UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS
AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| | x | | ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE, SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2002
| | ¨ | | TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
Commission file number 000-19483
| | A. | | Full title of the plan and the address of the plan, if difference from that of the issuer named below: |
SWS GROUP 401(K) PROFIT SHARING PLAN
| | B. | | Name of issuer of these securities held pursuant to the plan and the address of its principal executive office: |
SWS GROUP, INC.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
SWS GROUP 401(K) PROFIT SHARING PLAN
Index
Item 4- Audited financial statements and schedules prepared in accordance with the financial reporting requirements of ERISA.
Report of Independent Auditors
To the Participants and Administrator of
SWS Group 401(k) Profit Sharing Plan:
In our opinion, the accompanying statements of net assets available for benefits and the related statement of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of SWS Group 401(k) Profit Sharing Plan (the “Plan”) at December 31, 2002 and 2001, and the changes in net assets available for benefits for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets (held at end of year) is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
PricewaterhouseCoopers
Dallas, Texas
May 26, 2003
SWS GROUP
401(k) PROFIT SHARING PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2002 AND 2001
| | | December 31, 2002
| | December 31, 2001
|
Investments, at fair value (Notes 4 and 5): | | | | | | |
Common stock | | $ | 18,211,106 | | $ | 25,977,960 |
Southwest Securities 401(k) Stock Fund | | | 1,168,357 | | | 1,861,611 |
Money market funds | | | 8,349,529 | | | 8,014,929 |
Government securities | | | 587,822 | | | 579,259 |
Mutual funds | | | 15,467,384 | | | 18,518,336 |
Common/collective trusts | | | 6,410,548 | | | 3,304,782 |
Corporate bonds and debentures | | | 193,778 | | | 358,892 |
Preferred stock | | | 207,704 | | | 218,648 |
Other assets | | | 265,404 | | | 333,944 |
Loans to participants | | | 2,388,779 | | | 2,495,071 |
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Total investments | | | 53,250,411 | | | 61,663,432 |
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Receivables: | | | | | | |
Employer contributions (Note 2 (a)) | | | 4,395 | | | 1,657 |
Participant contributions (Note 2 (b)) | | | 4,511 | | | 2,344 |
Other | | | 3,455 | | | 1,672 |
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Total receivables | | | 12,361 | | | 5,673 |
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Cash | | | 197,089 | | | 20,730 |
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Net assets available for benefits | | $ | 53,459,861 | | $ | 61,689,835 |
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The accompanying notes are an integral part of these financial statements.
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SWS GROUP
401(k) PROFIT SHARING PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 2002
| | | December 31, 2002
| |
Additions (deductions) to net assets attributed to: | | | | |
Investment income (loss) (Note 4): | | | | |
Net depreciation in fair value of investments | | $ | (11,024,335 | ) |
Interest and dividends | | | 712,759 | |
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Net investment loss | | | (10,311,576 | ) |
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Contributions: | | | | |
Employer | | | 1,974,901 | |
Participant | | | 3,883,558 | |
Participant rollovers from other plans | | | 433,773 | |
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Total contributions | | | 6,292,232 | |
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Deductions from net assets attributed to: | | | | |
Benefits paid to participants | | | (4,387,487 | ) |
Administrative expenses | | | (123,939 | ) |
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Total deductions | | | (4,511,426 | ) |
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Net decrease | | | (8,530,770 | ) |
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Transfers to the Plan (Note 1 (a)) | | | 1,985,229 | |
Transfers from the Plan (Note 1 (a)) | | | (1,684,433 | ) |
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Net assets available for benefits, beginning of year | | | 61,689,835 | |
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Net assets available for benefits, end of year | | $ | 53,459,861 | |
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The accompanying notes are an integral part of these financial statements.
3
SWS GROUP
401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
| 1. | | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The SWS Group 401(k) Profit Sharing Plan (the “Plan”) (formerly known as the Southwest Securities Group 401(k) Profit Sharing Plan) is a defined contribution plan covering all employees of companies affiliated with SWS Group, Inc. (the “Company” or “Employer”) who meet certain minimum hours of service requirements. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.
In 2002, the Plan was amended to include the language that complies with certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. The changes modified the top-heavy rules and increased the annual eligible compensation and benefit limits.
Effective January 1, 2002, the Board of Directors of SWS Group, Inc. and the Plan Administrator voted to terminate the SWS Group Money Purchase Pension Plan. All participant accounts of the SWS Group Money Purchase Pension Plan were immediately vested 100%. On April 19, 2002, $1,985,229 was transferred from the SWS Group Money Purchase Pension Plan to the Plan.
