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Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
Form 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 27, 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
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  þ    No  ¨
 
As of November 4, 2002, there were 16,946,443 shares of the registrant’s common stock, $.10 par value, outstanding.
 
 

Table of Contents
 
SWS GROUP, INC. AND SUBSIDIARIES
 
INDEX
 
FORWARD-LOOKING STATEMENTS
 
PART I. FINANCIAL INFORMATION
 
Item 1.
   
Financial Statements
     
         
    
September 27, 2002 (unaudited) and June 28, 2002
   
1
         
    
For the three months ended September 27, 2002 and September 28, 2001 (unaudited)
   
2
         
    
For the three months ended September 27, 2002 and September 28, 2001 (unaudited)
   
3
       
4
Item 2.
      
17
Item 3.
      
32
Item 4.
      
32
 
PART II. OTHER INFORMATION
 
Item 1.
      
32
Item 2.
      
33
Item 3.
      
33
Item 4.
      
33
Item 5.
      
33
Item 6.
      
33
  
34
  
35
  
36
  
37

Table of Contents
 
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 or assumptions 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 “Management Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies and Estimates,” “—Operations Outlook” and “—Market Risk” 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, loan losses 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.

Table of Contents
SWS GROUP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Financial Condition
September 27, 2002 and June 28, 2002
(In thousands, except par values and share amounts)
 
    
September
(unaudited)
     
June
 
  
Assets
                  
Cash
   
$
29,171
 
   
$
24,777
 
Assets segregated for regulatory purposes
   
 
449,596
 
   
 
442,707
 
Marketable equity securities available for sale
   
 
3,389
 
   
 
3,932
 
Receivable from brokers, dealers and clearing organizations
   
 
1,939,430
 
   
 
1,770,055
 
Receivable from clients, net
   
 
346,005
 
   
 
467,131
 
Loans held for sale, net
   
 
185,421
 
   
 
103,124
 
Loans, net
   
 
347,042
 
   
 
345,538
 
Securities owned, at market value
   
 
82,350
 
   
 
103,888
 
Other assets
   
 
107,292
 
   
 
102,501
 
    
  
    
$
3,489,696
 
   
$
3,363,653
 
    
  
Liabilities and Stockholders’ Equity
                  
Short-term borrowings
   
$
—
 
   
$
37,600
 
Payable to brokers, dealers and clearing organizations
   
 
1,901,044
 
   
 
1,764,741
 
Payable to clients
   
 
702,152
 
   
 
747,534
 
Deposits
   
 
355,026
 
   
 
265,370
 
Securities sold, not yet purchased, at market value
   
 
15,655
 
   
 
19,657
 
Drafts payable
   
 
30,268
 
   
 
34,531
 
Advances from Federal Home Loan Bank
   
 
162,193
 
   
 
160,468
 
Other liabilities
   
 
65,389
 
   
 
69,920
 
Exchangeable subordinated notes
   
 
6,338
 
   
 
6,785
 
    
  
    
 
3,238,065
 
   
 
3,106,606
 
Minority interest in consolidated subsidiaries
   
 
1,938
 
   
 
1,762
 
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 17,603,738 and outstanding 16,961,888 shares at September 27, 2002; issued 17,601,705 and outstanding 17,240,570 shares at June 28, 2002
   
 
1,760
 
   
 
1,760
 
Additional paid-in capital
   
 
246,592
 
   
 
247,199
 
Accumulated deficit
   
 
(1,377
)
   
 
—
 
Accumulated other comprehensive income—unrealized holding gain,
net of tax of $5,972 at September 27, 2002 and $6,177 at June 28, 2002
   
 
11,092
 
   
 
11,472
 
Deferred compensation, net
   
 
1,348
 
   
 
1,502
 
Treasury stock (641,850 shares at September 27, 2002 and 361,135 shares at June 28, 2002, at cost)
   
 
(9,722
)
   
 
(6,648
)
    
  
Total stockholders’ equity
   
 
249,693
 
   
 
255,285
 
Commitments and contingencies
                  
    
  
    
$
3,489,696
 
   
$
3,363,653
 
    
  
 
See accompanying Notes to Consolidated Financial Statements.

