SWS GROUP INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2002

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 Number)

1201 Elm Street, Suite 3500, Dallas, Texas		75270
(Address of principal executive offices)		(Zip Code)

(214) 859-1800

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of February 7, 2003, there were 16,948,863 shares of the registrant’s common stock, $.10 par value, outstanding.

SWS GROUP, INC. AND SUBSIDIARIES

INDEX

FORWARD-LOOKING STATEMENTS

PART I. FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Statements of Financial Condition December 31, 2002 (unaudited) and June 28, 2002	1

	Consolidated Statements of Income and Comprehensive Income (Loss) For the three and six months ended December 31, 2002 and 2001 (unaudited)	2

	Consolidated Statements of Cash Flows For the six months ended December 31, 2002 and 2001 (unaudited)	3

	Notes to Consolidated Financial Statements (unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 2.	Changes in Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Submission of Matters to a Vote of Security Holders	36

Item 5.	Other Information	36

Item 6.	Exhibits and Reports on Form 8-K	36

SIGNATURES		38

CERTIFICATION BY CHIEF EXECUTIVE OFFICER		39

CERTIFICATION BY CHIEF FINANCIAL OFFICER		40

EXHIBIT INDEX		41

FORWARD-LOOKING STATEMENTS

From time to time, we make statements (including some contained in this Report) that predict or forecast future events, 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 changes 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–Overview,” “–Critical Accounting Policies and Estimates” 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.

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2002 and June 28, 2002

(In thousands, except par values and share amounts)

	December			June
	(unaudited)

Assets
Cash	$	39,039		$	24,777
Assets segregated for regulatory purposes		490,488			442,707
Marketable equity securities available for sale		3,728			3,932
Receivable from brokers, dealers and clearing organizations		1,925,278			1,770,055
Receivable from clients, net		316,370			467,131
Loans held for sale, net		200,709			103,124
Loans, net		356,019			345,538
Securities owned, at market value		81,275			103,888
Other assets		106,860			102,501

	$	3,519,766		$	3,363,653

Liabilities and Stockholders’ Equity
Short-term borrowings	$	—		$	37,600
Payable to brokers, dealers and clearing organizations		1,911,451			1,764,741
Payable to clients		669,816			747,534
Deposits		425,615			265,370
Securities sold, not yet purchased, at market value		32,049			19,657
Drafts payable		30,069			34,531
Advances from Federal Home Loan Bank		123,400			160,468
Other liabilities		70,859			69,920
Exchangeable subordinated notes		6,624			6,785

		3,269,883			3,106,606
Minority interest in consolidated subsidiaries		1,806			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 17,612,326 and outstanding 16,868,246 shares at December 31, 2002; issued 17,601,705 and outstanding 17,240,570 shares at June 28, 2002		1,761			1,760
Additional paid-in capital		245,017			247,199
Accumulated deficit		(533	)		—
Accumulated other comprehensive income – unrealized holding gain (loss), net of tax of $6,140 at December 31, 2002 and $6,177 at June 28, 2002		11,403			11,472
Deferred compensation, net		1,449			1,502
Treasury stock (744,080 shares at December 31, 2002 and 361,135 shares at June 28, 2002, at cost)		(11,020	)		(6,648	)

Total stockholders’ equity		248,077			255,285

Commitments and contingencies
	$	3,519,766		$	3,363,653

See accompanying Notes to Consolidated Financial Statements.

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss)

For the three and six months ended December 31, 2002 and 2001

(In thousands, except per share and share amounts)

(Unaudited)

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
	2002		2001 Restated		2002		2001 Restated
Net revenues from clearing operations	$	4,864	$	9,443	$	10,174	$	16,684
Commissions		22,519		20,035		40,669		36,120
Interest		24,194		31,904		49,011		71,534
Investment banking, advisory and administrative fees		7,025		10,843		13,995		20,299
Net gains on principal transactions (including net gains on the sale of Knight Trading Group, Inc. (“Knight”) common stock of $6,034 and $15,474 for the three and six months ended December 31, 2001.)		2,804		13,864		9,566		25,079
Other		4,950		4,897		8,730		8,639

		66,356		90,986		132,145		178,355

Commissions and other employee compensation		33,184		38,621		64,175		70,919
Interest		10,348		17,207		21,128		41,751
Occupancy, equipment and computer service costs		7,915		13,317		16,744		23,203
Communications		3,869		4,886		7,852		9,256
Floor brokerage and clearing organization charges		1,755		2,338		3,537		3,934
Advertising and promotional		961		2,654		1,708		5,684
Other		7,034		9,278		15,943		17,584

		65,066		88,301		131,087		172,331

Income before income tax expense and minority interest in consolidated subsidiaries		1,290		2,685		1,058		6,024
Income tax expense		325		2,202		74		3,348

Income before minority interest in consolidated subsidiaries		965		483		984

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