from exercise of stock options 376 -
Proceeds related to Deferred Compensation Plan 639 -
Purchase of treasury stock (639) -
Payment of cash dividend on common stock (3,603) (2,107)
Proceeds from issuance of stock of consolidated subsidiary 50 100
--------- ---------
Net cash provided by financing activities 264,627 53,594
--------- ---------
Net increase (decrease) in cash 11,618 (3,255)
Cash at beginning of period 11,334 13,706
--------- ---------
Cash at end of period $ 22,952 $ 10,451
========= =========
</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"):
Broker/Dealer Group
Southwest Securities, Inc. "Southwest"
SWS Financial Services, Inc. "SWSFS"
Mydiscountbroker.com, Inc. "MDB"
Southwest Clearing Corporation "Clearing"
Asset Management Group
Westwood Management Corporation "Westwood"
Westwood Trust "Trust"
SW Capital Corporation "Capital"
Southwest Investment Advisors, Inc. "Advisors"
Other
SWS Technologies Corporation "Technologies"
Trading Finance Corporation "Trading"
Southwest, SWSFS, MDB and Clearing are registered broker/dealers under the
Securities Exchange Act of 1934 ("1934 Act"). Clearing has not yet begun
operations. Advisors and Westwood are registered investment advisors under the
Investment Advisors Act of 1940. Trust is chartered and regulated by the Texas
Department of Banking. Trading, a Delaware corporation, was incorporated in
October 1999 and is currently dormant.
The consolidated financial statements as of March 31, 2000, and for the three
and nine month periods ended March 31, 2000 and March 26, 1999, 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 25, 1999 filed on Form 10-K. Amounts included for June 25, 1999 are from
the audited consolidated financial statements as filed on Form 10-K.
All significant intercompany balances and transactions have been eliminated.
CASH FLOW REPORTING
Cash paid for interest was $110,522,000 and $72,285,000 for the nine month
periods ended March 31, 2000 and March 26, 1999, respectively. Cash paid for
income taxes was $9,141,000 and $7,425,000 for the nine months ended March 31,
2000 and March 26, 1999, respectively.
MERGER WITH ASBI HOLDINGS, INC.
On April 28, 2000, the Company completed a merger with ASBI Holdings, Inc.
(ASBI) through the exchange of 2.6 million shares of newly-issued Company common
stock for all of the outstanding shares of ASBI common stock. The merger will be
accounted for as a pooling-of-interests combination and, accordingly, the
Company's historical consolidated financial statements presented in future
reports will be restated to include the accounts and results of operations of
ASBI.
ASBI is a unitary savings and loan holding company subject to regulation by the
Office of Thrift Supervision ("OTS"). A wholly owned subsidiary of ASBI, First
Savings Bank, FSB, Arlington, Texas, ("the Bank") is a federally chartered
savings association organization also regulated by the OTS. Subsidiaries
<PAGE>
of the Bank include First Consumer (82% ownership interest), FSB Financial (51%
ownership interest), FSB Development (100% ownership interest) and American
First Mortgage (51% ownership interest).
The following unaudited pro forma data summarizes the combined results of
operations of the Company and ASBI as if the combination had been consummated on
March 31, 2000, and reflects adjustments to conform the accounting methods of
ASBI and the Company. Financial statements as of March 31, 2000 and for the
three and nine months ended March 31, 2000 for both ASBI and the Company were
combined to derive fiscal 2000 figures below. Due to the fact that the companies
had non-conforming year ends prior to the merger, the Company's financial
statements for the three and nine months ended March 26, 1999 were combined with
ASBI's financial statements for the three and nine months ended June 30, 1999.
Pro forma total revenue and net income for the Company and ASBI prior to the
combination were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 26, March 31, March 26,
2000 1999 2000 1999
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue
Southwest Securities Group, Inc. $ 206,425 $ 90,042 $ 415,857 $ 242,535
ASBI Holdings, Inc. 9,472 7,872 28,644 26,191
---------- ---------- ---------- ----------
Combined pro forma $ 215,897 $ 97,914 $ 444,501 $ 268,726
========== ========== ========== ==========
Net income, giving effect to pro forma income
taxes
Southwest Securities Group, Inc. $ 52,887 $ 7,533 $ 71,806 $ 18,358
ASBI Holdings, Inc. 1,783 1,923 6,027 5,917
---------- ---------- ---------- ----------
Combined pro forma $ 54,670 $ 9,456 $ 77,833 $ 24,275
========== ========== ========== ==========
Earnings per share - basic
Combined pro forma $ 3.51 $ .61 $ 4.99 $ 1.56
========== ========== ========== ==========
Earnings per share - diluted
Combined pro forma $ 3.47 $ .60 $ 4.94 $ 1.56
========== ========== ========== ==========
</TABLE>
Prior to consummation of the combination, ASBI was treated as an S Corporation
for income tax reporting purposes. Accounting adjustments therefore include
recognition of deferred tax assets or liabilities on temporary differences that
existed in ASBI as if ASBI had C Corporation status.
