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 September 24, 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 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 October 27, 2004, there were 17,268,821 shares of the registrant’s common stock, $.10 par value, outstanding.
SWS GROUP, INC. AND SUBSIDIARIES
INDEX
| PART I. FINANCIAL INFORMATION |
||||
| Item 1. |
Financial Statements | |||
| Consolidated Statements of Financial Condition September 24, 2004 and June 25, 2004 (unaudited) | 1 | |||
| Consolidated Statements of Income and Comprehensive Income for the three months ended September 24, 2004 and September 26, 2003 (unaudited) | 2 | |||
| Consolidated Statements of Cash Flows for the three months ended September 24, 2004 and September 26, 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 | 40 | ||
| Item 4. |
Controls and Procedures | 40 | ||
| PART II. OTHER INFORMATION |
||||
| Item 1. |
Legal Proceedings | 40 | ||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 41 | ||
| 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 | 42 | ||
| 43 | ||||
| 44 | ||||
SWS Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 24, 2004 and June 25, 2004
(In thousands, except par values and share amounts)
(Unaudited)
| September |
June |
|||||||
| Assets |
||||||||
| Cash and cash equivalents |
$ | 33,458 | $ | 88,589 | ||||
| Assets segregated for regulatory purposes |
401,527 | 367,070 | ||||||
| Marketable equity securities available for sale |
3,205 | 7,038 | ||||||
| Receivable from brokers, dealers and clearing organizations |
3,452,684 | 3,107,287 | ||||||
| Receivable from clients, net |
362,463 | 421,799 | ||||||
| Loans held for sale, net |
97,008 | 79,083 | ||||||
| Loans, net |
476,447 | 462,957 | ||||||
| Securities owned, at market value |
187,979 | 141,108 | ||||||
| Goodwill |
8,358 | 8,183 | ||||||
| Other assets |
64,412 | 59,536 | ||||||
| $ | 5,087,541 | $ | 4,742,650 | |||||
| Liabilities and Stockholders’ Equity |
||||||||
| Short-term borrowings |
$ | 16,800 | $ | — | ||||
| Payable to brokers, dealers and clearing organizations |
3,372,699 | 3,050,748 | ||||||
| Payable to clients |
684,608 | 691,456 | ||||||
| Deposits |
498,134 | 501,094 | ||||||
| Securities sold, not yet purchased, at market value |
108,429 | 88,957 | ||||||
| Drafts payable |
32,395 | 32,212 | ||||||
| Advances from Federal Home Loan Bank |
34,681 | 36,576 | ||||||
| Other liabilities |
84,765 | 82,968 | ||||||
| Exchangeable subordinated notes |
— | 8,604 | ||||||
| 4,832,511 | 4,492,615 | |||||||
| Minority interest in consolidated subsidiaries |
2,540 | 2,396 | ||||||
| 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 17,819,654 and outstanding 17,169,930 shares at September 24, 2004; issued 17,817,444 and outstanding 17,109,925 shares at June 25, 2004 |
1,781 | 1,781 | ||||||
| Additional paid-in capital |
245,389 | 245,391 | ||||||
| Retained Earnings |
14,603 | (2,718 | ) | |||||
| Accumulated other comprehensive income – unrealized holding gain (loss), net of tax of $117 at September 24, 2004 and $6,910 at June 25, 2004 |
218 | 12,833 | ||||||
| Deferred compensation, net |
166 | 834 | ||||||
| Treasury stock (649,724 shares at September 24, 2004 and 707,519 shares at June 25, 2004, at cost) |
(9,667 | ) | (10,482 | ) | ||||
| Total stockholders’ equity |
252,490 | 247,639 | ||||||
| Commitments and contingencies |
||||||||
| $ | 5,087,541 | $ | 4,742,650 | |||||
See accompanying Notes to Consolidated Financial Statements.
