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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 25, 1999
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
SOUTHWEST SECURITIES GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2040825
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
<S> <C>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.10 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
----
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _________
As of September 14, 1999, there were 11,814,793 shares of the Registrant's
common stock, $.10 par value, outstanding. The aggregate market value of Common
Stock held by non-affiliates was approximately $258,562,000 using a market
price of $27.50 on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the solicitation
of proxies to be voted at the Registrant's Annual Meeting of Stockholders to be
held November 3, 1999, which will be filed with the Commission pursuant to
Regulations 240.14a (6)(c) within 120 days after the Registrant's fiscal year
end, are incorporated by reference into Part I and Part III of the Report on
Form 10-K.
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PART I
Item 1. Business
(a) General Development of Business
We are a full-service securities firm using technology to deliver a broad range
of investment and related financial services to our clients, which include
individual and institutional investors, broker/dealers, corporations,
governmental entities and financial intermediaries.
We provide clearing services to over 200 correspondent broker/dealers and 700
independent contract brokers, as well as full-service and online discount
brokerage services to individual investors. Clearing involves maintaining our
correspondent clients' accounts, processing securities transactions, extending
margin loans and performing a variety of administrative services as agent for
our correspondent broker/dealers. Our clearing business is complemented by our
securities trading, securities lending, investment banking and asset management
businesses.
Our principal subsidiary, Southwest Securities, Inc. ("Southwest") is a
registered securities broker/dealer and a member of the NYSE and other major
exchanges. Southwest provides correspondent services to securities
broker/dealers and other financial institutions in 30 states, Canada and Europe.
Southwest serves individual investors through its Private Client Group offices
in Texas, New Mexico and California and institutional investors nationwide from
its Dallas, New York and Chicago offices. Clients of these offices gain access
to Southwest's investment research that focuses on corporations primarily in the
southwestern United States.
We operate three other broker/dealer subsidiaries engaged in certain aspects of
the securities brokerage business. All three are NASD registered
broker/dealers. SWS Financial Services, Inc. ("SWSFS") contracts with
independent registered representatives for the administration of their
securities business. We offer discount brokerage services through
Mydiscountbroker.com, Inc. ("MDB") which began operations in 1997. SWSFS and MDB
are correspondents of Southwest. Southwest Clearing Corporation ("Clearing") was
incorporated in the State of Delaware on September 30, 1998 and has not yet
begun operations. NorAm, formerly Equity Securities Trading Company, was sold
in August 1999.
We offer investment management, advisory and trust services through three
subsidiaries. Westwood Management Corporation ("Westwood"), a registered
investment advisor, manages the Gabelli-Westwood Family of Mutual Funds as well
as equity and fixed income investments for a diverse clientele including
corporate plan sponsors, charitable institutions, educational endowments and
public funds. Westwood Trust ("Trust") provides trust, custodial and other
management services to high net worth individuals and corporations throughout
Texas and the Southwest. SW Capital Corporation ("Capital"), administers the
Local Government Investment Cooperative ("LOGIC") fund for cities, counties,
schools and other local governments across Texas.
SWS Technologies Corporation ("Technologies") incorporated in 1997, provides
Internet services, network design and engineering and disaster recovery services
to the Company, its clients and other customers in the southwestern United
States.
On August 10, 1999, we signed a definitive merger agreement to acquire ASBI
Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB, (the
"Bank"). ASBI is classified as a unitary savings and loan holding company, the
business of which principally consists of the ownership and management of its
subsidiaries, the principal operating subsidiary of which is the Bank. The Bank,
headquartered in Arlington, Texas, is a federally chartered savings association
organized and existing under the laws of the United States.
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Pursuant to the terms of the merger agreement, we will acquire ASBI and its
subsidiaries, including the Bank, through the merger of one of our wholly owned
subsidiaries with and into ASBI. The agreement provides that we will issue 2.6
million shares of its common stock in a private placement to the holders of all
of the outstanding stock of ASBI. As a result of the merger, the shareholders of
ASBI will become our stockholders.
Don A. Buchholz serves as our chairman and as chairman of ASBI, and is currently
the beneficial owner of approximately 7.0% of our outstanding voting securities.
Mr. Buchholz also owns approximately 19.3% of the outstanding securities of
ASBI. As a result of the conversion of such securities into shares of our common
stock pursuant to the merger, it is anticipated that Mr. Buchholz's beneficial
ownership interest will increase to 9.2% of our outstanding stock. Pursuant to
the terms of a voting agreement among the shareholders of ASBI, Mr. Buchholz as
the power to exercise voting control for approximately 58.6% of ASBI's
outstanding voting securities. Such voting agreement, however, will not be used
in conjunction with the vote of ASBI shareholders to approve the merger.