ASSETS SEGREGATED FOR REGULATORY PURPOSES
At March 31, 2000, the Company had U.S. Treasury securities with a market value
of $190,176,000 segregated in a special reserve bank account for the exclusive
benefit of customers under Rule 15c3-3 of the 1934 Act. The Company also had
U.S. Treasury securities with a market value of $19,515,000 in a special reserve
bank account for the Proprietary Accounts of Introducing Brokers at March 31,
2000. At June 25, 1999, the Company had U.S. Treasury securities with a market
value of $28,465,000 and reverse repurchase agreements of $197,271,000 in this
account. The reverse repurchase agreements were collateralized by U.S.
Government securities with a market value of approximately $198,298,000 at June
25, 1999.
<PAGE>
MARKETABLE EQUITY SECURITIES
The investment in Knight/Trimark Group, Inc. ("Knight") common stock is
classified as marketable equity securities available for sale, and the
unrealized holding gains (losses), 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. The following table summarizes the cost and market
value of the investment in Knight at March 31, 2000 and June 25, l999 (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
March
Marketable equity securities $ 208 82,101 - $ 82,309
============================================================
June
Marketable equity securities $ 432 172,496 - $172,928
============================================================
</TABLE>
The "specific identification" method is used to determine the cost of marketable
securities sold. In the three and nine month periods ended March 31, 2000, the
Company sold 1,248,200 and 1,735,800 shares of Knight, respectively, with
proceeds from the sales totaling $59,724,000 and $81,077,000, respectively.
Realized gains on these sales totaled approximately $59,563,000 and $80,853,000
for the three and nine month periods ended March 31, 2000, respectively.
The other comprehensive loss - unrealized holding loss arising during the
periods presented on the Consolidated Statements of Income and Comprehensive
Income is shown net of tax of $17,215,000 and $31,638,000 for the three and nine
month periods ended March 31, 2000, respectively. For the three and nine months
ended March 26, 1999, other comprehensive income - unrealized holding gain
arising during the periods is presented net of tax of $19,307,000 and
$33,189,000, respectively.
RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
At March 31, 2000 and June 25, l999, the Company had receivable from and payable
to brokers, dealers and clearing organizations related to the following (in
thousands):
<TABLE>
<CAPTION>
March June
-------------- --------------
<S> <C> <C>
Receivable
Securities failed to deliver $ 217,822 $ 27,505
Securities borrowed 3,425,380 2,987,910
Correspondent broker/dealers 55,629 47,805
Clearing organizations 1,663 1,444
Other 55,468 23,341
-------------- --------------
$ 3,755,962 $ 3,088,005
============== ==============
Payable
Securities failed to receive $ 85,160 $ 23,634
Securities loaned 3,413,145 2,945,007
Correspondent broker/dealers 15,518 15,273
Other 24,237 16,182
-------------- --------------
$ 3,538,060 $ 3,000,096
============== ==============
</TABLE>
<PAGE>
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
At March 31, 2000 and June 25, l999, the Company held securities owned and
securities sold, not yet purchased as follows (in thousands):
<TABLE>
<CAPTION>
March June
-------------- --------------
<S> <C> <C>
Securities owned
Corporate equity securities $ 36,200 $ 35,671
Municipal obligations 12,556 19,391
U.S. Government and Government agency obligations 15,131 9,470
Corporate obligations 16,258 4,114
Other 43,770 5,840
-------------- --------------
$ 123,915 $ 74,486
============== ==============
Securities sold, not yet purchased
Corporate equity securities $ 8,088 $ 14,972
Municipal obligations 694 6,184
U.S. Government and Government agency obligations 601 2,491
Corporate obligations 1,952 372
Other 15,181 331
-------------- --------------
$ 26,516 $ 24,350
============== ==============
</TABLE>
SHORT-TERM BORROWINGS
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $350,000,000. These lines of credit are used primarily to
finance securities owned, securities held for Correspondent broker/dealer
accounts and receivables in customers' margin accounts. These 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 March 31, 2000, the amount
outstanding under these secured arrangements was $262,664,000 which was
collateralized by clients' securities valued at $233,589,000, firm securities
valued at $22,084,000 and non-customer securities valued at $51,823,000. There
was $2,700,000 outstanding at June 25, 1999 on these credit arrangements which
was collateralized by securities held for firm accounts valued at $29,724,000.