1
SWS Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the three months ended September 24, 2004 and September 26, 2003
(In thousands, except per share and share amounts)
(Unaudited)
| For the Three Months Ended |
||||||||
| September 24, 2004 |
September 26, 2003 |
|||||||
| Net revenues from clearing operations |
$ | 3,667 | $ | 5,276 | ||||
| Commissions |
19,225 | 21,858 | ||||||
| Interest |
27,352 | 24,403 | ||||||
| Investment banking, advisory and administrative fees |
6,847 | 6,045 | ||||||
| Net gains on principal transactions |
22,316 | 3,453 | ||||||
| Other |
9,165 | 2,735 | ||||||
| 88,572 | 63,770 | |||||||
| Commissions and other employee compensation |
31,493 | 32,620 | ||||||
| Interest |
10,280 | 8,169 | ||||||
| Occupancy, equipment and computer service costs |
6,839 | 7,364 | ||||||
| Communications |
3,037 | 3,095 | ||||||
| Floor brokerage and clearing organization charges |
1,582 | 1,768 | ||||||
| Advertising and promotional |
805 | 771 | ||||||
| Other |
5,045 | 7,873 | ||||||
| 59,081 | 61,660 | |||||||
| Income before income tax expense and minority interest in consolidated subsidiaries |
29,491 | 2,110 | ||||||
| Income tax expense |
10,198 | 527 | ||||||
| Income before minority interest in consolidated subsidiaries |
19,293 | 1,583 | ||||||
| Minority interest in consolidated subsidiaries |
(262 | ) | (300 | ) | ||||
| Net income |
19,031 | 1,283 | ||||||
| Other comprehensive income (loss): |
||||||||
| Holding loss arising during the three months ended September 24, 2004, net of tax of $(32), holding gain arising during the three months ended September 26, 2003, net of tax of $1,064. |
(161 | ) | 2,073 | |||||
| Reclassification for hedging activities, net of tax of $9 and ($635) for the three months ended September 24, 2004 and September 26, 2003, respectively. |
17 | (1,180 | ) | |||||
| Maturity of DARTS, net of tax of $(6,262) |
(12,471 | ) | — | |||||
| Net income (loss) recognized in other comprehensive income |
(12,615 | ) | 893 | |||||
| Comprehensive income |
$ | 6,416 | $ | 2,176 | ||||
| Earnings per share - basic |
||||||||
| Net income |
$ | 1.12 | $ | 0.08 | ||||
| Weighted average shares outstanding – basic |
17,064,681 | 17,001,684 | ||||||
| Earnings per share – diluted |
||||||||
| Net income |
$ | 1.11 | $ | 0.07 | ||||
| Weighted average shares outstanding – diluted |
17,167,448 | 17,206,521 | ||||||
See accompanying Notes to Consolidated Financial Statements.
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SWS Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 24, 2004 and September 26, 2003
(In thousands)
(Unaudited)
| For the Three Months Ended |
||||||||
| September 24, 2004 |
September 26, (see “- |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 19,031 | $ | 1,283 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
1,668 | 1,460 | ||||||
| Amortization of discounts on loans purchased |
(367 | ) | (425 | ) | ||||
| Provision for doubtful accounts |
885 | 806 | ||||||
| Deferred income tax expense |
11 | 1,267 | ||||||
| Deferred compensation |
89 | 108 | ||||||
| Gain on sale of loans |
(108 | ) | (113 | ) | ||||
| Gain on sale of fixed assets |
(8 | ) | — | |||||
| Loss on sale of real estate |
24 | 58 | ||||||
| Gain on maturity of DARTSsm |
(23,567 | ) | — | |||||
| Equity in undistributed losses on investments |
566 | 1,265 | ||||||
| Net change in minority interest in consolidated subsidiaries |
144 | 207 | ||||||
| Change in operating assets and liabilities: |
||||||||
| Increase in assets segregated for regulatory purposes |
(34,457 | ) | (64,126 | ) | ||||
| Net change in broker, dealer and clearing organization accounts |
(23,446 | ) | 9,635 | |||||
| Net change in client accounts |
52,248 | (31,479 | ) | |||||
| Net change in loans held for sale |
(17,925 | ) | 95,886 | |||||
| Increase in securities owned |
(46,974 | ) | (13,627 | ) | ||||
| Decrease (increase) in other assets |
(942 | ) | 838 | |||||
| Increase in drafts payable |
183 | 3,526 | ||||||
| Increase in securities sold, not yet purchased |
19,472 | 29,964 | ||||||
| Increase (decrease) in other liabilities |
1,324 | (221 | ) | |||||
| Net cash provided by (used in) operating activities |
(52,149 | ) | 36,312 | |||||
| Cash flows from investing activities: |
||||||||
| Purchase of fixed assets |
(1,109 | ) | (1,431 | ) | ||||
| Purchase of real estate |
(186 | ) | — | |||||
| Proceeds from the sale of fixed assets |
9 | — | ||||||
| Proceeds from the sale of real estate |
604 | 3,807 | ||||||
| Loan originations and purchases |
(131,719 | ) | (106,100 | ) | ||||
| Loan repayments |
117,839 | 106,801 | ||||||
| Cash paid for purchase of O’Connor, net of cash acquired |
(175 | ) | (142 | ) | ||||
| Cash paid on investments |
(721 | ) | (938 | ) | ||||
| Cash received on investments |
20 | 40 | ||||||
| Investment in Federal Home Loan Bank |
(47 | ) | (46 | ) | ||||
| Net cash provided by (used in) investing activities |
(15,485 | ) | 1,991 | |||||
| Cash flows from financing activities: |
||||||||
| Payments on short-term borrowings |
(350,840 | ) | (585,100 | ) | ||||
| Cash proceeds from short-term borrowings |
367,640 | 633,500 | ||||||
| Payments on capital leases |
(253 | ) | (83 | ) | ||||
| Increase (decrease) in deposits |
(2,960 | ) | 104,242 | |||||
| Decrease in advances from Federal Home Loan Bank |
(1,895 | ) | (31,875 | ) | ||||
| Cash proceeds from notes payable-Bank |
2,500 | 775 | ||||||
| Payment of cash dividends on common stock –SWS Group |
(1,717 | ) | (1,702 | ) | ||||
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