The acquisition is expected to be accounted for by the pooling-of-interests
method and is subject to prior regulatory and shareholder approval. Detailed
information regarding the acquisition of ASBI, including a description of the
terms and conditions of the definitive merger agreement, issuance of shares of
our common stock to ASBI shareholders and related matters, is set forth in our
Definitive Proxy Statement for our Annual Meeting of Stockholders to be held on
November 3, 1999.
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(b) Financial Information about Operations
Our operations consist of various financial services provided to our clients.
The following table shows our revenue by source for the last three fiscal years
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from clearing
operations $ 40,118 12% $ 26,607 9% $ 22,693 10%
------------- ----------- -----------
Commissions:
Listed equities 13,481 4% 14,125 5% 9,729 4%
Over-the-counter equities 15,392 4% 12,418 4% 9,635 4%
Corporate bonds 7,630 2% 5,027 2% 1,906 1%
Government bonds and mortgage-
backed securities 3,162 1% 2,785 1% 1,970 1%
Municipal bonds 5,568 2% 4,658 2% 4,026 2%
Options 2,885 1% 1,820 1% 1,228 1%
Mutual funds 14,310 4% 13,737 5% 9,013 4%
Other 2,620 1% 4,831 2% 1,375 1%
----------- ----------- -----------
65,048 59,401 38,882
----------- ----------- -----------
Interest 147,006 44% 143,121 50% 119,176 55%
----------- ---------- -----------
Investment banking fees:
Corporate 2,108 1% 5,786 2% 2,913 1%
Municipal 10,650 3% 9,933 3% 6,218 3%
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12,758 15,719 9,131
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Advisory and administrative fees:
Institutional and individual
accounts 9,851 3% 8,135 3% 4,667 2%
Money market funds 6,090 2% 3,559 1% 1,790 1%
Other 401 -- 437 -- 443 --
----------- ---------- -----------
16,342 12,131 6,900
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Net gains on principal transactions:
Equity securities 36,163 10% 7,295 3% 4,377 2%
Municipal securities 3,399 1% 4,095 1% 6,092 3%
Other 2,127 1% 1,186 -- 1,387 1%
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41,689 12,576 11,856
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Other 14,309 4% 16,203 6% 9,766 4%
----------- ---------- -----------
Total revenue $337,270 100% $285,758 100% $218,404 100%
=========== ========== ===========
</TABLE>
(c) Narrative Description of Business
As of June 25, 1999, we employed 928 individuals. Southwest employed 833 of
these individuals, 120 of whom were full-time retail representatives. In
addition, 710 full-time retail representatives were affiliated as
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independent contractors. Through our broker/dealer subsidiaries, we provide
securities services to approximately 250,000 client accounts. No single client
accounts for a material percentage of our total business.
BROKERAGE SERVICES
Southwest Securities, Inc. Southwest's activities in the securities business
include execution and clearing of securities transactions, individual and
institutional securities brokerage, securities lending, management of and
participation in underwriting of equity and fixed income securities, market
making in corporate securities and research and investment advisory services.
For the year ended June 25, 1999, revenues of Southwest accounted for 87% of
consolidated revenues.
Southwest is a member firm of the NYSE, the American Stock Exchange, Inc. and
the Chicago Stock Exchange, Inc. It is also a member of the NASD, the
Securities Investor Protection Corporation ("SIPC"), and other regulatory and
trade organizations. SIPC provides protection for clients up to $500,000 each
with a limitation of $100,000 for claims for cash balances. Southwest purchases
insurance which, when combined with the SIPC insurance, provides total coverage
in certain circumstances of up to $25 million per client for securities held in
clients' accounts with no aggregate limit.
Execution and Clearing. Southwest provides clearing and execution primarily on a
fully-disclosed basis for other broker/dealers including general securities
broker/dealers, bank affiliated firms and those firms specializing in high
volume trading. In a fully disclosed clearing transaction, the identity of the
correspondent's client is known to Southwest, and Southwest physically maintains
the client's account and performs a variety of services as agent for the
correspondent. Southwest provides clearing and execution services for over 200
correspondents throughout the United States and Europe. Correspondent firms are
charged fees based on their use of services according to a standard clearing
schedule. Discounts are given from the standard schedule based on total volume
and type of services provided to the correspondent. Besides service charges
realized from securities clearing activities, Southwest also earns substantial
amounts of interest income. Southwest extends credit directly to its customers,
the customers of correspondent firms and the correspondent firms themselves in
order to facilitate the conduct of customer and correspondent securities
transactions. This credit is termed margin lending. The correspondents indemnify
Southwest against margin losses on their customers' accounts. Southwest also
extends margin credit directly to correspondents to the extent that such firms
pledge proprietary assets as collateral. Since Southwest must rely on the
guaranties and general credit of the correspondents, Southwest may be exposed to
significant risk of loss if correspondents are unable to meet their financial
commitments should there be a substantial adverse change in the value of
margined securities.
