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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.10 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
----
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 ____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.______
As of September 22, 2000, there were 15,889,924 shares of the Registrant's
common stock, $.10 par value, outstanding. The aggregate market value of Common
Stock held by non-affiliates was approximately $417,302,000 using a market price
of $33.00 on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the solicitation
of proxies to be voted at the Registrant's Annual Meeting of Stockholders to be
held November 1, 2000, which will be filed with the Commission pursuant to
Regulations 240.14a (6)(c) within 120 days after the Registrant's fiscal year
end, are incorporated by reference into Part I and Part III of the Report on
Form 10-K.
PART 1
Item 1. Business
(a) General Development of Business
We are a full-service securities and banking firm using technology to deliver a
broad range of investment and related financial services to our clients, which
include individual and institutional investors, broker/dealers, corporations,
governmental entities and financial intermediaries.
Brokerage Group
We provide clearing services to 200 correspondent broker/dealers and over 500
independent contract brokers, as well as full-service and online discount
brokerage services to individual investors. Clearing involves maintaining our
correspondent clients' accounts, processing securities transactions, extending
margin loans and performing a variety of administrative services as agent for
our correspondent broker/dealers. Our clearing business is complemented by our
securities trading, securities lending, investment banking and asset management
businesses.
Our principal subsidiary, Southwest Securities, Inc. ("Southwest") is a
registered securities broker/dealer and a member of the New York Stock Exchange
("NYSE") and other major exchanges. Southwest provides correspondent services
to securities broker/dealers and other financial institutions in 27 states,
Canada and Europe. Southwest serves individual investors through its Private
Client Group offices in Texas and New Mexico and institutional investors
nationwide from its Dallas, New York and Chicago offices. Clients of these
offices gain access to Southwest's investment research that focuses on
corporations primarily in the southwestern United States.
We operate three other broker/dealer subsidiaries engaged in certain aspects of
the securities brokerage business. All three are National Association of
Securities Dealers ("NASD") registered broker/dealers. SWS Financial Services,
Inc. ("SWSFS") contracts with independent registered representatives for the
administration of their securities business. We offer on-line discount
brokerage services through Mydiscountbroker.com, Inc. ("MDB"). SWSFS and MDB are
correspondents of Southwest. Southwest Clearing Corporation ("Clearing") was
incorporated in the State of Delaware on September 30, 1998 and has not yet
begun operations.
Asset Management Group
We offer investment management, advisory and trust services through three
subsidiaries. Westwood Management Corporation ("Westwood"), a registered
investment advisor, manages the Gabelli-Westwood Family of Mutual Funds as well
as equity and fixed income investments for a diverse clientele including
corporate plan sponsors, charitable institutions, educational endowments and
public funds. Westwood Trust ("Trust") provides trust, custodial and other
management services to high net worth individuals and corporations throughout
Texas and the Southwest. SW Capital Corporation ("Capital"), administers the
Local Government Investment Cooperative ("LOGIC") fund for cities, counties,
schools and other local governments across Texas.
Banking Group
We also offer full-service, traditional banking through First Savings Bank, FSB,
Arlington, Texas ("FSB"), as well as Internet banking via FSB's online division,
MyBankUSA.com. FSB has several wholly and majority owned subsidiaries as well.
First Consumer Credit, L.L.C. buys and sells home improvement loans receivable;
FSB Financial, L.L.C. purchases non-prime automobile loans; and FSB Development,
L.L.C. develops single family residential lots.
Other Services
We provide Internet services, network design and engineering and disaster
recovery services to the Company, its clients and other customers in the
southwestern United States through our subsidiary SWS Technologies Corporation
("Technologies").
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(b) Financial Information about Operations
Our operations consist of various financial services provided to our clients.
The following table shows our revenue by source for the last three fiscal years
as restated for the acquisition of ASBI Holdings, Inc. ("ASBI"), the parent of
FSB, accounted for as a pooling-of-interests (dollars in thousands):
2000 1999 1998
-------- -------- --------
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------
Net revenues from clearing
operations $ 61,233 10% $ 40,118 11% $ 26,607 8%
-------- -------- --------
Commissions:
Listed equities 11,303 2% 13,481 3% 14,125 4%
Over-the-counter equities 25,294 4% 15,392 4% 12,418 4%
Corporate bonds 8,922 2% 7,630 2% 5,027 2%
Government bonds and mortgage-backed
securities 1,019 -- 3,162 1% 2,785 1%
Municipal bonds 5,465 1% 5,568 1% 4,658 1%
Options 3,749 1% 2,885 1% 1,820 1%
Mutual funds 15,702 3% 14,310 4% 13,737 4%
Other 2,270 -- 2,620 1% 4,831 2%
-------- -------- --------
73,724 65,048 59,401
-------- -------- --------
Interest 265,664 45% 178,110 48% 173,464 54%
-------- -------- --------
Investment banking fees:
Corporate 2,943 -- 2,108 -- 5,786 2%
Municipal 7,538 2% 10,650 3% 9,933 3%
-------- -------- --------
10,481 12,758 15,719
-------- -------- --------
Advisory and administrative fees:
Institutional and individual
accounts 14,111 2% 11,502 3% 9,736 3%
Money market funds 6,019 1% 6,090 2% 3,559 1%
Other 724 -- 401 -- 437 --
-------- -------- --------
20,854 17,993 13,732
-------- -------- --------
Net gains on principal transactions:
Investment in Knight Trading Group, Inc. 83,570 14% -- -- -- --
Equity securities 50,748 9% 36,163 10% 7,295 3%
Municipal securities 1,046 -- 3,399 1% 4,095 1%
Other 2,098 -- 2,127 -- 1,186 --
-------- -------- --------
137,462 41,689 12,576
-------- -------- --------
Other:
Other fee revenue from clearing
operations 9,151 2% 8,102 2% 6,463 2%
Non-interest bank revenue 3,966 1% 3,971 1% 3,017 1%
Floor brokerage 2,353 -- 2,281 1% 2,551 1%
Other 4,198 1% 2,275 1% 5,587 2%
-------- -------- --------
19,668 16,629 17,618
-------- -------- --------
Total revenue $589,086 100% $372,345 100% $319,117 100%
======== ======== ========
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(c) Narrative Description of Business
As of June 30, 2000, we employed 1,057 individuals. Southwest employed 842 of
these individuals, 114 of whom were full-time retail representatives. In
addition, 550 full-time retail representatives were affiliated as independent
contractors. Through our broker/dealer subsidiaries, we provide securities
services to approximately 284,000 client accounts. No single client accounts
for a material percentage of our total business.
BROKERAGE SERVICES
Southwest Securities, Inc. Southwest's activities in the securities business
include execution and clearing of securities transactions, individual and
institutional securities brokerage, securities lending, management of and
participation in underwriting of equity and fixed income securities, market
making in corporate securities and research and investment advisory services.
For the year ended June 30, 2000, revenues of Southwest accounted for 72% of
consolidated revenues.
Southwest is a member firm of the NYSE, the American Stock Exchange, Inc. and
the Chicago Stock Exchange, Inc. It is also a member of the NASD, the
Securities Investor Protection Corporation ("SIPC"), and other regulatory and
trade organizations. SIPC provides protection for clients up to $500,000 each
with a limitation of $100,000 for claims for cash balances. Southwest purchases
insurance which, when combined with the SIPC insurance, provides total coverage
in certain circumstances of up to $25 million per client for securities held in
clients' accounts with no aggregate limit.
Execution and Clearing. Southwest provides clearing and execution primarily on
a fully-disclosed basis for other broker/dealers including general securities
broker/dealers, bank affiliated firms and those firms specializing in high
volume trading. In a fully disclosed clearing transaction, the identity of the
correspondent's client is known to Southwest, and Southwest physically maintains
the client's account and performs a variety of services as agent for the
correspondent. Southwest provides clearing and execution services for 200
correspondents throughout the United States and Europe. Correspondent firms are
charged fees based on their use of services according to a standard clearing
schedule. Discounts are given from the standard schedule based on total volume
and type of services provided to the correspondent. Besides service charges
realized from securities clearing activities, Southwest also earns substantial
amounts of interest income. Southwest extends credit directly to its customers,
the customers of correspondent firms and the correspondent firms themselves in
order to facilitate the conduct of customer and correspondent securities
transactions. This credit is termed margin lending. The correspondents
indemnify Southwest against margin losses on their customers' accounts.
Southwest also extends margin credit directly to correspondents to the extent
that such firms pledge proprietary assets as collateral. Since Southwest must
rely on the guaranties and general credit of the correspondents, Southwest may
be exposed to significant risk of loss if correspondents are unable to meet
their financial commitments should there be a substantial adverse change in the
value of margined securities.
