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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 28, 2002
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
SWS GROUP, INC.
(Exact name of Registrant as
specified in its charter)
| Delaware |
|
75-2040825 |
| (State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer 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 18, 2002,
there were 17,017,638 shares of the Registrant’s common stock, $.10 par value, outstanding. The aggregate market value of Common Stock held by non-affiliates was approximately $181,110,000 using a market price of $12.90 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 6, 2002, 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.
SWS GROUP, INC. AND SUBSIDIARIES
INDEX TO 2002 ANNUAL REPORT ON FORM 10-K
| |
| PART I |
|
|
| |
| |
|
1 |
| |
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|
12 |
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| |
|
12 |
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|
13 |
| |
| PART II |
|
|
| |
| |
|
13 |
| |
| |
|
14 |
| |
| |
|
15 |
| |
| |
|
32 |
| |
| |
|
32 |
| |
| |
|
33 |
| |
| PART III |
|
|
| |
| |
|
34 |
| |
| |
|
34 |
| |
| |
|
34 |
| |
| |
|
34 |
| |
| PART IV |
|
|
| |
| |
|
34 |
| |
| |
|
36 |
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| |
|
38 |
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| |
|
39 |
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| |
|
F-1 |
PART I
(a) General Development of Business
We are a full-service securities and banking firm delivering a broad range of investment and related
financial services to our clients, which include individual and institutional investors, broker/dealers, corporations, governmental entities and financial intermediaries. We are a Delaware corporation and were incorporated in 1972.
On June 28, 2002, we distributed our 80.18% ownership interest in Westwood Holdings Group, Inc. (“Westwood Group”),
previously part of our asset management operations, to our stockholders. Stockholders received one Westwood Group common share for every four shares of our common stock that they owned. During fiscal 2002, Westwood Group generated $20,575,000 in
revenue and $648,000 in net income. As of the date of the spin-off, Westwood Group held $20,976,000 in total assets. Our consolidated financial information contained in this report includes the results of Westwood Group; however, following the
spin-off, Westwood Group is no longer a part of our ongoing operations.
We currently operate through three
primary business segments:
Brokerage Group
We provide clearing services to over 225 correspondent broker/dealers and over 400 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 and investment banking businesses.
Our principal subsidiary, SWS Securities, Inc. (“SWS Securities”), is a registered securities broker/dealer and a member of the New York Stock
Exchange (“NYSE”) and other major exchanges. SWS Securities provides correspondent services to securities broker/dealers and other financial institutions in 31 states, one U.S. Territory, Canada and Europe. SWS Securities serves individual
investors through its Private Client Group offices in Texas and New Mexico and institutional investors nationwide from its Dallas, New York, Chicago, Milwaukee and Newport Beach offices.
We operate other broker/dealer subsidiaries engaged in certain aspects of the securities brokerage business. All are National Association of Securities
Dealers (“NASD”) registered broker/dealers. SWS Financial Services, Inc. (“SWS Financial”) contracts with independent registered representatives for the administration of their securities business. We offer on-line discount
brokerage services through Mydiscountbroker.com, Inc. (“Mydiscountbroker”). May Financial Corporation (“May Financial”) was acquired on February 28, 2001 and conducts trading operations as a principal for its own account. SWS
Financial, Mydiscountbroker and May Financial are correspondents of SWS Securities.
In October
2001, the Securities Investor Protection Corporation (“SIPC”) assumed responsibility for the accounts of a Midwest broker/dealer when it reported that it was in violation of minimum capital requirements. All existing accounts were
transferred to Southwest Clearing Corp. (“Southwest Clearing”), a fully guaranteed subsidiary of SWS Securities, in October 2001. In April 2002, all remaining customer accounts were transferred to SWS Securities from Southwest Clearing.
Forty-four former correspondents of the Midwest broker/dealer have signed clearing agreements with SWS Securities. Southwest Clearing is currently inactive.
1
Asset Management Group
Following the spin-off of the Westwood Group, we continue to offer asset management services through SWS Capital
Corporation (“SWS Capital”), which 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 (“First Savings” or “Bank”), as well as Internet banking via the Bank’s
on-line division, MyBankUSA.com. First Savings has wholly and majority owned subsidiaries as well. FSB Financial LTD (“FSB Financial”) purchases non-prime automobile loans and FSB Development LLC (“FSB Development”) develops
single family residential lots.