While Southwest's correspondent relationships are with a wide range of general
securities broker/dealers and bank-affiliated broker/dealers, Southwest provides
clearing services for a number of high-volume trading firms. These firms
specialize in providing services to those customers who trade actively on a
daily basis. As of June 25, 1999, Southwest provides clearing services for 16
of these firms. The nature of services provided to the customers of these firms
are substantially different from the standard correspondent relationship and,
accordingly, fees for services to these correspondents are discounted from the
fees normally charged in the standard clearing schedule.
The following table reflects the number of client transactions processed for
each of the last three years and the number of correspondents at the end of each
year:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Tickets for third party correspondents 21,819,847 6,439,240 3,049,700
Tickets for internal correspondents 258,948 159,156 115,963
Tickets for Southwest account executives 304,540 172,203 155,896
--------------- --------------- --------------
Total tickets 22,383,335 6,770,599 3,321,559
=============== =============== ==============
Number of correspondents 216 231 227
=============== =============== ==============
</TABLE>
In addition to clearing trades, Southwest provides other products and services
to its correspondents such as recordkeeping, trade reporting, accounting,
general back-office support, securities lending, reorganization and custody of
securities. Southwest also attempts to enrich its correspondent relationships
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by advising the correspondent on communications and networking functions as well
as making available to them a variety of non-brokerage products and services on
favorable terms.
The terms of Southwest's agreements with its correspondents define the
allocation of financial, operational and regulatory responsibility arising from
the clearing relationship. To the extent that the correspondent has available
resources, Southwest is protected against claims by customers of the
correspondent arising from actions by the correspondent; however, if the
correspondent is unable to meet its obligations, dissatisfied customers may
attempt to seek recovery from Southwest.
Individual and Institutional Securities Brokerage. As a securities broker,
Southwest acts as agent in the purchase and sale of securities, options,
commodities and futures contracts traded on various securities and commodities
exchanges or in the over-the-counter ("OTC") market. In most cases, Southwest
charges commissions to its retail clients, on both exchange and OTC
transactions, in accordance with its established commission schedule. In certain
instances, varying discounts from the schedule are given, generally based upon
the client's level of business, the trade size and other relevant factors.
Southwest discounts its commissions substantially on institutional transactions
based on trade size and the amount of business conducted annually with each
institution. For certain fee-based accounts, a fee is charged in lieu of
standard commissions. In addition, Southwest sells a number of professionally
managed mutual funds and maintains dealer-sales agreements with most major
distributors of mutual fund shares sold through broker/dealers. Some account
executives employed by Southwest maintain a license to sell certain insurance
products. Southwest is registered with the Commodity Futures Trading Commission
as a non-guaranteed introducing broker and is a member of the National Futures
Association. Southwest is a fully disclosed client of one of the largest futures
commodity merchants in the United States.
As of June 25, 1999, Southwest had 11 retail brokerage offices, three located in
Dallas and one each in Georgetown, Longview, Lufkin, Nacogdoches, and San
Antonio, Texas; Albuquerque and Santa Fe, New Mexico; and Beverly Hills,
California. In addition, Southwest has bond brokerage offices in Dallas,
Chicago and New York; and an institutional sales office in Dallas.
Customer Financing. Client transactions in securities are effected on either a
cash or margin basis. In margin transactions, the client pays a portion of the
purchase price, and Southwest makes a loan to the client for the balance,
collateralized by the securities purchased or by other securities owned by the
client. Southwest provides financing for margin transactions for its own
clients as well as correspondents' clients. Southwest may extend credit on a
margin basis directly to correspondents to the extent the correspondent holds
securities positions for their own account. Interest is charged, at a floating
rate, to clients on the amount borrowed to finance margin transactions. The rate
charged is dependent on the average net debit balance in the client's accounts,
the activity level in the accounts and the applicable cost of funds. The amount
of the loan is subject to the margin regulations ("Regulation T") of the Board
of Governors of the Federal Reserve System, NYSE margin requirements, and
Southwest's internal policies, which in many instances are more stringent than
Regulation T or NYSE requirements. In most transactions, Regulation T limits
the amount loaned to a customer for the purchase of a particular security to 50%
of the purchase price. Furthermore, in the event of a decline in the value of
the collateral, the NYSE regulates the percentage of client cash or securities
that must be on deposit at all times as collateral for the loans. In permitting
clients to purchase on margin, Southwest is subject to the risk of a market
decline, which could reduce the value of its collateral below the client's
indebtedness. Agreements with margin account clients permit Southwest to
liquidate clients' securities with or without prior notice in the event of an
insufficient amount of margin collateral. Despite those agreements, Southwest
may be unable to liquidate clients' securities for various reasons including the
fact that the pledged securities may not be actively traded, there is an undue
concentration of certain securities pledged, or a stop order is issued with
regard to pledged securities.