On June 28, 2002, the Company completed a spin off of one of its affiliates, Westwood Holdings Group (“Westwood”). Subsequently, the participant accounts for employees of Westwood were transferred out of the Plan. The amount of the transfer was $1,684,433 and was effective in July 2002.
| | (b) | | Basis of presentation |
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of the Plan’s financial statements in conformity with accounting principles generally accepted in the United States of America requires the Plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
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SWS GROUP
401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
The Plan is administered by a Trustee Committee appointed by the Company’s Board of Directors. The Trustees of the Plan are Charles Schwab Trust Company and Westwood Trust Company. Certain expenses of the Plan are charged directly to participant accounts and totaled $123,939 for 2002. Recordkeeper, trustee and professional fees of the Plan are paid by the Company and therefore are not reflected in the Plan’s financial statements.
The Company contributes 100% of the first 4% of compensation that a participant contributes into the Plan. The Board of Directors of the Company determines the amount of discretionary Employer contribution to the Plan each year. The contribution may not exceed the lesser of 15% of the total annual compensation paid to the participants or of the Employer’s net profits before taxes. These contributions are allocated to each participant in the ratio of each participant’s covered compensation to the total covered compensation of all participants. No discretionary contribution is required to be made by the Employer.
The carrying amount of the Employer contributions receivable approximates fair value at December 31, 2002 and 2001, due to the short-term nature of the account.
| | (b) | | Participant contributions |
For the year ended December 31, 2001, maximum participant contributions of pretax annual compensation, as defined by the Plan, was 10%. In 2002, the Plan was amended to increase the maximum participant contribution to 15%. Participants may also contribute rollovers of distributions from other qualified defined benefit or defined contribution plans. Participants direct the investment of their contributions into various investment options offered by the Plan. Participant contributions were limited to $11,000 during the 2002 Plan year.
The carrying amount of the Participant contributions receivable approximates fair value at December 31, 2002 and 2001, due to the short-term nature of the account.
Forfeitures reduce Employer contributions for the year in which the forfeitures occur and are allocated to participants in the same manner as the Employer contribution. At December 31, 2002 and 2001, forfeited nonvested accounts totaled $396,025 and $431,610, respectively. These accounts will be used to reduce future employer contributions. During 2002, employer contributions were reduced by approximately $472,316 from forfeited nonvested accounts.
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SWS GROUP
401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
| 3. | | ELIGIBILITY AND VESTING |
Employees of the Company are eligible to participate in the Plan upon hire, as soon as administratively possible.
Participant contributions and Employer matching contributions are immediately vested. Employees who work a minimum of 1,000 hours a year and are employed on the last day of the calendar year qualify for a year of service and vest in the discretionary Employer contribution as follows:
Years of service
| | | | Percentage vested
|
Less than 2 | | | | 0% |
2 years | | | | 20% |
3 years | | | | 40% |
4 years | | | | 60% |
5 years | | | | 80% |
6 years | | | | 100% |
The vested portion of the accrued benefit of a participant upon termination or retirement is his or her plan benefit. Normal retirement age as elected by the Company is 55. Several options for payments are available and all require the agreement of the participant. Benefits are recorded by the Plan when paid.
| 4. | | INVESTMENTS AND INVESTMENT INCOME |
All investments are held by Charles Schwab Trust Company except for $1,773,735 in investments which are held by Westwood Trust Company. The Company maintains a participant-directed plan with separate, segregated accounts and each participant’s income or loss, including market fluctuations, is applied directly to the participant’s account.
Investments are carried at fair value based on quoted market prices. The fair values of all securities held at December 31, 2002 and 2001 are based on quoted market prices. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned and dividends are recorded on the ex-dividend date. These investments are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with these investments, it is at least reasonably possible that changes in the values of such investments will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
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SWS GROUP
401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
The Plan presents the net change in fair value of investments, which consists of realized gains and losses, unrealized appreciation (depreciation) and any income or capital gain distributions, in the accompanying statement of changes in net assets available for benefits.
Investments greater than 5% of net assets available for benefits at either December 31, 2002 and 2001 are as follows:
| | | 2002
| | 2001
|
Schwab Value Advantage Fund | | $ | 6,410,548 | | $ | 3,304,782 |
Money market funds, Schwab | | | 8,141,986 | | | 7,967,987 |
The Plan has investments in parties-in-interest (including SWS Group, Inc.) with market values of $12,194,005 and $15,240,389 at December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002, the Plan’s investments, including those bought, sold and held during the year, depreciated in value as follows:
| | | 2002
| |
Self-directed brokerage accounts | | $ | (7,413,046 | ) |
Common stock | | | (941,788 | ) |
Mutual funds | | | (2,669,501 | ) |
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Net depreciation in fair value of investments | | $ | (11,024,335 | ) |
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Included in net depreciation in common stock is depreciation on investments in SWS Group, Inc. of approximately $210,150 for the year ended December 31, 2002.