In addition to the broker loan 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 line of credit
at March 31, 2000 and June 25, l999.
At March 31, 2000 and June 25, l999, 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 March 31, 2000, Southwest had net capital of $130,526,000, or
approximately 7.86% of aggregate debit balances, which is $97,296,000 in excess
of its minimum net capital requirement of $33,230,000 at that date.
Additionally, the net capital rule of the New York Stock Exchange, Inc. (the
"Exchange") provides that equity capital may not be withdrawn or cash dividends
paid if resulting net capital would be less than 5% of aggregate debit items. At
March 31, 2000, Southwest had net capital of $47,451,000 in excess of 5% of
aggregate debit items.
Clearing also follows the alternative method. At March 31, 2000, Clearing had
net capital of $1,284,000, which is $1,034,000 in excess of its minimum net
capital requirement of $250,000 at that date.
<PAGE>
SWSFS and MDB follow the primary (aggregate indebtedness) method under Rule
15c3-1, which requires the maintenance of minimum net capital of $250,000. At
March 31, 2000, the net capital and excess net capital were $318,000 and
$68,000, respectively, for SWSFS and $743,000 and $493,000, respectively, for
MDB.
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 $3,023,000, which is $2,023,000 in excess
of its minimum capital requirement at March 31, 2000.
EARNINGS PER SHARE
A reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computations is as follows for the three and nine months
ended March 31, 2000 and March 26, 1999 (in thousands, except share and per
share amounts), as restated for the ten percent stock dividend declared May 4,
2000 (see DIVIDENDS DECLARED):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income $ 52,887 $ 7,533 $ 71,806 $ 18,358
========================== ==========================
Weighted average shares outstanding - basic 12,990,197 12,942,415 12,997,012 12,927,578
Effect of dilutive securities:
Assumed exercise of stock options 149,997 95,723 144,501 49,723
-------------------------- --------------------------
Weighted average shares outstanding - diluted 13,140,194 13,038,138 13,141,513 12,977,301
========================== ==========================
Earnings per share - basic $ 4.07 $ .58 $ 5.52 $ 1.42
========================== ==========================
Earnings per share - diluted $ 4.02 $ .58 $ 5.46 $ 1.41
========================== ==========================
</TABLE>
At March 31, 2000, 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 March 31,
2000, there were approximately 687,000 options outstanding under the 1996 Plan
and approximately 26,000 options outstanding under the 1997 Plan. The Company
also had approximately 17,000 options outstanding that were granted in
conjunction with the acquisition of Barre & Company, Inc. ("Barre Options"). For
the three months ended March 31, 2000, all outstanding options were dilutive and
were included in the calculation of weighted average shares outstanding -
diluted, except approximately 274,000 shares under the 1996 Plan and 3,000
shares under the 1997 Plan. In the nine month calculation, all shares except
approximately 274,000 shares under the 1996 Plan and 264 shares under the 1997
Plan were dilutive. Options above have not been restated for ten percent
dividend.
SEGMENT REPORTING
The Company operates two principal segments within the financial services
industry: the Broker/Dealer Group and the Asset Management Group. There have
been no changes in the basis of segmentation or in the basis of measurement of
segment profit or loss since last reported.
<TABLE>
<CAPTION>
Consolidated
Asset Other Southwest
Broker/Dealer Management Consolidated Securities
(in thousands) Group Group Entities Group, Inc.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended March 31, 2000
Net revenues from external sources $ 143,787 $ 3,981 $ 58,657 $ 206,425
Net intersegment revenues -- 231 1,259 --
Income before income taxes 27,432 1,359 52,426 81,217
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated
Asset Other Southwest
Broker/Dealer Management Consolidated Securities
(in thousands) Group Group Entities Group, Inc.