The primary source of funds to finance clients' margin account balances is
credit balances in clients' accounts. Southwest generally pays interest to
clients on these credit balances at a rate determined periodically. Available
credit balances are used to lend funds to Southwest customers purchasing
securities on margin. SEC regulations restrict the use of clients' funds to the
financing of clients' activities including margin account balances. Excess
customer credit balances are invested in short-term securities segregated for
the exclusive benefit of customers as required by SEC regulations. Southwest
generates net interest income from the positive interest rate spread between the
rate earned from margin lending and alternative short-term investments and the
rate paid on customer credit balances.
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Securities Lending Activities. Southwest performs securities lending services
for its own clients, clients of correspondents and correspondents themselves as
well as for other broker/dealers and lending institutions. Southwest's
securities borrowing and lending activities involve borrowing securities to
cover short sales and to complete transactions in which clients have failed to
deliver securities by the required settlement date, and lending securities to
other broker/dealers for similar purposes. When borrowing securities, Southwest
is required to deposit cash or other collateral, or to post a letter of credit
with the lender and Southwest generally receives a rebate (based on the amount
of cash deposited) or a fee calculated to yield a negotiated rate of return.
When lending securities, Southwest receives cash or similar collateral and
generally pays a rebate (based on the amount of cash deposited) to the other
party to the transaction. Generally, Southwest earns net interest income based
on the spread between the interest rate on cash or similar collateral deposited
and the interest rate paid on cash or similar collateral received. Stock
borrowing and securities lending transactions are generally executed pursuant to
written agreements with counterparties which require that (1) securities
borrowed and loaned be marked-to-market on a daily basis, (2) excess collateral
be refunded, and (3) deficit collateral be furnished. Margin adjustments are
usually made on a daily basis through the facilities of various clearing houses.
Southwest is a principal in these securities borrowing and lending transactions
and becomes liable for losses in the event of a failure of any other party to
honor its contractual obligation. Southwest's management sets limits on
transaction volumes with each counter-party and reviews these limits on a weekly
basis to monitor the risk level with each counter-party.
The securities lending business is conducted primarily out of the Company's New
York office using a highly specialized sales force. Competition for these
professionals is intense and there can be no assurance that Southwest will be
able to retain these securities lending professionals.
Investment Banking and Underwriting Activities. Southwest earns investment
banking revenues by assisting corporate clients in planning to meet their
financial needs and advising them on the most advantageous means of raising
capital. Such plans are sometimes implemented by managing or co-managing public
offerings of securities or by arranging private placements of securities with
institutional or individual investors. These types of activities are conducted
in the corporate finance department that is staffed with 12 professionals and 8
analysts. In addition to public offerings and private placements, Southwest
provides other consulting services, including providing valuations of securities
and companies, arranging and evaluating mergers and acquisitions and advising
clients with respect to financing plans and related matters.
The syndicate department coordinates the distribution of managed and co-managed
corporate equity underwritings, accepts invitations to participate in
competitive or negotiated underwritings managed by other investment banking
firms, and allocates and merchandises Southwest's selling allotments to its
branch office system, to institutional clients and to other broker/dealers.
Southwest is also among the leaders in its geographic region in the origination,
syndication and distribution of securities of municipalities and political
subdivisions. The public finance department, which is staffed by 21
professionals, provides professional financial advisory services to public
entities across Texas and the Southwest and maintains branch offices in San
Antonio, Austin and Houston, Texas, and Albuquerque, New Mexico.
The following table sets forth, for the last three fiscal years, the number and
dollar amounts, using the full credit to the co-manager method, of municipal
bond offerings senior-managed or co-managed by Southwest.
