-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HAp0wx7ZhvwDYi2LVpVNlGCWrNnPksjSMYelMRFwgiS+9oieCpOsxiQBGsa+ba+3 SL+thZapGENC0Ep45OyINg== 0000930661-98-000320.txt : 19980218 0000930661-98-000320.hdr.sgml : 19980218 ACCESSION NUMBER: 0000930661-98-000320 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST SECURITIES GROUP INC CENTRAL INDEX KEY: 0000878520 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 752040825 STATE OF INCORPORATION: DE FISCAL YEAR END: 0628 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13401 FILM NUMBER: 98535989 BUSINESS ADDRESS: STREET 1: SUITE 3500 STREET 2: 1201 ELM STREET CITY: DALLAS STATE: TX ZIP: 75270 BUSINESS PHONE: 2146511800 MAIL ADDRESS: STREET 1: SUITE 3500 STREET 2: 1201 ELM STREET CITY: DALLAS STATE: TX ZIP: 75270 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 Commission file number 0-19483 SOUTHWEST SECURITIES GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 75-2040825 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 ELM STREET, SUITE 3500, DALLAS, TEXAS 75270 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (214) 651-1800 (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of February 12, 1998, there were 10,169,986 shares of the registrant's common stock, $.10 par value, outstanding. ================================================================================ SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition December 31, 1997 and June 27, l997 Consolidated Statements of Income For the three and six months ended December 31, l997 and December 31, 1996 Consolidated Statements of Cash Flows For the six months ended December 31, 1997 and December 31, 1996 Notes to Consolidated Financial Statements December 31, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition December 31, l997 and June 27, l997 (In thousands, except par values and share amounts)
December June (Unaudited) --------------------------- ---------------------- ASSETS Cash $ 75,282 $ 10,745 Assets segregated for regulatory purposes 115,464 352,197 Receivable from brokers, dealers and clearing organizations 2,362,669 2,282,304 Receivable from clients, net 624,332 570,461 Securities owned, at market value 34,136 31,921 Other assets 28,736 28,764 --------------------------- ---------------------- $3,240,619 $3,276,392 =========================== ====================== Liabilities and stockholders' equity Short-term borrowings $ --- $ 4,000 Payable to brokers, dealers and clearing organizations 2,244,257 2,139,611 Payable to clients 799,586 963,552 Drafts payable 48,091 31,036 Other liabilities 32,288 29,865 --------------------------- ---------------------- 3,124,222 3,168,064 Liabilities subordinated to claims of general creditors --- 1,400 --------------------------- ---------------------- 3,124,222 3,169,464 Stockholders' equity: Preferred stock of $1.00 par value. Authorized 100,000 shares; none issued. --- --- Common stock of $.10 par value. Authorized 20,000,000 shares. Issued 10,179,163 and outstanding 10,169,986 at December 31, 1997. Issued 10,161,599 and outstanding 10,152,422 shares at June 27, 1997. 1,018 1,016 Additional paid-in capital 56,675 56,139 Retained earnings 58,885 49,984 Receivable from employees under the Employee Stock Purchase Plan (107) (137) Treasury stock (9,177 shares, at cost) (74) (74) --------------------------- ---------------------- Total stockholders' equity 116,397 106,928 Commitments and contingencies $3,240,619 $3,276,392 =========================== ======================
See accompanying Notes to the Consolidated Financial Statements. SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income For the three and six months ended December 31, 1997 and December 31, 1996 (In thousands, except per share and share amounts) (Unaudited)
Three Months Ended Six Months Ended -------------------------------------------------------------- 1997 1996 1997 1996 -------------------------------------------------------------- Net revenues from clearing operations $ 6,374 $ 5,693 $ 13,081 $10,418 Commissions 15,367 9,552 29,254 17,800 Interest 36,535 28,159 70,913 53,720 Investment banking, advisory and administrative fees 6,552 2,931 10,928 6,600 Net gains on principal transactions 3,174 3,209 6,312 6,300 Other 2,463 2,175 5,273 4,585 -------------------------------------------------------------- 70,465 51,719 135,761 99,423 -------------------------------------------------------------- Commissions and other employee compensation 21,703 15,072 42,029 29,851 Interest 25,679 19,176 49,987 37,178 Occupancy, equipment and computer service costs 4,107 3,195 7,995 5,740 Communications 2,975 2,943 6,133 5,116 Floor brokerage and clearing organization charges 1,206 994 2,461 1,971 Other 6,390 4,392 10,966 7,606 -------------------------------------------------------------- 62,060 45,772 119,571 87,462 -------------------------------------------------------------- Income before income taxes 8,405 5,947 16,190 11,961 Income taxes 3,015 2,088 5,755 4,174 -------------------------------------------------------------- Net income $ 5,390 $ 3,859 $ 10,435 $ 7,787 ============================================================== Earnings per share - basic and diluted $.53 $.40 $1.03 $.81 ============================================================== Weighted average shares outstanding - basic 10,169,986 9,661,993 10,163,686 9,661,993 ============================================================== Weighted average shares outstanding - diluted 10,184,679 9,669,597 10,175,862 9,668,878 ==============================================================