While Southwest's correspondent relationships are with a wide range of general
securities broker/dealers and bank-affiliated broker/dealers, Southwest provides
clearing services for a number of high-volume trading firms. These firms
specialize in providing services to those customers who trade actively on a
daily basis. As of June 30, 2000, Southwest provides clearing services for 11
of these firms. The nature of services provided to the customers of these firms
are substantially different from the standard correspondent relationship and,
accordingly, fees for services to these correspondents are discounted from the
fees normally charged in the standard clearing schedule.
The following table reflects the number of client transactions processed for
each of the last three years and the number of correspondents at the end of each
year:
Fiscal 2000 Fiscal 1999 Fiscal 1998
----------- ----------- -----------
Tickets for third party correspondents 58,549,705 21,819,847 6,439,240
Tickets for internal correspondents 545,733 258,948 159,156
Tickets for Southwest account executives 516,699 304,540 172,203
----------- ----------- -----------
Total tickets 59,612,137 22,383,335 6,770,599
=========== =========== ===========
Number of correspondents 200 216 231
=========== =========== ===========
3
In addition to clearing trades, Southwest provides other products and services
to its correspondents such as recordkeeping, trade reporting, accounting,
general back-office support, securities lending, reorganization and custody of
securities. Southwest also attempts to enrich its correspondent relationships
by advising the correspondent on communications and networking functions as well
as making available to them a variety of non-brokerage products and services on
favorable terms.
The terms of Southwest's agreements with its correspondents define the
allocation of financial, operational and regulatory responsibility arising from
the clearing relationship. To the extent that the correspondent has available
resources, Southwest is protected against claims by customers of the
correspondent arising from actions by the correspondent; however, if the
correspondent is unable to meet its obligations, dissatisfied customers may
attempt to seek recovery from Southwest.
Individual and Institutional Securities Brokerage. As a securities broker,
Southwest acts as agent in the purchase and sale of securities, options,
commodities and futures contracts traded on various securities and commodities
exchanges or in the over-the-counter ("OTC") market. In most cases, Southwest
charges commissions to its retail clients, on both exchange and OTC
transactions, in accordance with its established commission schedule. In
certain instances, varying discounts from the schedule are given, generally
based upon the client's level of business, the trade size and other relevant
factors. Southwest discounts its commissions substantially on institutional
transactions based on trade size and the amount of business conducted annually
with each institution. For certain fee-based accounts, a fee is charged in lieu
of standard commissions. In addition, Southwest sells a number of professionally
managed mutual funds and maintains dealer-sales agreements with most major
distributors of mutual fund shares sold through broker/dealers. Some account
executives employed by Southwest maintain a license to sell certain insurance
products. Southwest is registered with the Commodity Futures Trading Commission
as a non-guaranteed introducing broker and is a member of the National Futures
Association. Southwest is a fully disclosed client of one of the largest
futures commodity merchants in the United States.
As of June 30, 2000, Southwest had nine retail brokerage offices, two located in
Dallas and one each in Georgetown, Longview, Lufkin, Nacogdoches, and San
Antonio, Texas; and Albuquerque and Santa Fe, New Mexico. In addition,
Southwest has bond brokerage offices in Dallas, Chicago and New York; and an
institutional sales office in Dallas.
Customer Financing. Client transactions in securities are effected on either a
cash or margin basis. In margin transactions, the client pays a portion of the
purchase price, and Southwest makes a loan to the client for the balance,
collateralized by the securities purchased or by other securities owned by the
client. Southwest provides financing for margin transactions for its own
clients as well as correspondents' clients. Southwest may extend credit on a
margin basis directly to correspondents to the extent the correspondent holds
securities positions for their own account. Interest is charged, at a floating
rate, to clients on the amount borrowed to finance margin transactions. The rate
charged is dependent on the average net debit balance in the client's accounts,
the activity level in the accounts and the applicable cost of funds. The amount
of the loan is subject to the margin regulations ("Regulation T") of the Board
of Governors of the Federal Reserve System, NYSE margin requirements, and
Southwest's internal policies, which in many instances are more stringent than
Regulation T or NYSE requirements. In most transactions, Regulation T limits
the amount loaned to a customer for the purchase of a particular security to 50%
of the purchase price. Furthermore, in the event of a decline in the value of
the collateral, the NYSE regulates the percentage of client cash or securities
that must be on deposit at all times as collateral for the loans. In permitting
clients to purchase on margin, Southwest is subject to the risk of a market
decline, which could reduce the value of its collateral below the client's
indebtedness. Agreements with margin account clients permit Southwest to
liquidate clients' securities with or without prior notice in the event of an
insufficient amount of margin collateral. Despite those agreements, Southwest
may be unable to liquidate clients' securities for various reasons including the
fact that the pledged securities may not be actively traded, there is an undue
concentration of certain securities pledged, or a stop order is issued with
regard to pledged securities.
The primary source of funds to finance clients' margin account balances is
credit balances in clients' accounts. Southwest generally pays interest to
clients on these credit balances at a rate determined periodically. Available
credit balances are used to lend funds to Southwest customers purchasing
securities on margin. SEC regulations restrict the use of clients' funds to the
financing of clients' activities including margin account balances. Excess
customer credit balances are invested in short-term securities segregated for
the exclusive benefit of customers as required by SEC regulations. Southwest
generates net interest
4
income from the positive interest rate spread between the rate earned from
margin lending and alternative short-term investments and the rate paid on
customer credit balances.
Securities Lending Activities. Southwest performs securities lending services
for its own clients, clients of correspondents and correspondents themselves as
well as for other broker/dealers and lending institutions. Southwest's
securities borrowing and lending activities involve borrowing securities to
cover short sales and to complete transactions in which clients have failed to
deliver securities by the required settlement date, and lending securities to
other broker/dealers for similar purposes. When borrowing securities, Southwest
is required to deposit cash or other collateral, or to post a letter of credit
with the lender and Southwest generally receives a rebate (based on the amount
of cash deposited) or a fee calculated to yield a negotiated rate of return.
When lending securities, Southwest receives cash or similar collateral and
generally pays a rebate (based on the amount of cash deposited) to the other
party to the transaction. Generally, Southwest earns net interest income based
on the spread between the interest rate on cash or similar collateral deposited
and the interest rate paid on cash or similar collateral received. Stock
borrowing and securities lending transactions are generally executed pursuant to
written agreements with counterparties which require that (1) securities
borrowed and loaned be marked-to-market on a daily basis, (2) excess collateral
be refunded, and (3) deficit collateral be furnished. Margin adjustments are
usually made on a daily basis through the facilities of various clearing houses.
Southwest is a principal in these securities borrowing and lending transactions
and becomes liable for losses in the event of a failure of any other party to
honor its contractual obligation. Southwest's management sets limits on
transaction volumes with each counter-party and reviews these limits on a weekly
basis to monitor the risk level with each counter-party.
The securities lending business is conducted primarily out of the Company's New
York office using a highly specialized sales force. Competition for these
professionals is intense and there can be no assurance that Southwest will be
able to retain these securities lending professionals.
Investment Banking and Underwriting Activities. Southwest earns investment
banking revenues by assisting corporate clients in planning to meet their
financial needs and advising them on the most advantageous means of raising
capital. Such plans are sometimes implemented by managing or co-managing public
offerings of securities or by arranging private placements of securities with
institutional or individual investors. These types of activities are conducted
in the corporate finance department that is staffed with 11 professionals and 3
analysts. In addition to public offerings and private placements, Southwest
provides other consulting services, including providing valuations of securities
and companies, arranging and evaluating mergers and acquisitions and advising
clients with respect to financing plans and related matters.
The syndicate department coordinates the distribution of managed and co-managed
corporate equity underwritings, accepts invitations to participate in
competitive or negotiated underwritings managed by other investment banking
firms, and allocates and merchandises Southwest's selling allotments to its
branch office system, to institutional clients and to other broker/dealers.
Southwest is also among the leaders in its geographic region in the origination,
syndication and distribution of securities of municipalities and political
subdivisions. The public finance department, which is staffed by 21
professionals, provides professional financial advisory services to public
entities across Texas and the Southwest and maintains branch offices in San
Antonio, Austin and Houston, Texas, and Albuquerque, New Mexico.
The following table sets forth, for the last three fiscal years, the number and
dollar amounts, using the full credit to the co-manager method, of municipal
bond offerings senior-managed or co-managed by Southwest.
Aggregate
Fiscal Number of Amount of
Years Issues Offerings
--------- ---------- -----------------
2000 158 $ 3,414,729,000
1999 175 $ 4,846,558,000
1998 203 $ 5,143,646,000
Participation in underwritings, both corporate and municipal, can expose
Southwest to material risk, since the possibility exists that securities it has
committed to purchase cannot be sold at the initial offering price.
