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Table of Contents

 

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 March 26, 2004

 

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 May 3, 2004, there were 17,151,996 shares of the registrant’s common stock, $.10 par value, outstanding.

 

Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES

 

INDEX

 

PART I. FINANCIAL INFORMATION     
Item 1. Financial Statements     

Consolidated Statements of Financial Condition
March 26, 2004 and June 27, 2003(unaudited)

    1

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
For the three and nine months ended March 26, 2004 and March 28, 2003 (unaudited)

    2

Consolidated Statements of Cash Flows
For the nine months ended March 26, 2004 and March 28, 2003 (unaudited)

    3

Notes to Consolidated Financial Statements (unaudited)

    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    40
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    40
Item 3. Defaults Upon Senior Securities    41
Item 4. Submission of Matters to a Vote of Security Holders    41
Item 5. Other Information    41
Item 6. Exhibits and Reports on Form 8-K    41
SIGNATURES    42
EXHIBIT INDEX    43

Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

March 26, 2004 and June 27, 2003

(In thousands, except par values and share amounts)

(Unaudited)

 

     March
     June
  
Assets                 

Cash and cash equivalents

    $ 95,270     $ 74,706  

Assets segregated for regulatory purposes

      378,697       441,184  

Marketable equity securities available for sale

      9,694       5,599  

Receivable from brokers, dealers and clearing organizations

      3,265,530       2,488,008  

Receivable from clients, net

      441,253       297,238  

Loans held for sale, net

      99,759       201,265  

Loans, net

      420,947       366,008  

Securities owned, at market value

      194,143       122,693  

Goodwill

      8,097       7,558  

Other assets

      70,140       87,825  
    
 
     $ 4,983,530     $ 4,092,084  
    
 
Liabilities and Stockholders’ Equity                 

Short-term borrowings

    $ 15,600     $ —  

Payable to brokers, dealers and clearing organizations

      3,247,614       2,405,427  

Payable to clients

      700,347       705,474  

Deposits

      522,607       528,515  

Securities sold, not yet purchased, at market value

      97,438       40,620  

Drafts payable

      30,551       29,331  

Advances from Federal Home Loan Bank

      20,142       49,885  

Other liabilities

      82,847       73,953  

Exchangeable subordinated notes

      9,500       7,284  
    
 
       4,726,646       3,840,489  

Minority interest in consolidated subsidiaries

      2,333       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 17,810,674 and outstanding 17,056,919 shares at March 26, 2004; issued 17,707,998 and outstanding 16,957,287 shares at June 27, 2003

      1,781       1,770  

Additional paid-in capital

      245,931       243,683  

Retained Earnings

      3,332       1,217  

Accumulated other comprehensive income – unrealized holding gain (loss), net of tax of $7,480 at March 26, 2004 and $6,824 at June 27, 2003

      13,891       12,673  

Deferred compensation, net

      792       1,549  

Treasury stock (753,755 shares at March 26, 2004 and 750,711 shares at June 27, 2003, at cost)

      (11,176 )     (11,119 )
    
 

Total stockholders’ equity

      254,551       249,773  

Commitments and contingencies

                 
    
 
     $ 4,983,530     $ 4,092,084  
    
 

 

See accompanying Notes to Consolidated Financial Statements.

 

1

Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the three and nine months ended March 26, 2004 and March 28, 2003

(In thousands, except per share and share amounts)

(Unaudited)

 

     For the Three Months Ended
     For the Nine Months Ended
  
     March 26,
2004
     March 28,
2003
     March 26,
2004
     March 28,
2003
  

Net revenues from clearing operations

    $ 4,678     $ 4,034     $ 14,964     $ 14,208  

Commissions

      24,753       19,701       73,080       60,370  

Interest

      23,013       22,352       71,154       71,363  

Investment banking, advisory and administrative fees

      7,765       5,579       19,711       19,574  

Net gains on principal transactions

      5,087       4,578       14,612       14,144  

Other

      4,404       3,017       11,966       11,747  
    
 
 