See accompanying Notes to Consolidated Financial Statements SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the six months ended December 31, 1997 and December 31, 1996 (In thousands) (Unaudited)
1997 1996 ----------------------- ------------------------ Cash flows from operating activities: Net income $ 10,435 $ 7,787 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,591 1,471 Provision for doubtful accounts 711 25 Deferred income taxes (531) (521) Decrease (increase) in assets segregated for regulatory purposes 236,733 (76,469) Net change in broker, dealer and clearing organization accounts 24,281 17,923 Net change in client accounts (218,548) 118,521 Increase in securities owned (2,215) (1,680) Decrease in other assets 41 3,756 Increase in drafts payable 17,055 10,253 Increase in other liabilities 2,416 3,488 ----------------------- ------------------------ Net cash provided by operating activities 71,969 84,554 ----------------------- ------------------------ Cash flows from investing activities: Purchase of furniture, equipment and leasehold improvements (1,066) (5,668) ----------------------- ------------------------ Net cash used in investing activities (1,066) (5,668) ----------------------- ------------------------ Cash flows from financing activities: Payments on short term borrowings (4,000) (74,009) Payments on liabilities subordinated to claims of general creditors (1,400) --- Proceeds from employees for Employee Stock Purchase Plan 30 108 Net proceeds from exercise of stock options 225 --- Payment of cash dividend on common stock (1,221) (790) ----------------------- ------------------------ Net cash used in financing activities (6,366) (74,691) ----------------------- ------------------------ Net increase in cash 64,537 4,195 Cash at beginning of period 10,745 5,284 ----------------------- ------------------------ Cash at end of period $75,282 $9,479 ======================= ========================
See accompanying Notes to the Consolidated Financial Statements. SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) GENERAL AND BASIS OF PRESENTATION The accompanying interim consolidated financial statements include the accounts of Southwest Securities Group, Inc. ("Parent") and its wholly owned subsidiaries, (collectively, the "Company"), Southwest Securities, Inc. ("Southwest"), Brokers Transaction Services, Inc. ("BTS"), Southwest Investment Advisors, Inc. ("Advisors"), Westwood Trust ("Trust"), formerly Trust Company of Texas, Westwood Management Corporation ("Westwood"), SW Capital Corporation ("Capital"), SWST Computer Corporation ("Computer Corp.") Sovereign Securities, Inc. ("Sovereign") and Equity Securities Trading Company ("ESTC"). Southwest, BTS, Sovereign and ESTC are registered broker/dealers under the Securities Exchange Act of 1934 ("1934 Act"). Advisors and Westwood are registered investment advisors under the Investment Advisors Act of 1940. All significant intercompany balances and transactions have been eliminated. The consolidated financial statements as of December 31, 1997, and for the three and six month periods ended December 31, 1997 and December 31, 1996, are unaudited; however, in the opinion of management, these interim statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows. These financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company's annual audited report as of June 27, 1997. Amounts included for June 27, 1997 are from the audited financial statements as filed on Form 10-K. CASH FLOW REPORTING Cash paid for interest was $49,120,000 and $36,645,000 for the six months ended December 31, 1997 and December 31, 1996, respectively. Cash paid for income taxes was $4,700,000 and $5,155,000 in 1997 and 1996, respectively. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (REVERSE REPURCHASE AGREEMENTS) Southwest, from time to time, enters into reverse repurchase agreements (collateralized by U.S. Government or U.S. Government agency securities), for the purpose of segregating assets for the exclusive benefit of its customers. Under a master repurchase agreement ("Agreement") with Trust, securities purchased under the reverse repurchase agreement are identified and segregated by Trust on its books and records as subject to the Agreement. Management regularly monitors the market value of the underlying securities relating to outstanding reverse repurchase agreements. ASSETS SEGREGATED FOR REGULATORY PURPOSES At December 31, 1997, the Company had reverse repurchase agreements of $73,318,000, U.S. Treasury securities with a market value of $41,846,000 and cash of $300,000 segregated in a special reserve bank account for the exclusive benefit of customers under Rule 15c3-3 of the 1934 Act, at Trust Company. The reverse repurchase agreements were collateralized by U.S. Government securities with a market value of approximately $74,121,000. At June 27, 1997, the Company had reverse repurchase agreements of $232,123,000, U.S. Treasury securities with a market value of $119,984,000 and cash of $90,000 in this account. The reverse repurchase agreements were collateralized by U.S. Government securities with a market value of approximately $234,372,000 at June 27, 1997. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS At December 31, l997 and June 27, l997, the Company had receivables from and payables to brokers, dealers and clearing organizations relating to the following (in thousands):