<TABLE>
<CAPTION>
Aggregate
Fiscal Number of Amount of
Years Issues Offerings
----------- ------------- ------------------
<S> <C> <C>
1999 175 $4,846,558,000
1998 203 $5,143,646,000
1997 165 $2,444,317,000
</TABLE>
Participation in underwritings, both corporate and municipal, can expose
Southwest to material risk, since the possibility exists that securities it has
committed to purchase cannot be sold at the initial offering price. Federal and
state securities laws and regulations also affect the activities of underwriters
and impose substantial potential liabilities for violations in connection with
sales of securities by underwriters to the public.
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Market Making Activities. Southwest is a market maker in OTC and exchange-
listed equity securities as well as a dealer in tax-exempt and governmental
fixed income securities. Trading securities in the OTC market involves the
purchase of securities from and the sale of securities to clients of Southwest
or to other dealers who may be purchasing or selling securities for their own
account or acting as agent for their clients. Profits and losses are derived
from the spreads between bid and asked prices, as well as market trends for the
individual securities during the holding period. At June 25, 1999, Southwest
made markets in 544 OTC common stocks and 61 exchange-listed stocks. Southwest
frequently acts as agent in the execution of OTC orders for its clients and, as
such, transacts these trades with other dealers. When Southwest receives a
client order in a security in which it makes a market, it may act as principal
as long as it matches or improves upon the best price in the dealer market, plus
or minus a mark-up or mark-down not exceeding the equivalent agency commission
charge. Recently adopted regulations require that client limit orders be
satisfied prior to the brokerage firm buying securities into or selling the
securities from their own inventory at the same price.
While most of Southwest's principal transactions are executed to facilitate
individual and institutional customer trades, Southwest also maintains certain
inventory positions for its own accounts. These inventories require the
commitment of capital and expose the Company to the risk of a loss if market
prices of the securities held in inventory decrease. General market conditions,
interest rates and the financial prospects for issuers of such securities may
affect the market prices of securities held in inventory. Internal guidelines
intended to limit the size and risk of inventories maintained have been
established and are reviewed periodically.
Research Activities. Southwest has a research department that provides
analysis, investment recommendations and market information with an emphasis on
companies located in the Southwest region. At June 25, 1999, Southwest had 17
senior securities analysts publishing research on 135 companies. The department
focuses on particular industry groups, including consumer products, health care,
real estate and technology.
Information Technology. Information technology is an integral part of
Southwest's clearing and brokerage activities. Southwest operates sophisticated
hardware and software to execute and process securities transactions and is
engaged in continuing software development and regular up-grades on its computer
hardware. Southwest's data center features a twelve processor Tandem K20,000
Himalaya system and a sophisticated telecommunications network supporting over
3,300 terminals. While Southwest's software is licensed from Securities
Industry Software Corporation, it employs in-house programmers to develop
proprietary enhancements and to maintain its system. Southwest provides
brokerage accounting, order entry and market data in a local area network/wide
area network environment as well as through other traditional communication
environments.
Southwest is transitioning from its Himalaya mainframe processors to a family of
Compaq(R) servers as a part of its migration to the Comprehensive Software
Systems, Ltd. ("CSS") software. This software is being developed by CSS, a
joint venture with Southwest and several other broker/dealers. This software is
capable of accommodating a variety of hardware platforms and operating systems
with a large degree of customization at each location. The CSS system will
automate both front- and back-office brokerage processes from contact and order
management to clearance and settlement. Southwest is currently operating
several CSS modules and intends to have substantially all modules in place by
December 31, 1999.
The CSS database at Southwest uses Microsoft SQL Server 7.0 and runs on three
Compaq Proliant(TM) 7000 servers using new Intel Xeon processors. Each of the
Quad/400-megahertz servers provides 50 to 150 gigabytes of disk space and a
gigabyte of random access memory (RAM). The CSS applications also use over 50
Compaq 1850R servers with Dual/400-megahertz processors and 512 megabytes of
RAM.
Southwest is also investing in Internet and other communications technology.
Southwest is currently providing Internet access to account information for
certain correspondents and expects to expand this service. Southwest also
provides Internet service for correspondents and other end users, as well as
employees. Internet and other communication mechanisms may expose the Company
to increased risk of unauthorized access to data systems.
SWS Financial Services, Inc. SWSFS is an NASD member broker/dealer that
contracts with individual registered representatives who are NASD licensed
salespersons for the conduct of their securities business. SWSFS is a
correspondent of Southwest. While these registered representatives must conduct
all of their
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securities business through SWSFS, their contracts permit them to conduct
insurance, real estate brokerage or other business for others or for their own
accounts. The registered representatives are responsible for all of their direct
expenses and are paid higher commission rates than Southwest's account
executives to compensate them for their added expenses.