See Note 23 of the notes to consolidated financial statements included
with this Report for the revenue, income (loss) and asset information of each of our business segments.
Forward-Looking Statements
From time to time, we make statements (including some contained in this Report) that predict or forecast
future events or results, which depend on future events for their accuracy, which embody projections and assumptions that may prove to have been inaccurate, or that otherwise contain “forward-looking information.” These statements may
relate to anticipated growth in revenues or earnings per share, anticipated changes in our businesses or in the amount of client assets under management, anticipated expense levels or expectations regarding financial market conditions.
We caution readers that any forward-looking information provided by or on our behalf is not a guarantee of future performance.
Actual results may differ materially as a result of various factors, some of which are outside of our control, including but not limited to the factors discussed in “Business—Narrative Description of Business,” “Management
Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies and Estimates” and those discussed in our periodic reports filed with and available from the Securities and Exchange Commission. All such
forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligations to update them to reflect events or circumstances occurring after the date on which they were made or to reflect the occurrence
of unanticipated events.
Our business and future prospects may fluctuate due to numerous factors, such as: the
volume of trading in securities; the volatility and general level of securities prices and interest rates; the level of customer margin loan activity and the size of customer account balances; the credit-worthiness of our correspondents in the event
of a material adverse change in the values of margined securities; general economic conditions and investor sentiment and confidence; competitive conditions in each of our business segments; the demand for investment banking services; the ability to
maintain investment management and administrative fees at current levels; the ability to attract and retain key personnel; and the total value and composition of assets under management.
Our future operating results are also dependent upon our operating expenses, which are subject to fluctuation due to variations in the level of compensation expense
incurred as a result of changes in the number of total employees, competitive factors, or other market variables; variations in expenses and capital costs, including depreciation, amortization and other non-cash charges incurred to maintain our
infrastructure; and unanticipated costs which may be incurred from time to time in connection with litigation or other contingencies. Our business is also subject to substantial governmental regulation and changes in legal, regulatory, accounting,
tax and compliance requirements which may have a substantial impact on our business and results of operations.
2
(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 (dollars in thousands):
| |
|
2002
|
|
|
2001
|
|
|
2000
|
|
| |
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
|
Amount
|
|
Percent
|
|
| Net revenues from clearing operations |
|
$ |
31,056 |
|
9 |
% |
|
$ |
50,017 |
|
11 |
% |
|
$ |
61,233 |
|
10 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commissions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Listed equities |
|
|
9,223 |
|
3 |
% |
|
|
8,255 |
|
2 |
% |
|
|
11,303 |
|
2 |
% |
| Over-the-counter equities |
|
|
24,231 |
|
7 |
% |
|
|
23,452 |
|
5 |
% |
|
|
25,294 |
|
4 |
% |
| Corporate bonds |
|
|
15,032 |
|
5 |
% |
|
|
10,730 |
|
2 |
% |
|
|
8,922 |
|
2 |
% |
| Government bonds and mortgage-backed securities |
|
|
4,143 |
|
1 |
% |
|
|
1,445 |
|
— |
|
|
|
1,719 |
|
— |
|
| Municipal bonds |
|
|
7,827 |
|
2 |
% |
|
|
5,291 |
|
1 |
% |
|
|
5,465 |
|
1 |
% |
| Options |
|
|
1,877 |
|
1 |
% |
|
|
2,558 |
|
1 |
% |
|
|
3,749 |
|
1 |
% |
| Mutual funds |
|
|
11,502 |
|
4 |
% |
|
|
13,227 |
|
3 |
% |
|
|
15,702 |
|
3 |
% |
| Other |
|
|
1,499 |
|
— |
|
|
|
1,412 |
|
— |
|
|
|
1,570 |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
75,334 |
|
|
|
|
|
66,370 |
|
|
|
|
|
73,724 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest |
|
|
125,119 |
|
38 |
% |
|
|
249,427 |
|
53 |
% |
|
|
265,664 |
|
45 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Corporate |
|
|
1,128 |
|
— |
|
|
|
1,695 |
|
— |
|
|
|
2,943 |
|
— |
|
| Municipal |
|
|
11,044 |
|
4 |
% |
|
|
8,372 |
|
2 |
% |
|
|
7,538 |
|
2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
12,172 |
|
|
|
|
|
10,067 |
|
|
|
|
|