December June --------------------- --------------------- Receivables: Securities failed to deliver $ 14,478 $ 15,213 Securities borrowed 2,209,416 2,159,204 Correspondent broker/dealers 78,465 62,235 Clearing organizations 1,554 7,355 Other 58,756 38,297 --------------------- --------------------- $2,362,669 $2,282,304 ===================== =====================
December June --------------------- --------------------- Payables: Securities failed to receive $ 18,469 $ 17,889 Securities loaned 2,204,388 2,102,972 Correspondent broker/dealers 10,261 9,013 Other 11,139 9,737 --------------------- --------------------- $2,244,257 $2,139,611 ===================== =====================
SHORT-TERM BORROWINGS The Company has credit arrangements with commercial banks, which include broker loan lines up to $197,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts, and receivables in clients' margin accounts. These lines may also be used to release pledged collateral against day loans. These credit arrangements are provided on an "as offered" basis and are not committed lines of credit. These arrangements can be terminated at any time by the lender. Any outstanding balance under these credit arrangements is due on demand and bears interest at rates indexed to the federal funds rate. There were no amounts outstanding at December 31, 1997 or June 27, 1997 on these credit arrangements. In addition to the broker loans lines, the Parent has a $10,000,000 unsecured line of credit which is due on demand and bears interest at rates indexed to the federal funds rate. There was no amount outstanding under this secured line of credit at December 31, 1997. The amount outstanding was $4,000,000 at June 27, 1997. At December 31, 1997 and at June 27, 1997, the Company had no repurchase agreements outstanding. NET CAPITAL REQUIREMENTS The broker/dealer subsidiaries are subject to the Securities and Exchange Commission's Uniform Net Capital Rule (the "Rule"), which requires the maintenance of minimum net capital. Southwest has elected to use the alternative method, permitted by the Rule, which requires that it maintain minimum net capital, as defined in Rule 15c3-1 under the 1934 Act, equal to the greater of $1,500,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 under the 1934 Act. At December 31, 1997, Southwest had net capital of $71,229,000 or approximately 10% of aggregate debit balances, which is $56,633,000 in excess of its minimum net capital requirement of $14,596,000 at that date. Additionally, the net capital rule of the New York Stock Exchange, Inc. (the "Exchange") provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debit items. At December 31, 1997, Southwest had net capital of $34,739,000 in excess of 5% of aggregate debit items. ESTC has also elected to use the alternative method, permitted by the Rule. At December 31, 1997, ESTC had net capital of $960,000, which is $710,000 in excess of its minimum net capital requirement of $250,000 at that date. Additionally, at December 31, 1997, ESTC had net capital of $660,000 in excess of 120% of the minimum net capital requirement. BTS follows the primary (aggregate indebtedness) method under Rule 15c3-1, which requires it to maintain minimum net capital of $100,000. BTS had net capital of $259,000 which is $159,000 in excess of its minimum net capital requirement at December 31, 1997. Sovereign also follows the primary (aggregate indebtedness) method under Rule 15c3-1, which requires it to maintain minimum net capital of $250,000. At December 31, 1997, Sovereign had net capital of $350,000 which is $100,000 in excess of its minimum net capital requirement. Trust is subject to the capital requirements of the Texas Department of Banking, and has a minimum capital requirement of $1,000,000. Trust Company had total stockholder's equity of $2,565,000, which is $1,565,000 in excess of its minimum capital requirement at December 31, 1997. LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS There were no subordinated notes outstanding at December 31, 1997. At June 27, 1997, liabilities subordinated to the claims of general creditors represent loans to ESTC. The loans are covered by agreements approved by the National Association of Securities Dealers ("NASD"), and are thus available to the Company in computing net capital under the Rule. To the extent that such borrowings are required for the Company's continued compliance with the minimum net capital requirements, they may not be repaid. At June 27, 1997, subordinated notes include the following (in thousands): Due to officer, due 1/31/98, interest at 2%/(1)/ $ 400 Due to officer, due 