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended March 31, 2000
Net revenues from external sources $ 345,856 $ 10,608 $ 59,393 $ 415,857
Net intersegment revenues -- 699 3,749 --
Income before income taxes 62,240 3,089 44,862 110,191
Three months ended March 26, 1999
Net revenues from external sources $ 86,868 $ 2,963 $ 211 $ 90,042
Net intersegment revenues -- 260 523 --
Income before income taxes 13,552 707 (2,553) 11,706
Nine months ended March 26, 1999
Net revenues from external sources $ 232,811 $ 8,991 $ 733 $ 242,535
Net intersegment revenues -- 719 1,661 --
Income before income taxes 30,683 2,292 (4,562) 28,413
</TABLE>
DIVIDENDS DECLARED
The Company's regular quarterly cash dividend of $.08 was declared on May 4,
2000, payable on July 3, 2000 to shareholders of record on June 15, 2000. In
addition, the Board of Directors also declared a ten percent stock dividend to
be paid on August 1, 2000 to shareholders of record as of July 15, 2000. As
such, earnings per share and weighted average shares outstanding have been
restated in the accompanying financial statements to reflect the stock dividend.
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; and (9) 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.
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
<PAGE>
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
Net income for the three and nine month periods ended March 31, 2000 totaled
$52,887,000 and $71,806,000, respectively, representing increases over
comparable prior year periods of $45,354,000, or 602%, and $53,448,000, or 291%,
respectively.
Included in net gains on principal transactions in the third quarter is a gain
totaling $57,819,000 from the sale of 1.2 million shares of Knight/Trimark
Group, Inc. ("Knight") common stock. Proceeds from these sales were added to the
working capital of the Company and will be used for general corporate purposes.
Additional shares of Knight stock sold to fund the advertising commitment of
Mydiscountbroker.com, Inc. ("MDB"), the Company's on-line investing subsidiary,
are discussed below in Net Gains on Principal Transactions.
Excluding the sale of the Knight shares discussed above, net income for the
third quarter totaled $15,305,000, representing an increase of $7,772,000, or
103%, from the third quarter of fiscal 1999. Net income for the nine months
ended March 31, 2000 increased $7,407,000, or 40%, to $25,765,000 excluding the
sale of Knight.
The following is a summary of increases in categories of net revenues and
operating expenses for the three and nine month periods ended March 31, 2000 and
March 26, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Three Month Change Nine Month Change
Amount Percent Amount Percent
------------------- -------------------
<S> <C> <C> <C> <C>
Net revenues:
Net revenues from clearing operations $ 9,811 93% $ 17,056 61%
Commissions 5,497 33% 8,832 19%
Net interest 7,368 67% 13,280 38%
Investment banking, advisory and administrative fees 491 8% 783 4%
Net gains on principal transactions 66,894 360% 85,998 291%
Other 1,152 33% 1,554 15%
------------------- -------------------
91,213 137% 127,503 75%
------------------- -------------------
Operating expenses:
Commissions and other employee compensation 10,319 29% 23,039 26%
Occupancy, equipment and computer service costs 759 14% 3,478 23%
Communications 737 22% 2,369 24%
Floor brokerage and clearing organization charges 670 43% 1,842 42%
Advertising and promotional 948 64% 7,427 201%
Other 8,269 127% 7,570 40%
------------------- -------------------
21,702 40% 45,725 32%
------------------- -------------------
Income before income taxes $ 69,511 594% $ 81,778 288%
=================== ===================
</TABLE>
<PAGE>
Net Revenues from Clearing Operations. Net revenues from clearing operations
increased primarily as a result of an increase in total transaction volumes in
the three and nine month periods ended March 31, 2000 over the same periods in
the prior year. Total transactions processed in the third quarter of fiscal 2000
increased 195% to approximately 18.4 million from approximately 6.2 million in
the same quarter a year ago. For the nine-month period, transactions increased
199% to approximately 41.4 million from 13.9 million in the same period of the
prior year. This increase is due to high trading volumes in the securities
markets during the past nine months. The rate of increase in transactions
processed has outpaced the increase in revenues from clearing, because, in
recent years, the Company has increased the number of high-volume trading
Correspondents in its customer base, and a substantial portion of the increase
in transactions processed were related to these Correspondents. 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. As transaction volumes increase, revenue per clearing transaction
tends to decrease as Correspondents take advantage of volume discounts. 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. As transaction volumes increase, revenue per clearing
transaction tends to decrease as Correspondents take advantage of volume
discounts. One such high-volume clearing customer, Archipelago ECN, transitioned
its business to another clearing firm during the quarter. Archipelago's business
accounted for less than five percent of the Company's revenues.
Commissions. Commissions from the Company's client transactions increased in the
three and nine month periods ended March 31, 2000 due to increased production
from the SWS Financial Services, Inc. ("SWSFS") independent contractor network,
as well as the Company's retail brokerage network. Also contributing to the
increase were increased commissions from MDB. Commissions at MDB for the three
and nine month periods ending March 31, 2000 increased 261% and 194%,
respectively, over in the comparable prior year periods. MDB's on-line accounts
have increased 239% over prior year.
