UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2003
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No ¨
As of February 9, 2004, there were 17,145,976 shares of the registrant’s common stock, $.10 par value, outstanding.
SWS GROUP, INC. AND SUBSIDIARIES
| FORWARD-LOOKING STATEMENTS |
||||
| PART I. |
FINANCIAL INFORMATION | |||
| Item 1. |
Financial Statements | |||
| Consolidated Statements of Financial Condition December 31, 2003 (unaudited) and June 27, 2003 |
1 | |||
| 2 | ||||
| 3 | ||||
| 5 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | ||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 39 | ||
| Item 4. |
Controls and Procedures | 39 | ||
| PART II. |
OTHER INFORMATION | |||
| Item 1. |
Legal Proceedings | 39 | ||
| Item 2. |
Changes in Securities and Use of Proceeds | 39 | ||
| Item 3. |
Defaults Upon Senior Securities | 39 | ||
| Item 4. |
Submission of Matters to a Vote of Security Holders | 40 | ||
| Item 5. |
Other Information | 40 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 40 | ||
| 41 | ||||
| 42 | ||||
FORWARD-LOOKING STATEMENTS
From time to time, we make statements (including some contained in this Report) that predict or forecast future events, depend on future events for their accuracy, 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 we provide 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.
Included among these factors are those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Overview,” “-Critical Accounting Policies and Estimates” and “-Market Risk” in this Report and those discussed in our other reports filed with and available from the Securities and Exchange Commission. All forward-looking statements we make speak only as of the date on which they 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.
3
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2003 and June 27, 2003
(In thousands, except par values and share amounts)
| December |
June |
|||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents |
$ | 156,882 | $ | 74,706 | ||||
| Assets segregated for regulatory purposes |
353,574 | 441,184 | ||||||
| Marketable equity securities available for sale |
10,551 | 5,599 | ||||||
| Receivable from brokers, dealers and clearing organizations |
3,037,298 | 2,488,008 | ||||||
| Receivable from clients, net |
397,937 | 297,238 | ||||||
| Loans held for sale, net |
81,378 | 201,265 | ||||||
| Loans, net |
380,944 | 366,008 | ||||||
| Securities owned, at market value |
122,896 | 122,693 | ||||||
| Goodwill |
7,936 | 7,558 | ||||||
| Other assets |
64,975 | 87,825 | ||||||
| $ | 4,614,371 | $ | 4,092,084 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Payable to brokers, dealers and clearing organizations |
$ | 2,909,310 | $ | 2,405,427 | ||||
| Payable to clients |
706,232 | 705,474 | ||||||
| Deposits |
529,792 | 528,515 | ||||||
| Securities sold, not yet purchased, at market value |
74,988 | 40,620 | ||||||
| Drafts payable |
31,676 | 29,331 | ||||||
| Advances from Federal Home Loan Bank |
18,827 | 49,885 | ||||||
| Other liabilities |
76,456 | 73,953 | ||||||
| Exchangeable subordinated notes |
10,311 | 7,284 | ||||||
| 4,357,592 | 3,840,489 | |||||||
| Minority interest in consolidated subsidiaries |
2,154 | 1,822 | ||||||
| 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 17,803,611 and outstanding 17,051,380 shares at December 31, 2003; issued 17,707,998 and outstanding 16,957,287 shares at June 27, 2003 |
1,780 | 1,770 | ||||||
| Additional paid-in capital |
245,795 | 243,683 | ||||||
| Retained Earnings |
3,587 | 1,217 | ||||||
| Accumulated other comprehensive income – unrealized holding gain (loss), net of tax of $7,498 at December 31, 2003 and $6,824 at June 27, 2003 |
13,925 | 12,673 | ||||||
| Deferred compensation, net |
687 | 1,549 | ||||||
| Treasury stock (752,231 shares at December 31, 2003 and 750,711 shares at June 27, 2003, at cost) |
(11,149 | ) | (11,119 | ) | ||||
| Total stockholders’ equity |
254,625 | 249,773 | ||||||
| Commitments and contingencies |
||||||||
| $ | 4,614,371 | $ | 4,092,084 | |||||
See accompanying Notes to Consolidated Financial Statements.