2/28/98, interest at prime + 1/2% 500 Due to officer, due 8/31/97, interest at prime + 1/2% 500 --------------- $1,400 =============== /(1)/ This subordinated note is related to secured demand notes receivable which bear interest at 2% and are collateralized by securities with a market value of approximately $9,457,000 at June 27, 1997. EMPLOYEE BENEFITS The Company adopted an Employee Stock Purchase Plan ("Plan") as of August 30, 1994 to enable employees of the Company to purchase up to 468,227 shares of common stock of the Company. Substantially all full-time employees were eligible to purchase a minimum of $2,500 up to a maximum of $50,000 of the common stock, subject to certain limitations, at a price of $6.89 per share. The terms of the Plan provide that the Company will loan the full purchase price of the stock to the employee under a promissory note due in monthly installments over a five year period bearing interest at the Applicable Federal Rate (5.86% at December 31, 1997). A total of 61,122 shares were sold under the terms of the Plan, resulting in loans to employees of $421,000. The amount outstanding under these notes at December 31, 1997 was $107,000. On November 6, 1996, the shareholders of the Company approved the Stock Option Plan ("Option Plan") adopted by the Board of Directors on September 17, 1996, pursuant to which options may be granted to eligible employees of the Company or its subsidiaries for the purchase of an aggregate of 1,000,000 shares of common stock of the Company. Options to purchase 197,300 shares of common stock were outstanding under the Option Plan at December 31, 1997. The options, which vest in 25% increments, expire ten years after date of grant. On November 6, 1996, the shareholders of the Company approved the Phantom Stock Plan ("Phantom Plan") adopted by the Board of Directors on September 17, 1996. The Phantom Plan allows non-employee directors to receive directors fees in the form of common stock equivalent units. As of December 31, 1997, 356 units have been issued under the Phantom Plan. On August 20, 1997, the Board of Directors approved the 1997 Stock Option Plan ("1997 Option Plan"), pursuant to which non-qualified options may be granted to eligible employees or potential employees of the Company or its subsidiaries for the purchase of an aggregate of 150,000 shares of Common Stock of the Company. Officers and directors are not eligible to receive options under the 1997 Option Plan. No options have been granted under the 1997 Option Plan. No options have been granted under the 1997 Option Plan as of December 31, 1997. On August 20, 1997, the Board of Directors adopted a Stock Purchase Plan ("Stock Purchase Plan") to enable employees of the Company and its subsidiaries to purchase up to 1,000,000 shares of common stock of the Company. The effective date of the Stock Purchase Plan is January 1, 1998. AUTHORIZED COMMON STOCK On November 6, 1996, the shareholders of the Company approved the authorization of an additional 10,000,000 shares of common stock. This brings the total common shares authorized to 20,000,000. STOCK DIVIDEND On August 28, 1997, the Board of Directors declared a ten percent stock dividend payable on October 1, 1997 to shareholders of record at the close of business on September 15, 1997. Per share amounts, shares outstanding, and weighted average shares outstanding as of December 31, 1996 have been restated in the accompanying financial statements, as have issued and outstanding shares as of June 27, 1997. EARNINGS PER SHARE Earnings Per Share ("EPS") has been calculated in conformity with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" and all prior periods have been restated. A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows (in thousands, except share and per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 ------------------------------------------------------------------------- Net income $ 5,390 $ 3,859 $ 10,435 $ 7,787 ========================================================================= Weighted average shares outstanding - basic 10,169,986 9,661,993 10,163,686 9,661,993 Effect of dilutive securities: Assumed exercise of stock options 14,693 7,604 12,176 6,885 ------------------------------------------------------------------------- Weighted average shares outstanding - diluted 10,184,679 9,669,597 10,175,862 9,668,878 ========================================================================= Earnings per share - basic and diluted $ .53 $ .40 $ 1.03 $ .81 =========================================================================