5
Federal and state securities laws and regulations also affect the activities of
underwriters and impose substantial potential liabilities for violations in
connection with sales of securities by underwriters to the public.
Market Making Activities. Southwest is a market maker in OTC and exchange-
listed equity securities as well as a dealer in tax-exempt and governmental
fixed income securities. Trading securities in the OTC market involves the
purchase of securities from and the sale of securities to clients of Southwest
or to other dealers who may be purchasing or selling securities for their own
account or acting as agent for their clients. Profits and losses are derived
from the spreads between bid and asked prices, as well as market trends for the
individual securities during the holding period. Southwest makes markets in 635
OTC common stocks and 368 exchange-listed stocks. Southwest frequently acts as
agent in the execution of OTC orders for its clients and, as such, transacts
these trades with other dealers. When Southwest receives a client order in a
security in which it makes a market, it may act as principal as long as it
matches or improves upon the best price in the dealer market, plus or minus a
mark-up or mark-down not exceeding the equivalent agency commission charge.
Recently adopted regulations require that client limit orders be satisfied prior
to the brokerage firm buying securities into or selling the securities from
their own inventory at the same price.
While most of Southwest's principal transactions are executed to facilitate
individual and institutional customer trades, Southwest also maintains certain
inventory positions for its own accounts. These inventories require the
commitment of capital and expose the Company to the risk of a loss if market
prices of the securities held in inventory decrease. General market conditions,
interest rates and the financial prospects for issuers of such securities may
affect the market prices of securities held in inventory. Internal guidelines
intended to limit the size and risk of inventories maintained have been
established and are reviewed periodically.
Research Activities. Southwest has a research department that provides
analysis, investment recommendations and market information with an emphasis on
companies located in the Southwest region. At June 30, 2000, Southwest had 13
senior securities analysts publishing research on 100 companies. The department
focuses on particular industry groups, including consumer products, health care,
real estate and technology.
Information Technology. Information technology is an integral part of
Southwest's clearing and brokerage activities. Southwest currently operates a
computing system that uses Comprehensive Software Systems, Ltd. ("CSS") software
to provide user interface (front-end) functions. This software is being
developed by CSS, a joint venture with Southwest and several other
broker/dealers.
The CSS system is a Microsoft-based architecture utilizing Microsoft Visual
Basic, Window NT, C++ and SQL Server 7.0 and is fully compatible with off-the-
shelf applications such as Word, Excel and PowerPoint. Since CSS is based on an
open architecture, Southwest is able to operate the system on standardized
servers. The CSS databases at Southwest run on Compaq Proliant(TM) 7000 and
8500 servers using Intel Xeon processors. The primary back office database of
the CSS system is stored on an EMC 3930 Symmetrix frame. In addition to the
database, the CSS applications also use over 70 Compaq 1850R and 6400 servers
with Dual/400-megahertz processors and 512 megabytes or more of RAM.
Southwest operates sophisticated hardware and software to execute and process
securities transactions (back-office) and is engaged in continuing software
development and regular up-grades on its computer hardware. Southwest's data
center features a six-processor Tandem S72000 Himalaya system and a
sophisticated telecommunications network supporting over 3,300 terminals.
Southwest is transitioning from its Himalaya mainframe to a family of Compaq(R)
servers as a part of its migration to the CSS software.
While Southwest's software is licensed from Securities Industry Software
Corporation, Southwest employs in-house programmers to develop proprietary
enhancements and to maintain its system. Southwest provides brokerage
accounting, order entry and market data in a local area network/wide area
network environment as well as through other traditional communication
environments.
Southwest continues to invest in Internet and other communications technology.
Southwest is currently providing Internet access to account information for
certain correspondents and expects to expand this service. Southwest also
provides Internet service for correspondents and other end users, as well as
employees. Internet and other communication mechanisms may expose the Company
to increased risk of unauthorized access to data systems.
6
SWS Financial Services, Inc. SWSFS is an NASD member broker/dealer that
contracts with individual registered representatives who are NASD licensed
salespersons for the conduct of their securities business. SWSFS is a
correspondent of Southwest. While these registered representatives must conduct
all of their securities business through SWSFS, their contracts permit them to
conduct insurance, real estate brokerage or other business for others or for
their own accounts. The registered representatives are responsible for all of
their direct expenses and are paid higher commission rates than Southwest's
account executives to compensate them for their added expenses.
Mydiscountbroker.com, Inc. MDB is a NASD member broker/dealer specializing in
deep discount brokerage services with an emphasis in trading over the Internet.
Although MDB's brokers do not provide investment advice or recommendations, they
do offer clients the information needed, including quotes, market news, and
trends, to make informed investment decisions. MDB's brokers work on a salary,
rather than commission.
ASSET MANAGEMENT AND TRUST SERVICES
Westwood Management Corporation Westwood is a registered investment advisor
founded in 1983 by Susan M. Byrne, who continues to serve as its President and
Chief Executive Officer. The firm, which has headquarters in Dallas, manages
equity, fixed income, cash and balanced accounts for a diverse clientele,
including corporate plan sponsors, charitable institutions, educational
endowments and public funds. In addition, Westwood manages the Gabelli-Westwood
Family of Mutual Funds which is available to both taxable and non-taxable
investors.
Westwood Trust Trust was established in 1974 and provides trust, custodial and
other management services to estates, charitable and other trusts and retirement
plans established by high net worth individuals and corporations throughout
Texas and the Southwest. Trust is chartered and regulated by the Texas
Department of Banking.
SW Capital Corporation Capital was established in 1994 and administers the
LOGIC program. The LOGIC program is targeted to the needs of cities, counties,
schools and other local governments across Texas and conforms with the
Interlocal Cooperation Act and the Public Funds Investment Act of the Texas
Government Code. This program allows participants to pool their available
funds, resulting in increased economies of scale, which allow higher returns
while maintaining a high degree of safety and liquidity.
BANKING
First Savings Bank. FSB is a federally chartered savings association organized
and existing under the laws of the United States. Originally chartered with the
Federal Home Loan Board on March 29, 1985 under the name "Arlington Savings
Bank, A Federal Savings Bank," FSB became "First Savings Bank, FSB" effective
April 3, 1989. Headquartered in Arlington, Texas, FSB conducts business from
its main office and a drive-thru facility. FSB opened a branch location in
Arlington, Texas in October 1999 and also has two loan production offices in
northeast Tarrant County and Dallas.
FSB offers services, such as certificates of deposit, checking and savings
accounts, through traditional channels as well as through its Internet division,
MyBankUSA.com. FSB's deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), up to applicable limits for each depositor.
FSB focuses on several sectors of the residential housing market, including
interim construction lending and short term funding for mortgage bankers. In
addition, FSB originates commercial loans and purchases loans or pools loans for
investment. FSB also engages in the buying and selling of home improvement
loan receivables and purchasing non-prime loans secured by liens on automobiles
through its operating subsidiaries, described in the following paragraphs.
First Consumer Credit, L.L.C. First Consumer Credit, L.L.C. a Texas limited
liability company, ("First Consumer"), received OTS approval as an operating
subsidiary of FSB on August 10, 1995. First Consumer engages in various aspects
of buying and selling home improvement loans receivable by purchasing
installment consumer home improvement notes that have anticipated average terms
of 90 months and are generally secured by residential real estate. First
Consumer typically holds these notes only a minimal
7
period of time before the portfolios of the notes are accumulated and sold in
bulk. This entity is licensed to conduct business in 37 states. FSB currently
owns approximately 74% of the voting interest in First Consumer.
FSB Financial, L.L.C. FSB Financial, L.L.C. a Texas limited liability company,
("FSB Financial"), received OTS approval as an operating subsidiary of FSB on
July 21, 1997, to engage in the purchasing of non-prime loans secured by liens
on automobiles and light trucks. The loans are generally originated by car
dealerships and other institutions in such consumer paper. FSB currently owns
approximately 51% of the voting interest in FSB Financial.
FSB Development, L.L.C. FSB Development, L.L.C. a Texas limited liability
company, ("FSB Development"), received OTS approval as an operating subsidiary
of FSB on November 5, 1997. FSB Development currently owns a 69% limited
partnership interest in Harley Associates, Ltd., a Texas limited partnership
("Harley Associates"). Harley Associates is engaged in developing single-family
residential lots in the Dallas-Fort Worth metropolitan area. The lots are sold
to high volume builders whose operating history indicates they will have the
ability to complete such development. FSB is currently the sole member of FSB
Development.
OTHER SERVICES
SWS Technologies Corporation SWS Technologies Corporation provides Internet
design and marketing strategies and other Internet-related services, including
high-speed connectivity, co-location, Web hosting and 24-hour technical support,
as well as disaster recovery services.