1
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
For the three and six months ended December 31, 2003 and 2002
(In thousands, except per share and share amounts)
(Unaudited)
| For the Three Months Ended December 31, |
For the Six Months Ended December 31, |
|||||||||||||||
| 2003 |
2002 |
2003 |
2002 |
|||||||||||||
| Net revenues from clearing operations |
$ | 5,009 | $ | 4,864 | $ | 10,285 | $ | 10,174 | ||||||||
| Commissions |
26,469 | 22,519 | 48,327 | 40,669 | ||||||||||||
| Interest |
23,739 | 24,194 | 48,142 | 49,011 | ||||||||||||
| Investment banking, advisory and administrative fees |
5,902 | 7,025 | 11,947 | 13,995 | ||||||||||||
| Net gains on principal transactions |
6,072 | 2,804 | 9,525 | 9,566 | ||||||||||||
| Other |
4,827 | 4,950 | 7,562 | 8,730 | ||||||||||||
| 72,018 | 66,356 | 135,788 | 132,145 | |||||||||||||
| Commissions and other employee compensation |
36,432 | 33,184 | 69,052 | 64,175 | ||||||||||||
| Interest |
8,423 | 10,348 | 16,592 | 21,128 | ||||||||||||
| Occupancy, equipment and computer service costs |
7,145 | 7,915 | 14,509 | 16,744 | ||||||||||||
| Communications |
3,293 | 3,869 | 6,388 | 7,852 | ||||||||||||
| Floor brokerage and clearing organization charges |
1,681 | 1,755 | 3,449 | 3,537 | ||||||||||||
| Advertising and promotional |
938 | 961 | 1,709 | 1,708 | ||||||||||||
| Other |
7,343 | 7,034 | 15,216 | 15,943 | ||||||||||||
| 65,255 | 65,066 | 126,915 | 131,087 | |||||||||||||
| Income before income tax expense and minority interest in consolidated subsidiaries |
6,763 | 1,290 | 8,873 | 1,058 | ||||||||||||
| Income tax expense |
2,286 | 325 | 2,813 | 74 | ||||||||||||
| Income before minority interest in consolidated subsidiaries |
4,477 | 965 | 6,060 | 984 | ||||||||||||
| Minority interest in consolidated subsidiaries |
(221 | ) | (116 | ) | (521 | ) | (445 | ) | ||||||||
| Net income |
4,256 | 849 | 5,539 | 539 | ||||||||||||
| Other comprehensive income (loss): |
||||||||||||||||
| Holding gain arising during the three and six months ended December 31, 2003, net of tax of $290 and $1,354, respectively and during the three months ended December 31, 2002, net of tax of $119 and a holding loss arising during the six months ended December 31, 2002, net of tax of $72. |
1,155 | 494 | 3,228 | (179 | ) | |||||||||||
| Reclassification for hedging activities, net of tax of ($429) and ($1,064) for the three and six months ended December 31, 2003 and ($99) and $59 for the three and six months ended December 31, 2002. |
(796 | ) | (184 | ) | (1,976 | ) | 109 | |||||||||
| Net income (loss) recognized in other comprehensive income |
359 | 310 | 1,252 | (70 | ) | |||||||||||
| Comprehensive income |
$ | 4,615 | $ | 1,159 | $ | 6,791 | $ | 469 | ||||||||
| Earnings per share – basic |
||||||||||||||||
| Net income |
$ | 0.25 | $ | 0.05 | $ | 0.33 | $ | 0.03 | ||||||||
| Weighted average shares outstanding – basic |
17,041,885 | 16,915,491 | 17,022,322 | 17,018,241 | ||||||||||||
| Earnings per share – diluted |
||||||||||||||||
| Net income |
$ | 0.25 | $ | 0.05 | $ | 0.32 | $ | 0.03 | ||||||||
| Weighted average shares outstanding – diluted |
17,249,984 | 16,922,640 | 17,228,830 | 17,030,219 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
2
SWS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended December 31, 2003 and 2002
(In thousands)
(Unaudited)
| December 31 |
||||||||
| 2003 |
2002 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 5,539 | $ | 539 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
3,011 | 2,426 | ||||||
| Provision for doubtful accounts |
1,644 | 1,833 | ||||||
| Provision for loss on mortgage loans |
— | 3,423 | ||||||
| Deferred income tax benefit |
596 | 2,962 | ||||||
| Deferred compensation |
651 | (322 | ) | |||||
| Gain on sale of fixed assets |
— | (98 | ) | |||||
| Equity in undistributed losses on investments |
2,562 | — | ||||||
| Net change in minority interest in consolidated subsidiaries |
332 | 44 | ||||||
| Change in operating assets and liabilities: |
||||||||
| (Increase) decrease in assets segregated for regulatory purposes |
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