Options to purchase 190,300 shares of common stock at $23.625, granted on August 28, 1997, were outstanding in the first quarter of fiscal 1998, but were not included in the computation of six months diluted EPS because the options' exercise price was greater than the average market price of the common share in the first quarter of fiscal 1998. 189,300 of these options were still outstanding at December 31, 1997. Options to purchase 8,000 shares of common stock at $23.5, granted on November 5, 1997, were not included in the computation of diluted EPS for either the three months ended or the six months ended December 31, 1997. These options were not included because the options' exercise price was greater than the average market price of the common share in the second quarter of fiscal 1998. All of these options were still outstanding at December 31, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The statements under Management's Discussion and Analysis of Financial Condition and Results of Operations and other statements in this Form 10-Q which are not historical facts are forward-looking statements. These forward-looking statements involve risks and uncertainties that could render them materially different from estimates provided herein. These risks and uncertainties include but are not limited to the effect of economic conditions, the availability of technical resources, the ability to develop and implement new software, the effect of regulatory and legal developments and other risks detailed in the Company's Securities and Exchange Commission filings. GENERAL Southwest Securities Group, Inc. and subsidiaries (the "Company"), through its principal subsidiary, Southwest Securities, Inc. ("Southwest"), provides securities transaction processing and other related services and operates a full-service brokerage, investment banking and asset management firm. Its primary business is delivering a broad range of securities transaction processing services to broker/dealers. Transaction processing services include cost-effective integrated trade execution, clearing, client account processing and other customized services ("Transaction Processing"). Southwest provides services that are directly related to Transaction Processing, including margin lending and stock loan services. The Company also provides securities brokerage and investment services to individuals and institutions, provides investment banking services to municipal and corporate clients and trades fixed income and equity securities. Brokers Transaction Services, Inc. ("BTS"), a wholly owned subsidiary of the Company, and a National Association of Securities Dealers ("NASD") registered broker/dealer, contracts with independent registered representatives for the administration of their securities business. Sovereign Securities, Inc. ("Sovereign") is a discount brokerage firm and NASD broker/dealer. Based in Minneapolis, Equity Securities Trading Company, Inc. ("ESTC") is an NASD broker/dealer which operates a regional securities clearing business. SW Capital Corporation, a wholly owned subsidiary of the Company, houses the Local Government Investment Cooperative ("LOGIC") program. The LOGIC program is targeted to the needs of cities, counties, schools and other local governments across Texas. This program allows participants to pool their available funds, resulting in increased economies of scale, and allows higher returns while maintaining a high degree of safety and liquidity. In addition, the Company offers asset management and trust services through its wholly owned subsidiaries, Westwood Management Corporation ("Westwood") and Westwood Trust ("Trust"), formerly The Trust Company of Texas. Southwest Investment Advisors, Inc. ("Advisors"), a wholly owned subsidiary of the Company is a registered investment advisor. Advisors has been inactive since April 11, 1994. SWST Computer Corporation ("Computer Corp.") provides computer processing and programming to affiliates as well as third parties. RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED DECEMBER 31, 1996 Total revenues and net income reached record levels in the second quarter of fiscal 1998. Total revenues increased by $18,746,000, or 36%, in the second quarter of fiscal 1998 to $70,465,000 compared to $51,719,000 in the second quarter of fiscal 1997. Net income increased 40% to $5,390,000 from $3,859,000 in the second quarter of the prior year. Substantially all of the revenues from Transaction Processing are shown on the Company's Consolidated Statements of Income as net revenues from clearing operations. Improved market conditions, as well as an increase in the number of correspondents, resulted in increased revenues from Transaction Processing of $681,000, an increase of 12%. The number of correspondents increased to 240 at December 31, 1997 from 232 at December 31, 1996. Total transactions processed in the second quarter of fiscal 1998 increased 111% to approximately 1,592,000 from approximately 755,000 in the second quarter of fiscal 1997 compared to the revenue increase of 12%. This was due to an increase in tickets from several high volume correspondents who earn substantial discounts. Commissions from Southwest's client transactions increased $5,815,000 to $15,367,000, an increase of 61% when compared with revenues in the second quarter of fiscal 1997 of $9,552,000. This was due to increased commissions from investment banking transactions managed by the Company, as well as an increase in the number of brokers in the Company's salesforce and independent contractor network. Interest income increased to $36,535,000, an increase of $8,376,000, or 30%, while interest expense increased 34%, or $6,503,000 to $ 25,679,000. This resulted in an increase in net interest revenue of $1,873,000, or 21%, due to increased balances in securities lending and