Net Interest Income. 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. The components of
interest earnings are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 26,
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Interest revenue
Customer margin accounts $ 24,442 $ 11,443 $ 55,933 $ 34,186
Assets segregated for regulatory purposes 2,189 3,170 6,798 8,850
Stock borrowed 38,376 18,401 96,227 57,757
Other 2,154 1,609 6,427 5,493
------------------------- -------------------------
67,161 34,623 165,385 106,286
------------------------- -------------------------
Interest expense
Customer funds on deposit 10,944 7,822 27,588 23,848
Stock loaned 31,999 15,033 81,405 46,534
Other 5,823 741 8,562 1,354
------------------------- -------------------------
48,766 23,596 117,555 71,736
------------------------- -------------------------
Net interest $ 18,395 $ 11,027 $ 47,830 $ 34,550
========================= =========================
</TABLE>
In the three and nine-month periods ended March 31, 2000, net interest income
accounted for approximately 12% and 16% of the Company's net revenue,
respectively. As a percentage of net revenue excluding the sale of the Knight
shares, net interest accounted for 18% and 21% in the three and nine-month
periods ended March 31, 2000. Net interest income was 17% and 20% of the
Company's net revenue in the comparable time periods of the previous year.
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 nine month periods ended March 31, 2000 and March 26, 1999.
<PAGE>
Average customer balances and average balances from securities lending
activities are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 26,
2000 1999 2000 1999
------------------------------ -------------------------------
<S> <C> <C> <C> <C>
Average customer margin balances $1,118,000 $ 645,000 $ 861,000 $ 565,000
Average customer funds on deposit 908,000 764,000 792,000 682,000
Average stock borrowed 3,759,000 2,182,000 3,155,000 2,090,000
Average stock loaned 3,729,000 2,152,000 3,139,000 2,061,000
</TABLE>
Rates on customer margin balances and funds on deposit are influenced by changes
in leading market interest rates and competitive factors. Spreads on securities
lending transactions are influenced by the types of securities borrowed or
loaned, market conditions and counterparty risk. 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.
Net Gains on Principal Transactions. For the three and nine months ended March
31, 2000, $1.7 million and $7.9 million, respectively, represent net gains
realized on the sale of Knight common stock to fund MDB's advertising
commitments (see Advertising and Promotional below). Excluding these gains, as
well as the previously mentioned $57.8 million third quarter gain on the sale of
1.2 million shares of Knight stock, net gains on principal transactions were $26
million and $34.7 million for the three and nine month periods ended December
31, 1999. Net gains increased when comparing both the three and nine months
ended March 31, 2000 to the same periods of the prior year. These results are
attributed to an improvement in the trading environment in both the equity and
fixed income markets in the third quarter of fiscal 2000 and to expansion of the
equity trading area. Coverage from market making activities has increased to 625
over-the-counter securities from 567 at the same time last year. In addition,
the Company now makes a market in approximately 100 listed securities. Revenue
in this area can fluctuate significantly from quarter to quarter based on market
conditions.
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 nine months ended March 31,
2000, 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 production from the SWSFS
independent contractor network; and (3) the addition of 68 full-time employees,
primarily at MDB and in the information systems area. The number of full-time
employees increased to 945 at March 31, 2000 compared to 877 at March 26, 1999.
Occupancy, Equipment and Computer Service Costs. Occupancy, equipment and
computer service costs increased for three and nine month periods as the Company
continued to increase the resources allocated to the implementation of its new
brokerage software, Comprehensive Software Systems, Ltd. ("CSS").
Communications. Communications expense increased primarily due to increased
quotations expense during the third quarter of fiscal 2000 due to the expansion
of the equity trading area, as well as the growth of MDB.
Floor Brokerage and Clearing Organization Charges. Floor brokerage and clearing
organization charges increased due to higher volume in the institutional trading
area.
Advertising and Promotional. Advertising and promotional expenses increased
primarily due to the national advertising campaign launched by MDB in the first
quarter of fiscal 2000. The Company sold
<PAGE>
48,200 shares of its investment in Knight to fund the advertising commitment for
the third quarter and 210,050 to fund the commitment for the nine months ended
March 31, 2000.
Other. Other expense increased due to additional contract labor consulting costs
and reserves associated with the Company's implementation of the CSS system.