COMPETITION
We encounter intense competition in our business, and we compete directly with
numerous securities firms and banks, many of which have substantially greater
capital and other resources. We also encounter competition from insurance
companies and financial institutions in many elements of our business. The
Gramm-Leach-Bliley Act, signed into law on November 12, 1999, allows for
affiliations among banks, securities firms and insurance companies by means of a
financial holding company. In addition, commercial banks have the possibility
of engaging in a broad range of non-banking activities through operating
subsidiaries. Such activities include all financial activities, including
broker/dealer activities, with the exception of insurance underwriting and real
estate investment or development.
In the past few years, a number of banks acquired securities firms and, in so
doing, gained unprecedented entry into the securities industry. While the
effect of such acquisitions cannot yet be determined, they have brought entirely
new sources of capital into the securities industry, resulting in more
formidable competition.
Additionally, competition among securities firms and other competitors for
successful sales representatives, securities traders, securities analysts, stock
loan professionals and investment bankers is intense and continuous.
We compete with other securities firms and with banks, insurance companies and
other financial institutions principally on the basis of service, product
selection, price, location and reputation in local markets. We operate at a
price disadvantage to discount brokerage firms that do not offer equivalent
services. Southwest competes for the correspondent clearing business on the
basis of service, price, technology, product selection and reputation. We
compete in asset management services with other portfolio managers principally
based on portfolio performance, price and service.
REGULATION
The securities industry in the United States is subject to extensive regulation
under federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Much of the regulation of
broker/dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the NYSE. These self-regulatory organizations adopt
rules (which are subject to approval by the SEC) for governing the industry and
conduct periodic examinations of member broker/dealers. Securities firms are
also subject to regulation by state securities commissions in the states in
which they are
8
registered. Southwest, SWSFS and MDB are registered in all 50 states. Southwest
is also registered in Puerto Rico.
The regulations to which broker/dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. Additional legislation, changes
in rules promulgated by the SEC and by self-regulatory organizations or changes
in the interpretation or enforcement of existing laws and rules often directly
affect the method of operation and profitability of broker/dealers. The SEC and
the self-regulatory organizations may conduct administrative proceedings that
can result in censure, fine, suspension or expulsion of a broker/dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker/dealers is the protection of clients and the securities markets rather
than protection of creditors and shareholders of broker/dealers. See Note 14 of
the notes to consolidated financial statements for further description of
certain SEC regulations.
FSB, as a federal savings bank, is registered with the Office of Thrift
Supervision ("OTS") and is subject to OTS regulation, examination, supervision
and reporting requirements. Regulations applicable to FSB generally relate to
lending and investment activities, payment of dividends and maintenance of
appropriate levels of capital. Failure to comply with these regulations may be
considered an unsafe and unsound practice and may result in the imposition by
the OTS of various sanctions. Because FSB's deposits are insured by the SAIF,
the FDIC also has the authority to conduct special examinations. FSB is
required to file periodic reports with the OTS describing its activities and
financial condition. This supervision and regulation is intended primarily for
the protection of FSB's depositors.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders:
Name Age Position
---- --- --------
David Glatstein 51 Director, Chief Executive Officer and President
William D. Felder 42 Executive Vice President
Kenneth R. Hanks 46 Executive Vice President and Chief Operating Officer
Stacy M. Hodges 37 Executive Vice President, Chief Financial Officer and
Treasurer
Daniel R. Leland 39 Executive Vice President
Richard H. Litton 53 Executive Vice President
W. Norman Thompson 44 Executive Vice President and Chief Information Officer
Paul D. Vinton 51 Executive Vice President
David Glatstein was elected Chief Executive Officer in May 1996 and has served
as President and a director of both the Company and Southwest since May 1995.
Mr. Glatstein was Chief Executive Officer of Barre & Company, Inc. from its
founding in 1980 until its acquisition by Southwest in 1995; First Vice
President of the Securities Division of Lehman Brothers Kuhn Loeb, Inc. from
1978 to 1980 and a securities broker with White, Weld & Company, Inc. from 1973
to 1978. Mr. Glatstein is a past Chairman of the District 6 Business Conduct
Committee of the NASD.
William D. Felder has served as Executive Vice President of the Company since
December 1995 and as Senior Vice President of the Company since 1993. Mr.
Felder has been associated with Southwest in various other capacities since
1980, including director since August 1993 and Senior Vice President in charge
of Clearing Services from 1988 to 1998. Mr. Felder is a past Chairman of the
District 6 Business Conduct Committee of the NASD and a past member of the Board
of Governors of the Chicago Stock Exchange. He is currently a member of the
Securities Industry Association Clearing Firms Committee.
Kenneth R. Hanks has served as Executive Vice President since June 1996 and
Chief Operating Officer since August 1998. Mr. Hanks was the Company's Chief
Financial Officer from June 1996 to August 1998 and has been a director of
Southwest since June 1997. Mr. Hanks served in various executive capacities of
Rauscher Pierce Refsnes, Inc. from 1981 to 1996, including Executive Vice
President and Chief Financial Officer. He serves as an arbitrator with the NASD
and formerly served as a member of the NASD's District 6 Business Conduct
Committee.
9
Stacy M. Hodges has served as Treasurer and Chief Financial Officer since August
1998 and Executive Vice President since February 1999. Ms. Hodges was
Controller of the Company from September 1994 to August 1998. Ms. Hodges has
been a director of Southwest since June 1997. Prior to joining Southwest, Ms.
Hodges was a Senior Audit Manager in the Financial Services division of KPMG
LLP. Ms. Hodges is a member of the Texas Society of CPAs.
Daniel R. Leland has served as Executive Vice President of the Company since
February 1999. He has served as Executive Vice President of Southwest since July
1995. He has been in charge of the Fixed Income Division since November 1997 and
MDB, SWSFS and the Private Client Group since July 2000. Mr. Leland began his
career at Barre & Company in June 1983 where he was employed in various
capacities in fixed income sales and trading before becoming President of Barre
& Company in 1993. Mr. Leland has been an arbitrator for the NASD and is a past
Vice Chairman of the District 6 Business Conduct Committee.
Richard H. Litton has served as Executive Vice President of the Company and
Executive Vice President in charge of the Public Finance Division since July
1995. Mr. Litton headed the Municipal Securities Group in Dallas for BA
Securities, Inc. from 1993 to 1995. Mr. Litton was President with First
Southwest Company, a regional investment bank from 1987 to 1993; Vice President
and Regional Manager of Merrill Lynch Capital Markets Municipal Group from 1977
to 1987 and a Vice President and Regional Manager with White, Weld & Company,
Inc. from 1976 to 1977. Mr. Litton served on the Advisory Committee on the
Recovery of Real Estate Finance for the Texas House of Representatives'
Financial Institutions Committee. Mr. Litton is past member and director of the
Municipal Advisory Council of Texas and past member of the Marketing Committee
of the Public Securities Association.
W. Norman Thompson has served as Executive Vice President and Chief Information
Officer of the Company since January 1995. Mr. Thompson was associated with
Kenneth Leventhal & Co. (now a part of Ernst & Young LLP) in various capacities
ranging from Audit Manager to Senior Consulting Manager from 1987 to 1994.
Previously, Mr. Thompson was an auditor with KPMG LLP from 1981 to 1987. In the
capacities he held with both Kenneth Leventhal & Co. and KPMG LLP, he was
heavily involved in Information Technology auditing and consulting.
Paul D. Vinton has served as Executive Vice President of the Company since
November 1998 and as Senior Vice President of Southwest since June 1995. Mr.
Vinton was associated with Stephens Inc. in various capacities from 1993 through
1995. Mr. Vinton has been employed within the securities industry since 1972
with various firms dealing primarily in operational, clearance and settlement
activities. Mr. Vinton has served on various industry group boards including
most recently the Depository Trust Company Settlement Advisory Board.
Item 2. Properties
Our executive offices are located in approximately 160,500 square-feet of leased
space in an office building in Dallas, Texas. The lease expires in 2008. We
conduct our clearing operations primarily in our principal office in Dallas,
Texas and our office in New York. We have nine retail brokerage offices, two
located in Dallas, Texas and one each in Georgetown, Longview, Lufkin,
Nacogdoches and San Antonio, Texas; and Albuquerque and Santa Fe, New Mexico.
We have public finance branch offices in San Antonio, Austin and Houston, Texas
and Albuquerque, New Mexico. We have fixed income branch offices in Chicago,
Illinois and New York. Our bank leases its main office located in Arlington,
Texas and also leases space in northeast Tarrant County and Dallas for loan
production offices. Our bank owns a drive-in facility located next to the main
office and a branch office in south Arlington. Our technology group has three
locations in the Dallas/Fort Worth area, including a disaster recovery site.