customer margin accounts. The amounts receivable and payable relating to open positions for securities borrowed and loaned as of December 31, 1997, were $2,209,416,000 and $2,204,388,000, respectively. As of December 31, 1996, these amounts were $1,785,018,000 and $1,751,925,000. Investment banking, advisory and administrative fees include revenues derived from the underwriting and distribution of corporate and municipal securities, unit trusts and money market and other mutual funds. Investment banking, advisory and administrative fees increased $3,621,000, or 124%, to $6,552,000 when compared to $2,931,000 in the second quarter of fiscal 1997 due to increased volume of transactions in both equity and municipal investment banking markets. Total expenses increased $16,288,000, or 36%, to $62,060,000 when compared to the quarter ended December 31, 1996 primarily as the result of increased interest expense, as discussed above, and increased commission and employee compensation expense. Commissions and other employee compensation increased $6,631,000 or 44% compared to the same period last year as a result of increased commissions generated by the Company's salesforce and its independent contractor network, as well as an increase in the number of employees to 729 at December 31, 1997 compared to 639 at December 31, 1996. The number of Company salespeople and independent contractors was 122 and 688, respectively, at December 31, 1997. As of December 31, 1996, these representatives totaled 114 and 529. Occupancy, equipment and computer service expenses increased $912,000, or 29%, primarily due to upgrades in computer processing equipment and an increase in office space. Other expenses increased $1,998,000, or 45%, to $6,390,000, primarily due to increases in expenses associated with underwriting fixed income securities, professional services and other expenses. RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE SIX MONTHS ENDED DECEMBER 31, 1996 (The factors impacting substantially all of the variances in the above three month comparison also apply to the six month comparison. Therefore, this section is limited to the discussion of additional factors influencing the six month discussion.) As discussed above, improved market conditions as well as an increase in the number of correspondents resulted in increased revenues from Transaction Processing. Net revenues from clearing operations increased to $13,081,000 an increase of $2,663,000, or 26%, from a year ago. Total ticket transactions increased 114% to 2,859,826 over the same six month period in the prior year. This was due to an increase in tickets from several high volume correspondents who earn substantial discounts. Communications expense increased $1,017,000, or 20%, to $6,133,000 from $5,116,000 when compared to the period ended December 31, 1996 due to expanded computer networking. FINANCIAL CONDITION Regulations governing broker/dealers require securities firms to maintain assets in a special bank account for the exclusive benefit of its customers (called "assets segregated for regulatory purposes" in the accompanying Statements of Financial Condition) approximately equal to the net amount of cash on deposit from clients. During the first six months of fiscal 1998, the net cash on deposit from clients decreased $218 million as customers' cash on deposit was invested in money market funds and other securities. The decrease in the net payable to clients caused a corresponding decrease in the assets segregated for regulatory purposes. LIQUIDITY AND CAPITAL RESOURCES Approximately 99% of the Company's assets consist of cash, marketable securities and receivables from clients, clients of Correspondents and Correspondents themselves (representing borrowings from Southwest to finance the purchase of securities on margin, which are secured by marketable securities); broker/dealers; and clearing organizations. All assets are financed by the Company's equity capital, short-term bank borrowings, interest bearing and non- interest bearing client credit balances, Correspondent deposits, and other payables. Southwest maintains an allowance for doubtful accounts which represents amounts, in the judgment of management, that are necessary to adequately absorb losses from known and inherent risks in receivables from clients, clients of Correspondents and Correspondents. Southwest has credit arrangements with commercial banks, which include broker loan lines up to $197,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts, and receivables in customers' margin accounts. These credit arrangements are provided on an "as offered" basis and are not committed lines of credit. Outstanding balances under these credit arrangements are due on demand, bear interest at rates indexed to the Federal Funds rate, and are collateralized by securities of Southwest and its clients. In addition to the broker loan lines, the Company has a $10,000,000 unsecured line of credit, which is due on demand and bears interest at rates indexed to the federal funds rate. There were no amounts outstanding at December 31, 1997 on these credit arrangements. In the opinion of management, these credit arrangements are adequate to meet the