DALLAS -- After his telephone calls went unanswered two years ago, Robert Utley spent an hour waiting in the reception area of First Southwest Co. before executives would meet with him about selling the Texas-based firm.

His persistence paid off.

Today Utley is a leading stockholder of the privately held investment bank, a firm that has seen some changes since he and a local investor group bought it in October 1991 for an estimated $15.5 million -- a relative bargain at about 110% of book value.

After beefing up the staff by about 50%, expanding technical support, and beginning to move the firm beyond the Texas financial advisory business that has been its hallmark, the Dallas investor says he and the new First Southwest are just getting started.

"We are very committed to the building of an institution," Utley said during a three-hour interview. "We intend to be the premier investment banking firm in the Southwest."

The investment bank, which has handled almost $60 billion in Texas advisory business since 1946, entered a transition period in 1991 after the death of two of its largest stockholders. But now that a winner has emerged from the bidding war that followed, not everyone is convinced the firm has found the right track.

Some of First Southwest's competitors and former bankers say the firm has become a more capable competitor. Others believe, however, that First Southwest has grown too fast, is too loaded with debt from the buyout, and will be caught off-balance when Texas' booming bond volume shows. Further, they say the firm's nationwide slot as a top financial adviser could be jeopardized by the move into new markets and lines of business.

"When the rainy day comes, they are going to have trouble," a former First Southwest banker said.

Critics frequently cite the firm's payroll, particularly the addition of big-dollar executives, as evidence that the firm is growing too fast. But Utley says the expansion to 180 employees from about 120 is a necessary part of the long-term strategy.

"The bottom line is that we brought on staff that we functionally needed," he said. "You can't take a pill and make them do this job. If I could, I would."

At the same time, the new management has revamped a compensation system that was considered cheap even by Texas standards. Under the firm's late founder, Decker Jackson, a vice president might earn a base salary in the mid-$20,000 range.

Today, officials say the base salaries are higher and the bonus systems, once viewed as capricious, is based on a partnership-style formula. "They seem to be rewarding their people more," said one outsider familiar with changes at the firm.

With more employees and healthier salaries, the firm reported spending $11.06 million on employee compensation in the fiscal year ended Sept. 30, 1992. That was up 39% from the last full year before the buyout, according to records filed with the Securities and Exchange Commission.

But during the same two-year period, the firm also reported that revenues rose to $20 million, a 64% gain. Perhaps the most notable change is on the bottom line. First Southwest reported net income of $1.32 million last year -- a nine-fold increase from the pre-buyout level.

Another thing that has definitely changed is debt level. While the brokerage is debt-free, the parent company, First Southwest Holdings Co., borrowed about $9.5 million for the acquisition and still owes $7.5 million.

To make up the rest of the $15.5 million needed for the deal, a group of First Southwest executives put $1.5 million into the transaction, worth 25% of the privately held common stock, while UFL Group Ltd. put in $4.5 million. The UFL partnership is controlled by Utley and Hillel A. Feinberg, a former Bear, Stearns & Co. executive who is now co-chief executive of First Southwest with Utley.

Confidential documents and interviews indicate that $5 million of the money borrowed by First Southwest Holdings was senior debt loaned by Utley and Feinberg. Of that, the holding company retired $2 million on Oct. 31, 1991. The remaining $3 million matures on Sept. 30, 1996.

The final $4.5 million borrowed by First Southwest Holdings came from a convertible subordinate note with a 10% annual interest rate and a final maturity of 2001, according to a Sept. 17, 1991, confidential overview of the buyout obtained by The Bond Buyer.

According to the document, the note's buyers were two insurance companies owned by Life Partners Group, a holding company that is 80% owned by General Electric Capital Corp. and the Dallas-based investment firm Hicks, Muse & Co. and its affiliates.

The debenture is convertible for an equity position of 35.7% of the common stock of First Southwest Holdings. Utley refused to discuss the firm's debt structure, other than to say that officials planned to exercise an option to retire half the notes.

Asked about the firm's current debt load, Utley responded, "That's personal business that I'm not going to talk about."

Competitors believe the debt structure makes it likely that First Southwest will go public so that its owners can recoup their investment after outbidding at least two other groups in 1991.

"It's clear the way to get out from under this noose is to have a good earnings record," said an executive at a competing brokerage. "Then you take and sell what you bought for 110% for two to three times book."

Utley would not rule out the possibility of a public stock offering for the underwriter. "I think it is very difficult for a personal service business to be in a public environment," he said. " I also know that certain aspects of this business require large amounts of capital and that [public offering] may become the best alternative."

Either way, Utley and other executives have said they are serious about expanding the firm's markets and lines of business.

Recently, First Southwest opened offices in Florida and Arizona. At the same time, the firm retained its ranking as the top financial adviser in Texas.

The firm has also moved into underwriting -- an area generally shunned before the buyout.

In January, for instance, First Southwest underwrote its largest deal yet, a $240 million general obligation bond issue for the recently downgraded Dallas Independent School District.

The selection of First Southwest as bookrunner for the prestige issue raised eyebrows in the Texas market, where competitors pointed out that Utley helped raised thousands of dollars for a successful school bond referendum campaign earlier this year.

Utley said he raised money through this involvement with the Dallas Citizens Council, a group of business people active in civic affairs, but says the perception of buying district business is wrong.

"I think the link is that once they felt comfortable with our proposal for the Dallas issue, we had some obligation to go help with the campaign," he said.

Privately, some of his Texas competitors give Utley and his partners credit for a strong turnaround and expansion of First Southwest.

One executive, who declined to be identified, said that before the buyout he never worried about losing advisory business to the firm. Today, he said, "I think they are more qualified and a greater threat than before."

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