FINANCIAL CONDITION
The Parent owns approximately 1.6 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."
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 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 $350,000,000. These lines of credit are used primarily to
finance securities owned, securities held for Correspondent broker/dealer
accounts and receivables in customers' margin accounts. These credit
arrangements are provided on an "as offered" basis and are not committed lines
of credit. Outstanding balances under these credit arrangements are due on
demand, bear interest at rates indexed to the federal funds rate and are
collateralized by securities of the Company and its clients. At March 31, 2000,
the amount outstanding under these secured arrangements was $262,664,000 which
was collateralized by clients' securities valued at $233,589,000, firm
securities valued at $22,084,000 and non-customer securities valued at
$51,823,000. In the opinion of management, these credit arrangements are
adequate to meet the short-term operating needs of the Company.
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 line of credit
at March 31, 2000.
The Company has issued $57.5 million of 5% Exchangeable Subordinated Notes (the
"Notes") due June 30, 2004. At maturity, the principal of the notes will be paid
in shares of the Class A common stock of Knight or, at the option of the
Company, their cash equivalent. The Notes, which are in the form of DARTS/SM/
(or, "Derivative Adjustable Ratio Securities/SM/"), were issued in denominations
of $56.6875, the closing bid price of Knight on June 10, 1999. At maturity,
Noteholders are entitled to one share of Knight common stock for each DARTS if
the average price for the 20 days immediately preceding the Note's maturity is
equal to or less than the DARTS issue price. Noteholders are entitled to .833
shares of Knight common stock for each DARTS if the average price of Knight's
common stock is 20% or more greater than the DARTS' issue price. If the average
price of the Knight common stock is between the Note's issue price and 20%
greater than the issue price, the exchange rate will be determined by a formula.
Net cash used in operating activities during the three month period ended March
31, 2000 was $330,839,000. The use of cash was due to the increase in
receivables from customers, as well as from brokers, dealers and clearing
organizations 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.
<PAGE>
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 issuer's 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 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 March 31,
2000 will not have a material adverse effect on the consolidated financial
position or operating results of the Company.
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.
<PAGE>
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)
Item 4. Submission of Matters to a Vote of Security Holders
None Reportable (Per Instructions to Form 10-Q)
Item 5. Other Information
None Reportable (Per Instructions to Form 10-Q)
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 the definitive Proxy Statement for the Company's
1999 Annual Meeting of Stockholders filed with the Commission pursuant to
Regulation 240.14a (6) (c) within 120 days after the Company's fiscal year end
is incorporated herein by reference.
27 Financial Data Schedule*
* Filed herewith
<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)
May 12, 2000 /S/ David Glatstein
- ------------ -------------------------------------
Date (Signature)
David Glatstein
President and Chief Executive Officer
(Principal Executive Officer)
May 12, 2000 /S/ Stacy M. Hodges
- ------------ -------------------------------------
Date (Signature)
Stacy M. Hodges
Treasurer and Chief Financial Officer
(Principal Financial Officer)
May 12, 2000 /S/ Laura Leventhal
- ------------ -------------------------------------
Date (Signature)
Laura Leventhal
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> JAN-01-2000 JUN-26-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 22,952 22,952
<RECEIVABLES> 5,039,338 5,039,338
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 3,425,380 3,425,380
<INSTRUMENTS-OWNED> 123,915 123,915
<PP&E> 12,700 12,700
<TOTAL-ASSETS> 5,551,453 5,551,453
<SHORT-TERM> 262,664 262,664
<PAYABLES> 4,715,595 4,715,595
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 3,413,145 3,413,145
<INSTRUMENTS-SOLD> 26,516 26,516
<LONG-TERM> 57,500 57,500
0 0
0 0
<COMMON> 1,184 1,184
<OTHER-SE> 272,859 272,859
<TOTAL-LIABILITY-AND-EQUITY> 5,551,453 5,551,453
<TRADING-REVENUE> 85,474 115,506
<INTEREST-DIVIDENDS> 67,161 165,385
<COMMISSIONS> 21,925 55,778
<INVESTMENT-BANKING-REVENUES> 6,863 21,976
<FEE-REVENUE> 20,332 45,086
<INTEREST-EXPENSE> 48,766 117,555
<COMPENSATION> 46,501 113,307
<INCOME-PRETAX> 81,217 110,191
<INCOME-PRE-EXTRAORDINARY> 81,217 110,191
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 52,887 71,806
<EPS-BASIC> 4.07 5.52
<EPS-DILUTED> 4.02 5.46
</TABLE>