10,481 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Advisory and administrative fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Institutional and individual accounts |
|
|
21,309 |
|
6 |
% |
|
|
18,781 |
|
4 |
% |
|
|
14,111 |
|
2 |
% |
| Money market funds |
|
|
5,325 |
|
2 |
% |
|
|
5,546 |
|
1 |
% |
|
|
6,019 |
|
1 |
% |
| Other |
|
|
3,409 |
|
1 |
% |
|
|
1,345 |
|
— |
|
|
|
724 |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
30,043 |
|
|
|
|
|
25,672 |
|
|
|
|
|
20,854 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net gains on principal transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investment in Knight Trading Group, Inc. |
|
|
24,251 |
|
7 |
% |
|
|
15,480 |
|
4 |
% |
|
|
83,570 |
|
14 |
% |
| Equity securities |
|
|
11,670 |
|
4 |
% |
|
|
22,198 |
|
5 |
% |
|
|
50,748 |
|
9 |
% |
| Municipal securities |
|
|
1,599 |
|
— |
|
|
|
1,318 |
|
— |
|
|
|
1,046 |
|
— |
|
| Other |
|
|
4,020 |
|
1 |
% |
|
|
6,090 |
|
1 |
% |
|
|
2,098 |
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
41,540 |
|
|
|
|
|
45,086 |
|
|
|
|
|
137,462 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other fee revenue from clearing operations |
|
|
6,320 |
|
2 |
% |
|
|
8,638 |
|
2 |
% |
|
|
9,151 |
|
2 |
% |
| Non-interest bank revenue |
|
|
5,056 |
|
1 |
% |
|
|
6,893 |
|
1 |
% |
|
|
3,966 |
|
1 |
% |
| Floor brokerage |
|
|
2,520 |
|
1 |
% |
|
|
2,214 |
|
1 |
% |
|
|
2,353 |
|
— |
|
| Other |
|
|
2,990 |
|
1 |
% |
|
|
6,318 |
|
1 |
% |
|
|
4,198 |
|
1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
16,886 |
|
|
|
|
|
24,063 |
|
|
|
|
|
19,668 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
$ |
332,150 |
|
100 |
% |
|
$ |
470,702 |
|
100 |
% |
|
$ |
589,086 |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
(c) Narrative Description of Business
At June 28, 2002, we employed 1,004 individuals. SWS Securities employed 792 of these individuals, 133 of whom were full-time retail
representatives. In addition, 414 full-time retail representatives were affiliated as independent contractors. Through our broker/dealer subsidiaries, we provide full-service securities brokerage services to approximately 240,000 client accounts.
Through our securities clearance unit, we provide securities services to approximately 80,000 additional client accounts. No single client accounts for a material percentage of our total business.
BROKERAGE SERVICES
SWS Securities, Inc. SWS Securities’ activities 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 28, 2002, revenues of SWS Securities accounted for approximately
59% of consolidated revenues.
SWS Securities 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 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. SWS
Securities 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. SWS Securities 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 SWS Securities, and SWS Securities physically maintains the client’s account and performs a variety of services as agent for the correspondent. SWS Securities provides clearing and execution services for
232 correspondents throughout the United States and Europe. Correspondent firms are charged fees based on their use of services according to a clearing schedule. Besides service charges realized from securities clearing activities, SWS Securities
also earns interest income. SWS Securities 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 SWS Securities against margin losses on their customers’ accounts. SWS Securities also extends margin credit directly to correspondents to the extent that such
firms pledge proprietary assets as collateral. Since SWS Securities must rely on the guaranties and general creditworthiness of the correspondents, SWS Securities 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.
SWS
Securities’ correspondent relationships are with a wide range of general securities broker/dealers and bank-affiliated broker/dealers, including 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 28, 2002, SWS Securities provided clearing services for 15 of these firms. The nature of services provided to the customers of these firms and the internal costs necessary to support them are
substantially different from the standard correspondent relationship and, accordingly, fees for services to these correspondents are discounted 50-95% from the fees normally charged to other customers. 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 2002
|
|
Fiscal 2001
|
|
Fiscal 2000
|
| Tickets for high-volume trading firms |
|
49,536,038 |
|
59,180,312 |
|
57,045,597 |
| Tickets for general securities broker/dealers |
|
1,435,030 |
|
1,104,326 |
|
1,504,108 |
| Tickets for internal correspondents |
|
393,207 |
|
496,874 |
|
545,733 |
| Tickets for SWS Securities account executives |
|
916,057 |
|