Mydiscountbroker.com, Inc. MDB, which began operations in 1997, is a NASD
member broker/dealer specializing in deep discount brokerage services with an
emphasis in trading over the Internet. Although MDB's brokers do not provide
investment advice or recommendations, they do offer clients the information
needed, including quotes, market news, and trends, to make informed investment
decisions. MDB's brokers work on a salary, rather than commission.
ASSET MANAGEMENT AND TRUST SERVICES
Westwood Management Corporation Westwood is a registered investment advisor
founded in 1983 by Susan M. Byrne, who continues to serve as its President and
Chief Executive Officer. The firm, which has headquarters in Dallas, manages
equity, fixed income, cash and balanced accounts for a diverse clientele,
including corporate plan sponsors, charitable institutions, educational
endowments and public funds. In addition, Westwood manages the Gabelli-Westwood
Family of Mutual Funds which is available to both taxable and non-taxable
investors.
Westwood Trust Trust was established in 1974 and provides trust, custodial and
other management services to estates, charitable and other trusts and retirement
plans established by high net worth individuals and corporations throughout
Texas and the Southwest. Trust is chartered and regulated by the Texas
Department of Banking.
SW Capital Corporation Capital was established in 1994 and administers the
LOGIC program. The LOGIC program is targeted to the needs of cities, counties,
schools and other local governments across Texas and conforms with the
Interlocal Cooperation Act and the Public Funds Investment Act of the Texas
Government Code. This program allows participants to pool their available
funds, resulting in increased economies of scale, which allow higher returns
while maintaining a high degree of safety and liquidity.
COMPETITION
We encounter intense competition in our business, and we compete directly with
numerous firms, many of which have substantially greater capital and other
resources. We also encounter competition from banks, insurance companies and
financial institutions in many elements of our business. For example, with the
prior approval of the Federal Reserve Board, securities subsidiaries of bank
holding companies may now underwrite and deal in corporate debt and equity
securities, provided that they comply with certain "firewalls" and that the
revenues from such activities do not exceed 25 percent of the security
subsidiary's total revenues. Legislative proposals also under consideration
would eliminate this limit on such activities and would permit commercial banks,
bank holding companies and their subsidiaries and affiliates to offer additional
services which have traditionally been provided only by securities and money
management firms.
In the past few years, a number of banks acquired securities firms and, in so
doing, gained unprecedented entry into the securities industry. While the
effect of such acquisitions cannot yet be determined, they have brought entirely
new sources of capital into the securities industry, resulting in more
formidable competition.
Additionally, competition among securities firms and other competitors for
successful sales representatives, securities traders, securities analysts, stock
loan professionals and investment bankers is intense and continuous.
We compete with other securities firms and with banks, insurance companies and
other financial institutions principally on the basis of service, product
selection, price, location and reputation in local markets. We operate at a
price disadvantage to discount brokerage firms that do not offer equivalent
services. Southwest competes for the correspondent clearing business on the
basis of service, price, technology, product selection and reputation. We
compete in asset management services with other portfolio managers principally
based on portfolio performance, price and service.
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REGULATION
The securities industry in the United States is subject to extensive regulation
under federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Much of the regulation of
broker/dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the NYSE. These self-regulatory organizations adopt
rules (which are subject to approval by the SEC) for governing the industry and
conduct periodic examinations of member broker/dealers. Securities firms are
also subject to regulation by state securities commissions in the states in
which they are registered. Southwest, SWSFS and MDB are registered in all 50
states. Southwest is also registered in Puerto Rico.
The regulations to which broker/dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. Additional legislation, changes
in rules promulgated by the SEC and by self-regulatory organizations or changes
in the interpretation or enforcement of existing laws and rules often directly
affect the method of operation and profitability of broker/dealers. The SEC and
the self-regulatory organizations may conduct administrative proceedings that
can result in censure, fine, suspension or expulsion of a broker/dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker/dealers is the protection of clients and the securities markets rather
than protection of creditors and shareholders of broker/dealers. See Note 10 of
the Notes to Consolidated Financial Statements for further description of
certain SEC regulations.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David Glatstein 50 Director, Chief Executive Officer and President
Edward R. Anderson 50 Executive Vice President
William D. Felder 41 Executive Vice President
Kenneth R. Hanks 45 Executive Vice President and Chief Operating Officer
Stacy M. Hodges 36 Executive Vice President, Chief Financial Officer and Treasurer
Daniel R. Leland 38 Executive Vice President
Richard H. Litton 52 Executive Vice President
W. Norman Thompson 43 Executive Vice President and Chief Information Officer
Paul D. Vinton 50 Executive Vice President
</TABLE>
David Glatstein was elected Chief Executive Officer in May 1996 and has served
as President and a director of both the Company and Southwest since May 1995.