Our present facilities and equipment are adequate for current and planned
operations.
Item 3. Legal Proceedings
On April 17, 1998, a judgment was entered against us in connection with a breach
of contract lawsuit stemming from the 1995 acquisition of Barre & Company, Inc.
The judge awarded the counterparty approximately $40,000 in damages and
approximately $1,700,000 in attorney's fees. The Company subsequently appealed
the verdict. In August 2000, the Court of Appeals of the Fifth District of
Texas reversed the previous judgment and awards and remanded the case back to
court for retrial.
10
On May 22, 1998, a class action claim was filed in the United States District
Court for the Northern District of Texas against us and ViaGraphix Corporation
alleging that material misrepresentations were made in the registration
statement and prospectus that was filed with the SEC and distributed to
investors in connection with the initial public offering of stock of ViaGraphix,
which was managed and underwritten by us. We believe that we have meritorious
defenses to the allegations of the lawsuit, and do not believe that the outcome
of this claim will have a material adverse effect on our business, financial
condition or operating results.
In the general course of our brokerage business and the business of clearing for
other brokerage firms, we have been named as defendants in various pending
lawsuits and arbitration proceedings. These claims allege violation of Federal
and state securities laws. FSB is also involved in certain claims and legal
actions arising in the ordinary course of business. We believe that resolution
of these claims will not result in any material adverse effect on our business,
financial condition or operating results.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock trades on the New York Stock Exchange, Inc. under the symbol
"SWS". At September 22, 2000, there were 144 holders of record of our common
stock and in excess of 9,500 total holders of our common stock. The following
table sets forth for the periods indicated the high and low market prices for
the common stock and the cash dividend declared per common share:
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------- ---------- ---------- ---------
Cash dividend declared per common share /(2)/ $ .073 $ .073 $ .073 $ .073
Stock Price Range /(2)/
High $59.15 $31.36 $44.55 $40.11
Low $21.82 $16.82 $22.78 $24.55
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------------------------------------------
Cash dividend declared per common share /(1)/ /(2)/ $ .057 $ .057 $ .057 $ .057
Stock Price Range /(1)/ /(2)/
High $20.82 $20.66 $33.63 $69.42
Low $13.38 $13.13 $17.41 $23.35
/(1)/ Adjusted to reflect a ten percent stock dividend which was effective
August 2, 1999.
/(2)/ Adjusted to reflect a ten percent stock dividend declared May 4, 2000,
payable on August 1, 2000 to shareholders of record on July 15, 2000.
11
(3) Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(In thousands, except ratios and per share amounts)
Year Ended /(6)/
------------------------------------------------------------
June 30, June 25, June 26, June 27, June 28,
2000 1999 1998 1997 1996
------------------------------------------------------------
Operating Results:
Revenue $ 589,086 $ 372,345 $ 319,117 $ 242,590 $ 202,616
Net income $ 94,234 $ 38,441 $ 31,023 $ 23,291 $ 18,812
Earnings per share - basic /(2) (3) (4)/ $ 5.94 $ 2.43 $ 1.97 $ 1.53 $ 1.24
Earnings per share - diluted /(2) (3) (4)/ $ 5.89 $ 2.42 $ 1.96 $ 1.53 $ 1.24
Weighted average shares outstanding -
basic /(2) (3) (4)/ 15,861 15,803 15,778 15,257 15,138
Weighted average shares outstanding -
diluted /(2) (3) (4)/ 16,003 15,883 15,800 15,271 15,145
Cash dividend declared per common
share /(2)/ $ .29 $ .23 $ .19 $ .14 $ .12
Financial Condition:
Total assets $5,229,035 $4,559,164 $3,490,621 $3,481,372 $2,360,802
Long-term debt /(7)/ $ 65,856 $ 54,430 $ 4,623 $ 23,636 $ 17,795
Stockholders' equity $ 291,140 $ 289,700 $ 147,680 $ 123,625 $ 99,263
Shares outstanding /(2) (3)/ 15,893 14,406 13,278 12,752 11,384
Tangible book value per common
share /(1) (2) (3)/ $ 17.88 $ 17.82 $ 8.88 $ 7.34 $ 6.36
Ratio of earnings to fixed charges /(5)/ 1.8 1.5 1.4 1.4 1.4
/(1)/ For purposes of calculating tangible book value per share, stockholders'
equity is adjusted to consider goodwill of $6,958 at June 30, 2000,
$7,244 at June 25, 1999, $7,558 at June 26, 1998, $8,002 at June 27, 1997
and $2,976 at June 28, 1996, and shares outstanding are adjusted to
reflect stock dividends declared in subsequent fiscal years of 1,441
shares at June 25, 1999, 2,503 shares at June 26, 1998, 3,007 shares at
June 27, 1997 and 3,752 shares at June 28, 1996.
/(2)/ Adjusted to reflect a ten percent stock dividend effective October 1,
1997, a five percent dividend effective August 3, 1998, a ten percent
stock dividend effective August 2, 1999 and a ten percent dividend
declared May 4, 2000, payable August 1, 2000 to shareholders of record as
of July 15, 2000.
/(3)/ Adjusted for the issuance of 2,600 shares of the Company's common stock
for the acquisition of ASBI.
/(4)/ Fiscal years 1998, 1997 and 1996 were adjusted to reflect the
implementation of Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
/(5)/ For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before the provision for income taxes and
fixed charges consist of interest expense and one-third of rental expense
which is deemed representative of an interest factor.
/(6)/ Adjusted to reflect the acquisition of ASBI, accounted for as a pooling-
of-interests.
/(7)/ Includes subordinated notes and Federal Home Loan Bank advances with
maturities in excess of one year.
12
Item 7. 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.
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. The Company also
engages in full-service banking and asset management activities. 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 financial
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 fiscal years ended June 30, 2000 and June 25, 1999 totaled
$94,234,000 and $38,441,000, respectively, representing increases over
comparable prior year periods of $55,793,000, or 145%, and $7,418,000, or 24%,
respectively.
Included in net gains on principal transactions in fiscal 2000 is a gain
totaling $72,917,000 from the sale of approximately 1,526,000 shares of Knight
Trading Group, Inc. (formerly 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 were 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 (tax effected), net
income for fiscal 2000 totaled $48,193,000, representing an increase of
$9,752,000, or 25%, over fiscal 1999. For the past three years, the equity
markets have experienced an unprecedented rise, spurring record levels of
transaction volume and capital market activity. These conditions have led to
record results in many sectors of the financial services industry, including
most of the Company's primary lines of business. These industry factors,
coupled with the Company's effort to grow into new areas of the industry, have
allowed the Company to reach earnings records.
On April 28, 2000, the Company consummated its acquisition of ASBI Holdings,
Inc. ("ASBI"), parent company of First Savings Bank, FSB ("FSB"). The
acquisition was accounted for under the pooling-of-interests method of
accounting, and, as a result, all financial information has been restated for
all periods prior to the combination. On May 15, 2000, ASBI merged with the
Parent, with the Parent being the surviving entity and making FSB and its
subsidiaries (hereafter collectively the "Bank") a wholly owned
13
subsidiary of the Parent. The Bank contributed $13,050,000, $12,222,000 and
$10,393,000 to net income in fiscal 2000, 1999 and 1998, respectively.
The following is a summary of year-to-year increases (decreases) in categories
of net revenues and operating expenses (dollars in thousands):
2000 vs. 1999 1999 vs. 1998
Amount Percent Amount Percent
-----------------------------------------------------
Net revenues:
Net revenues from clearing operations $ 21,115 53% $ 13,511 51%
Commissions 8,676 13% 5,647 10%
Net interest 22,264 34% 5,647 9%
Investment banking, advisory and
administrative fees 584 2% 1,300 4%
Net gains on principal transactions 95,773 230% 29,113 231%
Other 3,039 18% (989) (6%)
---------- ---------
151,451 58% 54,229 26%
---------- ---------
Operating expenses:
Commissions and other employee
compensation 32,306 25% 33,559 35%
Occupancy, equipment and computer
service costs 5,657 26% 3,885 21%
Communications 3,028 22% 1,229 10%
Floor brokerage and clearing
organization charges 2,280 37% 1,005 20%
Advertising and promotional 9,945 197% 643 15%
Other 13,710 48% 3,000 12%
---------- ---------
66,926 32% 43,321 27%
---------- ---------
Income before income taxes and minority
interest in consolidated subsidaries $ 84,525 158% $ 10,908 26%
========== =========
Net Revenues from Clearing Operations. Net revenues from clearing increased
$21,115,000, or 53%, from 1999 to 2000, as a result of an increase in
transaction volumes. Total transactions processed in fiscal 2000 increased 166%
to approximately 59.6 million from approximately 22.4 million in fiscal 1999.