 
       69,700       59,261       205,487       191,406  
    
 
 
 

Commissions and other employee compensation

      37,380       30,365       106,432       94,540  

Interest

      8,003       8,667       24,595       29,795  

Occupancy, equipment and computer service costs

      6,988       7,853       21,497       24,597  

Communications

      3,390       3,590       9,778       11,442  

Floor brokerage and clearing organization charges

      1,381       1,325       4,830       4,862  

Advertising and promotional

      718       763       2,427       2,471  

Other

      8,254       7,413       23,470       23,356  
    
 
 
 
       66,114       59,976       193,029       191,063  
    
 
 
 

Income (loss) before income tax expense (benefit) and minority interest in consolidated subsidiaries

      3,586       (715 )     12,458       343  

Income tax expense (benefit)

      1,806       (477 )     4,618       (403 )
    
 
 
 

Income (loss) before minority interest in consolidated subsidiaries

      1,780       (238 )     7,840       746  

Minority interest in consolidated subsidiaries

      (299 )     (472 )     (820 )     (917 )
    
 
 
 

Net income (loss)

      1,481       (710 )     7,020       (171 )

Other comprehensive income (loss):

                                 

Holding loss arising during the three months ended March 26, 2004, net of tax of $300, holding gain arising during the nine months ended March 26, 2004, net of tax of $1,056 and holding losses arising during the three and nine months ended March 28, 2003, net of tax of $3 and $69, respectively.

      (561 )     (130 )     2,668       (309 )

Reclassification for hedging activities, net of tax of $284 and ($781) for the three and nine months ended March 26, 2004 and $99 and $158 for the three and nine months ended March 28, 2003.

      527       185       (1,450 )     294  
    
 
 
 

Net income (loss) recognized in other comprehensive income

      (34 )     55       1,218       (15 )
    
 
 
 

Comprehensive income (loss)

    $ 1,447     $ (655 )   $ 8,238     $ (186 )
    
 
 
 

Earnings per share – basic

                                 

Net income (loss)

    $ 0.09     $ (0.04 )   $ 0.41     $ (0.01 )
    
 
 
 

Weighted average shares outstanding – basic

      17,056,661       16,866,511       17,033,225       16,969,887  
    
 
 
 

Earnings per share – diluted

                                 

Net income (loss)

    $ 0.09     $ (0.04 )   $ 0.41     $ (0.01 )
    
 
 
 

Weighted average shares outstanding – diluted

      17,225,618       16,866,511       17,227,870       16,969,887  
    
 
 
 

 

See accompanying Notes to Consolidated Financial Statements.

 

2

Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the nine months ended March 26, 2004 and March 28, 2003

(In thousands)

(Unaudited)

 

     March 26,
2004
     March 28,
2003
  

Cash flows from operating activities:

                 

Net income (loss)

    $ 7,020     $ (171 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                 

Depreciation and amortization

      4,623       3,754  

Provision for doubtful accounts

      3,234       753  

Provision for loss on mortgage loans

      —         3,423  

Write-off of correspondent margin loan

      —         (5,964 )

Deferred income tax benefit

      756       3,967  

Deferred compensation

      754       (403 )

Gain on sale of loans

      (1,017 )     —    

Gain on sale of fixed assets

      —         (104 )

Equity in undistributed losses on investments

      4,088       813  

Net change in minority interest in consolidated subsidiaries

      511       172  

Change in operating assets and liabilities:

                 

(Increase) decrease in assets segregated for regulatory purposes

      62,487       (45,025 )

Net change in broker, dealer and clearing organization accounts

      64,665       (73,811 )

Net change in client accounts

      (149,438 )     86,829  

Net change in loans held for sale

      101,506       (51,403 )

Increase in securities owned

      (70,741 )     (6,802 )

Decrease in other assets

      15,007       985  

Increase (decrease) in drafts payable

      1,220       (5,310 )