short-term operating capital needs of Southwest. Southwest is subject to the requirements of the Securities and Exchange Commission and the New York Stock Exchange relating to liquidity, capital standards and the use of client funds and securities. The Company has historically operated in excess of the minimum net capital requirements. EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS On July 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 will not have a material impact on the Company's financial position or results of operations, as the Company does not intend to adopt the value based measurement concept, but will require extensive disclosures regarding the Company's stock option plan at fiscal year end. The Company has adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" and has restated all prior periods presented in conformity with the new standard. EFFECTS OF INFLATION Management does not believe that changes in replacement costs of fixed assets will materially affect the Company's operations. The rate of inflation, however, affects the Company's expenses, such as employee compensation, rent and communications. Increases in these expenses may not be readily recoverable in the price the Company charges for its services. Inflation can have significant effects on interest rates which in turn can affect prices and activities in the securities markets. These fluctuations may have an adverse impact on the Company's operations. YEAR 2000 The widespread use of computer programs that rely on two-digit date programs to perform computations and decision-making functions may cause computer systems to malfunction in the Year 2000, and may lead to significant business delays in the U.S. and internationally. The impact of the Year 2000 problem on the securities industry as a whole will be material, as virtually every aspect of the sales of securities and processing of transactions will be affected. Due to the size of the task facing the securities industry, and the interdependent nature of securities transactions, the Company may be adversely affected by this problem in the Year 2000 depending on whether it and the entities with which it does business address this issue successfully. The Company has identified areas in which such computer programs affect our operations, the most significant of which is the Company's securities processing software. The Company participates with other broker/dealers in a joint venture, Comprehensive Software Systems, Ltd. ("CSS"), which is developing the next generation of software for the securities industry. The CSS system will automate front- and back-office processes and will be Year 2000 compliant. The system is expected to begin testing January 1, 1999 and to be fully operational by January 1, 2000. The ultimate cost of developing and implementing CSS is inestimable at this time; however management does not believe these costs will have a material impact on the Company's operations in fiscal 1998. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Reportable (229.103) Item 2. Changes in Securities None Reportable (Per Instructions to Form 10-Q) Item 3. Defaults upon Senior Securities None Reportable (Per Instructions to Form 10-Q) Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders was held on November 5, 1997. The following directors were elected at the meeting:
Nominees For Withheld - ----------------------- --------- -------- Don A. Buchholz 8,127,807 5,028 Raymond E. Wooldridge 8,127,707 5,128 David Glatstein 8,127,807 5,028 Allen B. Cobb 8,127,807 5,028 J. Jan Collmer 8,126,307 6,528 R. Jan LeCroy 8,125,457 7,378 Frederick R. Meyer 8,127,807 5,028 Jon L. Mosle, Jr. 8,127,707 5,128
There were no abstentions. Item 5. Other Information The Company's common stock began trading on the New York Stock Exchange, Inc. on October 6, 1997 under the symbol "SWS". Item 6. Exhibits and Reports on Form 8-K EXHIBITS 10.1 Executive Compensation The information required by this item regarding Executive compensation is incorporated by reference to pages 7 through 9 of the Company's Proxy Statement dated September 25, 1997 which was filed with the Commission pursuant to Regulation 240.14a (6) (c) prior to October 25, 1997. 27 Financial Data Schedule REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Southwest Securities Group, Inc. -------------------------------- (Registrant) February 12, 1998 /S/ David Glatstein - ----------------- -------------------------------- Date (Signature) David Glatstein President February 12, 1998 /S/ Kenneth R. Hanks - ----------------- -------------------------------- Date (Signature) Kenneth R. Hanks Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
BD 3-MOS 6-MOS JUN-26-1998 JUN-26-1998 SEP-27-1997 JUN-28-1997 DEC-31-1997 DEC-31-1997 75,282 75,282 2,987,001 2,987,001 73,106 73,106 2,209,416 2,209,416 34,136 34,136 9,514 9,514 3,240,619 3,240,619 0 0 3,043,843 3,043,843 0 0 2,204,388 2,204,388 2,632 2,632 0 0 0 0 0 0 1,018 1,018 115,379 115,379 3,240,619 3,240,619 3,174 6,312 36,535 70,913 15,367 29,254 6,552 10,928 6,374 13,081 25,679 49,987 21,703 42,029 8,405 16,190 8,405 16,190 0 0 0 0 5,390 10,435 .53 1.03 .53 1.03
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