This increase is due to high trading volumes in the securities markets over the
past twelve 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. One such high-volume
clearing customer, Archipelago ECN, transitioned its business to another
clearing firm during the third quarter of fiscal 2000. Archipelago's business
accounted for less than five percent of the Company's revenues, but represented
32% of the Company's transaction volume in fiscal 2000.
Net revenues from clearing increased $13,511,000, or 51%, from 1998 to 1999, as
a result of an increase in transaction volumes. Total transactions processed in
fiscal 1999 increased 229% to approximately 22.4 million from approximately 6.8
million in fiscal 1998. Turbulent market conditions during the first six months
of fiscal 1999 and high trading volumes in the Internet and technology sectors
lead to heavy trading volume in securities markets. As mentioned above, the
rate of increase in transactions processed has outpaced the increase in revenues
from clearing due to the number of high-volume trading Correspondents in its
customer base who use relatively low levels of clearing services and,
accordingly, are charged substantially discounted clearing fees from the
Company's standard clearing schedule.
14
Commissions. Commissions from the Company's client transactions increased
$8,676,000, an increase of 13% when compared with revenues in fiscal 1999. This
increase is primarily attributable to an increase in production from the SWS
Financial Services, Inc. ("SWSFS") independent contractor network, as well as
from the Company's retail brokerage network, which includes private client group
and fixed income representatives. Commission revenue by type of representative
is as follows (dollars in thousands):
June 30, 2000 June 25, 1999 June 26, 1998
Commission No. of Commission No. of Commission No. of
Revenue Reps Revenue Reps Revenue Reps
-------------------------------------------------------------------
Southwest retail $34,503 114 $32,674 120 $29,743 118
Independent contractors 29,036 550 25,734 710 24,828 697
Other 10,185 6,640 4,830
--------- ---------- ----------
$73,724 $65,048 $59,401
========= ========== ==========
Also contributing to the increase were increased commissions from
Mydiscountbroker.com, Inc. ("MDB"), the Company's on-line brokerage subsidiary.
Commissions at MDB increased approximately 176% over the prior year. The number
of MDB on-line accounts increased to 29,178 at June 30, 2000 from 8,726 at June
25, 1999, an increase of 234%.
In fiscal 1999, commissions from the Company's client transactions increased
$5,647,000, an increase of 10% when compared with revenues in fiscal 1998. This
increase is primarily attributable to an increase in fixed income sales, as well
as an increase in the number of brokers in the SWSFS's independent contractor
network. Fixed income sales increased 46% over the prior fiscal year. The
number of independent contractor sales representatives increased to 710 at June
25, 1999 from 697 at June 26, 1998. Also contributing to the increase were
increased commissions from MDB, which began offering on-line trading in the
third quarter of fiscal 1998. Commissions at MDB increased approximately 193%
over the prior year. The number of MDB on-line accounts increased approximately
393% from June 26, 1998 to June 25, 1999.
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. Net interest is the
primary source of income for the Bank and represents the amount by which
interest and fees generated by earning assets exceed the cost of funds,
primarily interest paid to the Bank's depositors on interest-bearing accounts.
The components of interest earnings are as follows (in thousands):
June 30, 2000 June 25, 1999 June 26, 1998
---------------------------------------------------
Interest revenue:
Customer margin accounts $ 76,476 $ 47,865 $ 39,662
Assets segregated for regulatory purposes 11,958 11,511 9,806
Stock borrowed 133,009 80,688 83,332
Loans 35,054 30,333 29,620
Other 9,167 7,713 11,044
------------ ------------ -----------
265,664 178,110 173,464
------------ ------------ -----------
Interest expense:
Customer funds on deposit 44,069 31,870 27,723
Stock loaned 113,166 65,868 67,956
Deposits 12,022 12,359 12,117
Federal Home Loan Bank advances 1,391 484 974
Other 7,436 2,213 5,025
------------ ------------ -----------
178,084 112,794 113,795
------------ ------------ -----------
Net interest $ 87,580 $ 65,316 $ 59,669
============ ============ ===========
15
For the year ended June 30, 2000, net interest income accounted for 21% of the
Company's net revenue versus 25% in the fiscal 1999 and 29% in fiscal 1998. Net
interest revenue generated by the Bank accounted for 5% of net revenue in 2000,
7% in 1999 and 8% in 1998. Interest revenue from customer margin balances and
interest expense from customer funds on deposit have fluctuated in relation to
average balances over the past two fiscal years. Net interest revenue generated
from securities lending activities has increased relative to average balances
borrowed and loaned in the current fiscal year versus the prior two fiscal
years. At the Bank, changes in net interest revenue are generally attributable
to the timing of loan payoffs and volume.
Average balances on interest-earning assets and interest-bearing liabilities are
as follows (in thousands):
Fiscal Years Ended
June 30, 2000 June 25, 1999 June 26, 1998
-----------------------------------------------
Average interest-earning assets:
Customer margin balances $ 867,000 $ 604,000 $ 477,000
Stock borrowed 3,131,000 2,219,000 2,139,000
Loans held for investment 222,000 186,000 181,000
Loans held for sale 43,000 62,000 52,000
Average interest-bearing liabilities:
Customer funds on deposit 852,000 699,000 544,000
Stock loaned 3,125,000 2,189,000 2,113,000
Certificates of deposit 204,000 215,000 198,000
NOW, money markets and savings 14,000 12,000 8,000
Federal Home Loan Bank advances 22,000 10,000 16,000
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 counter-party risk. Interest rate trends,
changes in the economy and the scheduled maturities and interest rate
sensitivity of the investment and loan portfolios and deposits affect the
spreads earned by the Bank.
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, as well as revenue generated by the Asset
Management Group. Investment banking, advisory and administrative fees in total
remained relatively static in fiscal 2000 over fiscal 1999. Increases in fees
from investment advisory services were offset by decreases in the municipal and
corporate finance businesses. Advisory fees earned on investment management
increased as assets under management ("AUM") in total averaged $4 billion for
the fiscal year ended June 30, 2000, an increase of 14% over the prior year
average AUM. Assets under management by Asset Management Group subsidiaries are
as follows (in thousands):
June 30, 2000 June 25, 1999 June 26, 1998
----------------------------------------------
Westwood Group $ 3,000,000 $ 2,400,000 $ 2,080,000
SW Capital Corporation (LOGIC) 1,427,000 1,132,000 1,084,000
------------ ------------ ------------
Total AUM $ 4,427,000 $ 3,532,000 $ 3,164,000
============ ============ ============
Investment banking, advisory and administrative fees increased in fiscal 1999
when compared to fiscal 1998 due to increases in fees from investment advisory
services, which were partially offset by decreases in corporate and municipal
finance fees. Advisory fees earned on investment management increased as AUM
increased during fiscal 1999. The number and offering amount of senior and co-
managed municipal
16
finance offerings in which the Company participated decreased 14% and 6%,
respectively, over the prior year.
Net Gains on Principal Transactions. For the fiscal year ended June 30, 2000,
$10.7 million of net gains on principal transactions represents net gains
realized on the sale of approximately 271,000 shares of Knight common stock to
fund MDB's advertising commitments (see Advertising and Promotional below).
Excluding these gains, as well as the previously mentioned $72.9 million gain on
the sale of 1.5 million shares of Knight stock, net gains on principal
transactions were $53.9 million for the fiscal year ended June 30, 2000. Net
gains exclusive of the sales of Knight stock, increased $12.2 million, or 29%,
over the prior fiscal year. These results are attributed to an improvement in
the trading environment in the equity markets in fiscal 2000 and to the
expansion of the equity trading area. The number of traders employed in this
area increased to 22 at June 30, 2000. Coverage from market making activities
increased to 635 over-the-counter securities and 368 exchange-listed securities,
or increases of 17% and 503%, respectively, from the same time last year.
Revenue in this area can fluctuate significantly from quarter to quarter based
on market conditions.
During the fiscal year ended June 25, 1999, net gains on principal transactions
experienced significant growth, increasing 231% to $41,689,000 over the prior
year. This growth is due to the expansion of the Company's equity trading area.
The number of market makers employed in this area has increased to 20 at June
25, 1999 from 15 at June 26, 1998, while coverage from market making activities
has increased to 544 over-the-counter securities and 61 exchange-listed
securities in which the Company makes a market.
Other Income. Other income in fiscal 2000 consists primarily of other fee
income related to the clearing business floor brokerage activities and non-
interest income from the Bank. The increase in fee income is primarily related
to increases in clearing volumes.