1

Table of Contents
SWS GROUP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Income (Loss) and Comprehensive Loss
For the three months ended September 27, 2002 and September 28, 2001
(In thousands, except per share and share amounts)
(Unaudited)
 
    
Fiscal 2003
 
     
Fiscal 2002 Restated
  
Net revenues from clearing operations
   
$
5,310
 
   
$
7,241
 
Commissions
   
 
18,150
 
   
 
16,085
 
Interest
   
 
24,817
 
   
 
39,630
 
Investment banking, advisory and administrative fees
   
 
6,970
 
   
 
9,456
 
Net gains on principal transactions (including net gains on the sale of Knight Trading Group, Inc. (“Knight”) common stock of $9,440 in fiscal 2002
   
 
6,762
 
   
 
11,215
 
Other
   
 
3,780
 
   
 
3,742
 
    
  
    
 
65,789
 
   
 
87,369
 
    
  
Commissions and other employee compensation
   
 
30,991
 
   
 
32,298
 
Interest
   
 
10,780
 
   
 
24,544
 
Occupancy, equipment and computer service costs
   
 
8,829
 
   
 
9,886
 
Communications
   
 
3,983
 
   
 
4,370
 
Floor brokerage and clearing organization charges
   
 
1,782
 
   
 
1,596
 
Advertising and promotional
   
 
747
 
   
 
3,030
 
Other
   
 
8,909
 
   
 
8,306
 
    
  
    
 
66,021
 
   
 
84,030
 
    
  
Income (loss) before income tax expense (benefit) and minority interest in consolidated subsidiaries
   
 
(232
)
   
 
3,339
 
Income tax expense (benefit)
   
 
(251
)
   
 
1,146
 
    
  
Income before minority interest in consolidated subsidiaries
   
 
19
 
   
 
2,193
 
Minority interest in consolidated subsidiaries
   
 
(329
)
   
 
(263
)
    
  
Net income (loss)
   
 
(310
)
   
 
1,930
 
Other comprehensive loss:
                  
Holding loss arising during period, net of tax of ($190) in fiscal 2003 and ($702) in fiscal 2002
   
 
(674
)
   
 
(2,080
)
Reclassification for hedging activities, net of tax of $158 in fiscal 2003 and $390 in fiscal 2002
   
 
294
 
   
 
724
 
Reclassification adjustment for gains realized in net income on the sale of Knight common stock, net of tax of ($3,304) in fiscal 2002
   
 
—
 
   
 
(6,137
)
    
  
Net loss recognized in other comprehensive loss
   
 
(380
)
   
 
(7,493
)
    
  
Comprehensive loss
   
$
(690
)
   
$
(5,563
)
    
  
Earnings per share—basic
                  
Net income (loss)
   
$
(.02
)
   
$
.11
 
    
  
Weighted average shares outstanding—basic
   
 
17,125,507
 
   
 
17,239,825
 
    
  
Earnings per share—diluted
                  
Net income (loss)
   
$
(.02
)
   
$
.11
 
    
  
Weighted average shares outstanding—diluted
   
 
17,125,507
 
   
 
17,281,079
 
    
  
 
See accompanying Notes to Consolidated Financial Statements.

2

Table of Contents
 
SWS GROUP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
For the three months ended September 27, 2002 and September 28, 2001
(In thousands)
(Unaudited)
 
    
Fiscal 2003
 
     
Fiscal 2002 Restated
  
Cash flows from operating activities:
                  
Net income (loss)
   
$
(310
)
   
$
1,930
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                  
Depreciation and amortization
   
 
1,173
 
   
 
1,269
 
Provision for doubtful accounts
   
 
655
 
   
 
535
 
Provision for loss on mortgage loans
   
 
3,423
 
   
 
—
 
Deferred income tax expense (benefit)
   
 
(413
)
   
 
991
 
Deferred compensation
   
 
(600
)
   
 
(655
)
Gain on sale of marketable equity securities
   
 
—
 
   
 
(9,440
)
Reclassification from other comprehensive income for SFAS No. 133
   
 
5
 
   
 
150
 
Equity in undistributed loss of Comprehensive Software Systems (“CSS”)
   
 
—
 
   
 
519
 
Net change in minority interest in consolidated subsidiaries
   
 
176
 
   
 
(577
)
Change in operating assets and liabilities:
           &nbs