Mr. Glatstein was Chief Executive Officer of Barre & Company, Inc. from its
founding in 1980 until its acquisition by Southwest in 1995; First Vice
President of the Securities Division of Lehman Brothers Kuhn Loeb, Inc. from
1978 to 1980 and a securities broker with White, Weld & Company, Inc. from 1973
to 1978. Mr. Glatstein is a past Chairman of the District 6 Business Conduct
Committee of the NASD.
Edward R. Anderson has served as Executive Vice President of the Company in
charge of the Operations Division since January 1999. Mr. Anderson joined the
Company in February 1998 as Executive Vice President for Acquisitions and New
Business Development. Prior to joining the Company, he spent 26 years in various
positions at Principal Financial Services in Dallas including Director of
Capital Markets, Chief Administrative Officer, Executive Vice President and
Chief Financial Officer. Mr. Anderson is a certified public accountant and is a
past Chairman of the District 6 Business Conduct Committee of the NASD.
William D. Felder has served as Executive Vice President of the Company since
December 1995 and as Senior Vice President of the Company since 1993. Mr.
Felder has been associated with Southwest in various other capacities since
1980, including director since August 1993 and Senior Vice President in charge
of Clearing Services from 1988 to 1998. Mr. Felder is a past Chairman of the
District 6 Business Conduct Committee of the NASD.
9
<PAGE>
Kenneth R. Hanks has served as Executive Vice President since June 1996 and
Chief Operating Officer since August 1998. Mr. Hanks was the Company's Chief
Financial Officer from June 1996 to August 1998 and has been a director of
Southwest since June 1997. Mr. Hanks served in various executive capacities of
Rauscher Pierce Refsnes, Inc. from 1981 to 1996, including Executive Vice
President and Chief Financial Officer. He serves as an arbitrator with the NASD
and formerly served as a member of the NASD's District 6 Business Conduct
Committee.
Stacy M. Hodges has served as Treasurer and Chief Financial Officer since August
1998 and Executive Vice President since February 1999. Ms. Hodges was
Controller of the Company from September 1994 to August 1998. Ms. Hodges has
been a director of Southwest since June 1997. Prior to joining Southwest, Ms.
Hodges was a Senior Audit Manager in the Financial Services division of KPMG
LLP. Ms. Hodges is a member of the Texas Society of CPAs.
Daniel R. Leland has served as Executive Vice President of the Company since
February 1999. He has served as Executive Vice President and director of
Southwest since July 1995. He has been in charge of the Fixed Income Division
since November 1997. Mr. Leland began his career at Barre & Company in June
1983 where he was employed in various capacities in fixed income sales and
trading before becoming President of Barre & Company in 1993. Mr. Leland is an
arbitrator for the NASD and is a past Vice Chairman of the District 6 Business
Conduct Committee.
Richard H. Litton has served as Executive Vice President of the Company and
Executive Vice President in charge of the Public Finance Division and a director
of Southwest since July 1995. Mr. Litton headed the Municipal Securities Group
in Dallas for BA Securities, Inc. from 1993 to 1995. Mr. Litton was President
with First Southwest Company, a regional investment bank from 1987 to 1993; Vice
President and Regional Manager of Merrill Lynch Capital Markets Municipal Group
from 1977 to 1987 and a securities broker with White, Weld & Company, Inc. from
1976 to 1977. Mr. Litton served on the Advisory Committee on the Recovery of
Real Estate Finance for the Texas House of Representatives' Financial
Institutions Committee. Mr. Litton is past member and director of the Municipal
Advisory Council of Texas and past member of the Marketing Committee of the
Public Securities Association.
W. Norman Thompson has served as Executive Vice President and Chief Information
Officer of the Company since January 1995. Mr. Thompson has been a director of
Southwest since June 1997. Mr. Thompson was associated with Kenneth Leventhal &
Co. (now a part of Ernst & Young LLP) in various capacities ranging from Audit
Manager to Senior Consulting Manager from 1987 to 1994. Previously, Mr.
Thompson was an Audit Manager with KPMG LLP from 1981 to 1987. In the
capacities he held with both Kenneth Leventhal & Co. and KPMG LLP, he was
heavily involved in Information Technology auditing and consulting.