Other income in fiscal 1999 decreased due to non-recurring revenue recorded in
fiscal 1998. The Parent owned a minority interest in Roundtable Partners, LLC
("Roundtable"), the predecessor of 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. In accordance with the terms of the limited
partnership agreement, prior to the offering, previously undistributed earnings
of Roundtable, approximately $3.7 million, were distributed to the Parent in
fiscal 1998.
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 fiscal year ended June 30, 2000,
commissions and other employee compensation expense increased over the same
periods in the prior year 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 72 full-time employees, primarily at MDB and the Bank and in the
information systems area. The number of full-time employees increased to 1,057
at June 30, 2000 compared to 985 at June 25, 1999. Included are 75 employees of
the Bank at June 30, 2000 and 57 employees of the Bank at June 25, 1999.
During the fiscal year ended June 25, 1999, commissions and other employee
compensation expense increased over the same periods in the prior year
principally as a result of (1) increased commissions and benefits paid to
revenue-producing employees generating higher levels of operating revenues; (2)
increased headcount among the independent contractor network; and (3) the
addition of 149 full-time employees. The number of full-time employees increased
to 985 at June 25, 1999 compared to 836 at June 26, 1998, as adjusted for
employees of the Bank. Approximately 57% of the increased employee count
relates to those employed in the information technology area.
Occupancy, Equipment and Computer Service Costs. Occupancy, equipment and
computer service costs increased in fiscal 2000 and 1999 as the Company
continued to increase the resources allocated to the implementation of its new
brokerage software, Comprehensive Software Systems, Ltd. ("CSS"). In fiscal
1999, these costs also increased due to the redesign of the Company's customer
statements.
17
Communications. In fiscal 2000, communications expense increased primarily due
to increased quotations expense due to the expansion of the equity trading area,
as well as the growth of MDB. Communications expense increased 10% in fiscal
years 1999 over 1998, due to expanded computer networking, as well as the
expansion of the equity trading area.
Floor Brokerage and Clearing Organization Charges. In fiscal 2000, 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 announced in August 1999 that it had
commenced a three and a half year, $40 million advertising campaign for MDB that
would be funded by selling Knight stock. The Company sold shares of Knight
common stock to fund the advertising commitment for fiscal 2000 for a gain of
$10.7 million.
Other Expense. Other expense increased due to additional contract labor,
consulting costs and costs associated with the Company's implementation of the
CSS system in both fiscal 2000 and 1999.
FINANCIAL CONDITION
The Parent's investment in Knight is classified as marketable equity securities
available for sale, and the unrealized holding gain, net of tax, is recorded as
other comprehensive income as a part of stockholders' equity on the consolidated
statements of financial condition in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At June 30, 2000, the Parent owned approximately
1.6 million shares of Knight.
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 June 30, 2000,
the amount outstanding under these secured arrangements was $46,300,000 which
was collateralized by securities held for firm accounts valued at $48,046,000
and $3,500,000 which was collateralized by securities held for non customer
accounts valued at $48,599,000. 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 that is due on demand and bears interest at rates
indexed to the federal funds rate. There were no amounts outstanding at June 30,
2000 under this unsecured line of credit.
On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated
Notes (the "Notes") due June 30, 2004. In July 1999, the Company issued an
additional $7.5 million of the Notes as the underwriters exercised their over-
allotment option. 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
18
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.
FSB's asset and liability management policy is intended to manage interest rate
risk. FSB accomplishes this through management of the repricing of its
interest-earning assets and its interest-bearing liabilities. Overall interest
rate risk is monitored through reports showing both sensitivity ratios, a
simulation model, and existing "gap" data.
Liquidity is monitored daily to ensure the ability to support asset growth, meet
deposit withdrawals, lending needs, maintain reserve requirements, and otherwise
sustain operations. FSB's liquidity is maintained in the form of readily
marketable loans, balances with the Federal Home Loan Bank ("FHLB"), vault cash,
and advances from the FHLB. In addition, FSB has significant borrowing capacity
with the FHLB for the purpose of purchasing short-term funds should additional
liquidity be needed. Management believes that FSB's present position is
adequate to meet its current and future liquidity needs.
Net cash used in operating activities during the fiscal year ended June 30, 2000
was $148,916,000. The use of cash was due to the increase in securities owned,
assets segregated for regulatory purposes and loans and was adequately financed
by increased short-term borrowings, customer funds on deposit and the deposits
at FSB.
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. The Company's banking
subsidiary is also subject to extensive capital standards imposed by regulatory
bodies, including the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. FSB has historically met all the capital adequacy
requirements to which it is subject.
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. At FSB,
interest rate risk arises when an interest-earning asset matures or when its
rate of interest changes in a timeframe different from that of the supporting
interest-bearing liability.
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
19
units involved. FSB seeks to reduce the risk of significant adverse effects of
market rate fluctuations by minimizing the difference between rate-sensitive
assets and liabilities, referred to as "gap", by maintaining an interest rate
sensitivity position within a particular timeframe. 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 June 30, 2000 will not have a material adverse effect on the consolidated
financial position or operating results of the Company.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires derivatives to be recognized in the consolidated statements of
financial condition at fair value. Changes in such fair value are required to
be recognized in earnings to the extent the derivative is not effective as a
hedge. This statement will apply to the Company's 5% Exchangeable Subordinated
Notes and the Company's underlying investment in Knight common stock as a fair
value hedge defined under SFAS No. 133. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and should be applied prospectively.
However, the FASB has subsequently issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" which postpones initial application until fiscal
years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in the
first quarter of fiscal 2001. Management estimates that as of July 1, 2000, the
Company will recognize a net transition loss of approximately $2 million ($1.4
million, net of tax), which includes, as a fair value hedge, gains on the change
in the value of the underlying derivative, net of losses on the change in value
of the corresponding Knight common stock reclassified from other comprehensive
income. The final impact on the consolidated financial statements will depend
on a variety of factors, including future interpretive guidance from the FASB.
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No.
138, "Accounting for Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133" which amends and supercedes certain
provisions of SFAS No. 133. Management has determined that SFAS No. 138 has no
material impact on the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption Market Risk.
20
Item 8. Financial Statements and Supplementary Data
(a) Financial statements, schedules and exhibits filed under this item are
listed in the index appearing on page F-1 of this report.
(b) QUARTERLY FINANCIAL INFORMATION /(4)/
(In thousands, except per share amounts)
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------------------------------------------------
Revenues $94,239 $134,366 $215,896 $144,585
Income before income taxes and minority interest in
consolidated subsidiaries $ 7,707 $ 28,272 $ 84,213 $ 17,713
Net income $ 6,153 $ 19,290 $ 55,686 $ 13,105
Earnings per share - basic /(2) (3)/ $ .39 $ 1.22 $ 3.51 $ .83
Earnings per share - diluted /(2) (3)/ $ .38 $ 1.21 $ 3.48 $ .82
Cash dividend declared per common share /(2)/ $ .073 $ .073 $ .073 $ .073
Stock Price Range /(2)/
High $ 59.15 $ 31.36 $ 44.55 $ 40.11
Low $ 21.82 $ 16.82 $ 22.78 $ 24.55
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------------------------------------------------
Revenues $82,216 $ 87,168 $ 98,598 $104,363
Income before income taxes and minority interest in
consolidated subsidiaries $10,193 $ 12,420 $ 14,747 $ 16,020
Net income $ 7,466 $ 9,113 $ 10,341 $ 11,521
Earnings per share - basic /(1) (2) (3)/ $ .47 $ .58 $ .65 $ .73
Earnings per share - diluted /(1) (2) (3)/ $ .47 $ .58 $ .65 $ .72
Cash dividend declared per common share /(1) (2)/ $ .057 $ .057 $ .057 $ .057
Stock Price Range /(1) (2)/
High $ 20.82 $ 20.66 $ 33.63 $ 69.42
Low $ 13.38 $ 13.13 $ 17.41 $ 23.35
/(1)/ Adjusted to reflect a ten percent stock dividend which was effective
August 2, 1999.
/(2)/ Adjusted to reflect a ten percent stock dividend declared May 4, 2000,
payable on August 1, 2000 to shareholders of record on July 15, 2000.
/(3)/ Adjusted for the issuance of 2,600 shares of the Company's common stock
for the acquisition of ASBI.
/(4)/ Adjusted to reflect the acquisition of ASBI, accounted for as a pooling-
of-interests.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to our executive officers, see "Executive Officers
of the Registrant" at the end of Part I, Item 1 of this report.
The information under the heading "Proposal One - Election of Directors" in the
definitive Proxy Statement for our 2000 Annual Meeting of Stockholders to be
filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120 days
after our fiscal year end is incorporated herein by reference.