As allowed by the Plan, loans have been made to numerous participants. Loans are limited to a maximum term of five years except when the loan is used to acquire the principal residence of the participant. Loan amounts are limited to 50% of the respective participant’s nonforfeitable accrued benefit at the time of the loan less any outstanding loans up to a maximum total of $50,000. Interest rates ranged from 4.25% to 10.5% at December 31, 2002.
Loans to participants are carried at the original loan balance plus accrued interest, less principal repayments, which approximates fair value.
Repayments are made through payroll deductions and are reinvested in the individual funds according to the current investment allocations of the participant.
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SWS GROUP
401(k) PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
The Company has modeled its Plan on a prototype plan for which a favorable tax determination letter has been received from the Internal Revenue Service. The Plan has not applied for a determination letter. The Plan administrator believes that the Plan is currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Therefore, the Plan was qualified and the related trust was tax-exempt as of the financial statement date.
Although it has not expressed any intent to do so, the Company may terminate the Plan at any time subject to the provisions of ERISA. In the event of Plan termination, the rights of each participant to the amount in his or her account on the date of such termination shall be fully vested and nonforfeitable.
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SWS GROUP
401(k) PROFIT SHARING PLAN
SCHEDULE H, LINE 4i – SCHEDULE OF ASSETS (HELD AT END OF YEAR)
AS OF DECEMBER 31, 2002
| (a) | | (b) / (c) | | (e) |
| | Identity of issue, borrower, lessor or similar party and description of investment including maturity date, rate of interest, collateral, par or maturity value
| | Current value
|
* | | Schwab Value Advantage Fund | | $ | 6,410,548 |
* | | Southwest Securities 401(k) Stock Fund | | | 1,168,357 |
| | | Self-directed brokerage accounts | | | 31,593,727 |
| | | Growth Fund of America | | | 1,145,007 |
| | | Gabelli Westwood Balanced Fund | | | 974,799 |
| | | Gabelli Westwood Equity Fund | | | 877,649 |
| | | Gabelli Westwood Realty Fund | | | 120,569 |
| | | Westwood Holdings Group Stock Fund | | | 219,080 |
| | | Manager’s Special Equity Fund | | | 1,117,117 |
| | | Pimco Total Return FD Class D Fund | | | 1,035,082 |
* | | Schwab Markettrack Balanced Fund | | | 250,521 |
* | | Schwab Markettrack Conservative Fund | | | 186,089 |
* | | Schwab Markettrack Growth Fund | | | 332,845 |
* | | Schwab S&P 500-Investors SHS Fund | | | 1,456,866 |
| | | Scudder International Fund | | | 780,069 |
| | | Weitz Value Portfolio | | | 1,387,801 |
| | | SEI Government Securities Principal | | | 207,545 |
| | | Westwood Trust SMid Cap Equity-EB Fund | | | 258,000 |
| | | Westwood Trust MultiCap Equity-EB Fund | | | 167,254 |
| | | Westwood Trust Small Cap Equity-EB Fund | | | 482,233 |
| | | Westwood Trust High Yield Bond-EB Fund | | | 410,971 |
| | | Westwood Trust Real Estate Invest Trust-EB Fund | | | 46,320 |
| | | Westwood Trust International Equity-EB Fund | | | 21,178 |
| | | Westwood Trust Large Cap Equity-EB Fund | | | 79,763 |
| | | Westwood Trust Core Investment Grade Bond-EB Fund | | | 100,420 |
| | | Enron Capital Pfd MIPS 8% | | | 27 |
| | | Kinder Morgan Energy Partners LP | | | 2,673 |
| | | LL&E Royalty Trust | | | 1,144 |
| | | Mesa Offshore Trust Unit Ben Int | | | 150 |
| | | Star Gas Partners LP SBI | | | 2,148 |
| | | TEL Offshore Trust UBI | | | 315 |
| | | Teppco Partners LP | | | 13,938 |
| | | Williams Energy Partners LP | | | 11,427 |
* | | Loans to Participants, Interest Rates 4.25% to 10.5% due through 2025 | | | 2,388,779 |
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| | | Total assets held for investment purposes | | $ | 53,250,411 |
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*Designates a party in-interest.
Note: Column (d) – Cost information has been omitted as all investments are participant-directed.
9
SIGNATURE
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrator has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | THE SWS GROUP 401(K) PROFIT SHARING PLAN |
| | | |
Date: June 27, 2003 | | | | By: | | /s/ James R. Zimcosky
|
| | | | | | | | | James R. Zimcosky Director—Human Resources Plan Administrator |
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