21
Item 11. Executive Compensation
The information under the subheading "Executive Compensation" under the heading
"Management" in the definitive Proxy Statement for our 2000 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 240.14a
(6)(c) within 120 days after our fiscal year end is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the subheading "Stock Ownership of Principal Owners and
Management" under the heading "Management" in the definitive Proxy Statement for
our 2000 Annual Meeting of Stockholders to be filed with the Commission pursuant
to Regulation 240.14a (6)(c) within 120 days after our fiscal year end is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Proposal One - Election of Directors" and
under the heading "Management" in the definitive Proxy Statement for our 2000
Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 240.14a (6)(c) within 120 days after our fiscal year end is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as a part of the report:
1. Exhibits required by this Item are either listed in the index appearing
on page F-1 of this report or have been previously filed with the SEC.
2. The following consolidated financial statement schedules of the
Registrant and its subsidiaries, and Independent Auditors' Report
thereon, are attached hereto as required by Item 14 (d):
Exhibit Number
--------------
S-1 Schedule I - Condensed Financial Information of
Registrant
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
3. The following exhibits of the Registrant and its subsidiaries are attached
hereto as required by Item 14(d):
Exhibit Number
--------------
2.1 Agreement and Plan of Reorganization dated as of
August 10, 1999 between the Registrant and ASBI
Holdings, Inc. incorporated by reference to the
Registrant's Annual Report on Form 10-K filed
September 23, 1999
3.1 Certificate of Incorporation of the Registrant
incorporated by reference to the Registrant's
Registration Statement No. 33-42338 filed August
21, 1991
3.2 By-laws of the Registrant incorporated by
reference to Amendment No. 1 to the Registrant's
Registration Statement No. 33-42338 filed
October 7, 1991
22
Exhibit Number
--------------
3.3 Certificate of Amendment of Certificate of
Incorporation incorporated by reference to the
Registrant's Annual Report on Form 10-K filed
September 25, 1997
10.1 Deferred Compensation Plan incorporated by
reference to the Registrant's Annual Report on
Form 10-K filed September 23, 1999
10.2 Employee Stock Purchase Plan incorporated by
reference to the Registrant's Registration
Statement on Form S-8, filed November 10, 1994
(Registration No. 33 -86234)
10.3 Stock Option Plan incorporated by reference to the
Registrant's Proxy Statement filed September 24,
1996
10.4 Phantom Stock Plan incorporated by reference to
the Registrant's Proxy Statement filed September
24, 1996
10.5 1997 Stock Option Plan incorporated by reference
to the Registrant's Annual Report on Form 10-K
filed September 24, 1998
10.6 Stock Purchase Plan (Restated) incorporated by
reference to the Registrant's Quarterly Report on
Form 10-Q filed February 16, 1999
10.7 Deferred Compensation Plan filed April 7, 2000
10.8 Stock Purchase Plan (Restated) post-effective
amendment filed April 7, 2000
12 Computation of Ratio of Earnings to Fixed Charges*
23 Consent of KPMG LLP*
27.1 Financial Data Schedule*
27.2 Restated Financial Data Schedule*
27.3 Restated Financial Data Schedule*
27.4 Restated Financial Data Schedule*
99 Press Release dated April 28, 2000 filed as an
exhibit to Current Report on Form 8-K filed on May
12, 2000
* Filed herewith
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on May 12, 2000. Item 5 of
the referenced Report refers to the Registrant's press release dated April 28,
2000 announcing the consummation of the acquisition of ASBI Holdings, Inc.
("ASBI") and the issuance of 2.6 million shares of the Registrant's common stock
to acquire ASBI. No financial statements were filed with the Report.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
September 28, 2000 /S/ David Glatstein
- ------------------ -----------------------------------------
(Date) (Signature)
David Glatstein
Director and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
September 28, 2000 /S/ Don A. Buchholz
- ------------------ -----------------------------------------
(Date) (Signature)
Don A. Buchholz
Chairman of the Board
September 28, 2000 /S/ David Glatstein
- ------------------ -----------------------------------------
(Date) (Signature)
David Glatstein
Director and Chief Executive Officer
(Principal Executive Officer)
September 28, 2000 /S/ Stacy M. Hodges
- ------------------ ----------------------------------------
(Date) (Signature)
Stacy M. Hodges
Treasurer and Chief Financial Officer
(Principal Financial Officer)
September 28, 2000 /S/ Laura Leventhal
- ------------------ ----------------------------------------
(Date) (Signature)
Laura Leventhal
Controller
(Principal Accounting Officer)
September 28, 2000
- ------------------ -----------------------------------------
(Date) (Signature)
Brodie L. Cobb
Director
September 28, 2000 /S/ J. Jan Collmer
- ------------------ -----------------------------------------
(Date) (Signature)
J. Jan Collmer
Director
24
September 28, 2000
- ------------------ -----------------------------------------
(Date) (Signature)
Robert F. Gartland
Director
September 28, 2000
- ------------------ -----------------------------------------
(Date) (Signature)
R. Jan LeCroy
Director
September 28, 2000 /S/ Frederick R. Meyer
- ------------------ -----------------------------------------
(Date) (Signature)
Frederick R. Meyer
Director
September 28, 2000 /S/ Jon L. Mosle, Jr.
- ------------------ -----------------------------------------
(Date) (Signature)
Jon L. Mosle, Jr.
Director
25
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE(S)
Consolidated Statements of Financial Condition F-2
as of June 30, 2000 and June 25, 1999
Consolidated Statements of Income and Comprehensive Income F-3
for the years ended June 30, 2000, June 25, 1999 and June 26, 1998
Consolidated Statements of Stockholders' Equity F-4
for the years ended June 30, 2000, June 25, 1999 and June 26, 1998
Consolidated Statements of Cash Flows F-5
for the years ended June 30, 2000, June 25, 1999 and June 26, 1998
Notes to Consolidated Financial Statements F-6-24
Independent Auditors' Report F-25
F-1
Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and June 25, 1999
(in thousands, except par values and share amounts)
2000 1999
------------- -----------
Assets
Cash $ 72,479 $ 23,267
Assets segregated for regulatory purposes 393,697 225,736
Marketable equity securities available for sale 46,283 172,928
Receivable from brokers, dealers and clearing organizations 3,405,209 3,088,005
Receivable from clients, net 784,434 679,652
Loans held for sale, net 77,936 32,763
Loans, net 247,958 210,106
Securities owned, at market value 123,107 74,486
Other assets 77,932 52,221
------------- -----------
$5,229,035 $4,559,164
============= ===========
Liabilities and Stockholders' Equity
Short-term borrowings $ 49,800 $ 2,700
Payable to brokers, dealers and clearing organizations 3,388,679 3,000,096
Payable to clients 986,749 812,559
Deposits 265,804 229,287
Securities sold, not yet purchased, at market value 25,279 24,350
Drafts payable 30,089 37,013
Advances from Federal Home Loan Bank 42,868 4,430
Other liabilities 90,080 108,400
Exchangeable subordinated notes 57,500 50,000
------------- -----------
4,936,848 4,268,835
Minority interest in consolidated subsidiaries 1,047 629
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,
issued 15,910,152 and outstanding 15,892,516 shares
in 2000; authorized 20,000,000 shares, issued and
outstanding 14,405,914 shares in 1999 1,591 1,440
Additional paid-in capital 215,620 127,284
Retained earnings 43,809 49,046
Accumulated other comprehensive income - unrealized
holding gain, net of tax of $16,129 in 2000 and $60,374 in 1999 30,198 112,123
Receivable from employees under the Employee Stock
Purchase Plan -- (7)
Deferred compensation, net 634 (186)
Treasury stock (17,636 shares, at cost, in 2000) (712) --
------------- -----------
Total stockholders' equity 291,140 289,700
Commitments and contingencies
------------- -----------
$5,229,035 $4,559,164
============= ===========
See accompanying Notes to Consolidated Financial Statements.
F-2
Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended June 30, 2000, June 25, 1999 and June 26, 1998
(in thousands, except share and per share amounts)
2000 1999 1998
------------- ------------ -----------
Net revenues from clearing operations $ 61,233 $ 40,118 $ 26,607
Commissions 73,724 65,048 59,401
Interest 265,664 178,110 173,464
Investment banking, advisory and administrative fees 31,335 30,751 29,451
Net gains on principal transactions (including net gains on
the sale of Knight Trading Group, Inc. ("Knight") common
stock of $83,570 in 2000) 137,462 41,689 12,576
Other 19,668 16,629 17,618
----------- ------------ -----------
589,086 372,345 319,117
----------- ------------ -----------
Commissions and other employee compensation 162,574 130,268 96,709
Interest 178,084 112,794 113,795
Occupancy, equipment and computer service costs 27,813 22,156 18,271
Communications 16,766 13,738 12,509
Floor brokerage and clearing organization charges 8,409 6,129 5,12