Paul D. Vinton has served as Executive Vice President of the Company since
November 1998 and as Senior Vice President of Southwest since June 1995 and as a
director of Southwest since May 1997. Mr. Vinton was associated with Stephens
Inc. in various capacities from 1993 through 1995. Mr. Vinton has been employed
within the securities industry since 1972 with various firms dealing primarily
in operational, clearance and settlement activities. Mr. Vinton has served on
various industry group boards including most recently the Depository Trust
Company Settlement Advisory Board.
Item 2. Properties
Our executive offices are located in approximately 160,500 square-feet of leased
space in an office building in Dallas, Texas. The lease expires in 2008. We
conduct our clearing operations primarily in our principal office in Dallas,
Texas and our office in New York. We have 11 retail brokerage offices, three
located in Dallas, Texas and one each in Georgetown, Longview, Lufkin,
Nacogdoches and San Antonio, Texas; Albuquerque and Santa Fe, New Mexico; and
Beverly Hills, California. We have public finance branch offices in San
Antonio, Austin and Houston, Texas and Albuquerque, New Mexico. We have fixed
income branch offices in Chicago, Illinois and New York. Our present facilities
and equipment are adequate for current and planned operations.
10
<PAGE>
Item 3. Legal Proceedings
On April 17, 1998, a judgment was entered against us in connection with a breach
of contract lawsuit stemming from the 1995 acquisition of Barre & Company, Inc.
The judge awarded the counterparty approximately $40,000 in damages and
approximately $1,700,000 in attorney's fees. We believe that we have
substantial grounds for appeal and we have begun the appellate process. We also
believe that our reserves are adequate to cover the full amount of the judgment.
On May 22, 1998, a class action claim was filed in the United States District
Court for the Northern District of Texas against us and ViaGraphix Corporation
alleging that material misrepresentations were made in the registration
statement and prospectus that was filed with the SEC and distributed to
investors in connection with the initial public offering of stock of ViaGraphix,
which was managed and underwritten by us. We believe that we have meritorious
defenses to the allegations of the lawsuit, and do not believe that the outcome
of this claim will have a material adverse effect on our business, financial
condition or operating results.
In the general course of our brokerage business and the business of clearing for
other brokerage firms, we have been named as defendants in various pending
lawsuits and arbitration proceedings. These claims allege violation of Federal
and state securities laws. We believe that resolution of these claims will not
result in any material adverse effect on our business, financial condition or
operating results.
Item 4. Submission of Matters to a Vote of Security Holders
None.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The registrant's common stock began trading on the New York Stock Exchange, Inc.
on October 6, 1997 under the symbol "SWS". Previously, the registrant's stock
was traded on the NASDAQ National Market System. At September 14, 1999, there
were 137 holders of record of our common stock and in excess of 9,500 total
holders of our common stock. The following table sets forth for the periods
indicated the high and low market prices for the common stock and the cash
dividend declared per common share:
<TABLE>
<CAPTION>
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash dividend declared per common share /(2)/ $ .063 $ .063 $ .063 $ .063
Stock Price Range /(2)/
High $22.90 $22.73 $36.99 $76.36
Low $14.72 $14.44 $19.15 $25.69
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
Cash dividend declared per common share /(2)/ $ .052 $ .052 $ .052 $ .052
Stock Price Range /(2)/
High $21.26 $23.65 $23.81 $25.87
Low $15.25 $18.29 $19.05 $19.86
</TABLE>
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(In thousands, except ratios and per share amounts)
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------
June 25, June 26, June 27, June 28, June 30,
1999 1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Revenue $ 337,270 $ 285,758 $ 218,404 $ 181,808 $ 120,181
Net income $ 26,219 $ 20,630 $ 16,983 $ 14,040 $ 5,668
Earnings per share - basic /(2) (3)/ $ 2.23 $ 1.76 $ 1.51 $ 1.26 $ .55
Earnings per share - diluted /(2) (3)/ $ 2.21 $ 1.75 $ 1.51 $ 1.26 $ .55
Weighted average shares outstanding -
basic /(2) (3)/ 11,766 11,743 11,270 11,162 10,393
Weighted average shares outstanding -
diluted /(2) (3)/ 11,839 11,764 11,283 11,168 10,393
Cash dividend declared per common share /(2)/
$ .25 $ .21 $ .15 $ .13 $ .12
Financial Condition:
Total assets $4,293,274 $3,220,106 $3,276,392 $2,196,397 $1,535,979
Long-term debt $ 50,000 $ -- $ -- $ -- $ --
Stockholders' equity $ 262,284 $ 125,467 $ 106,928 $ 84,449 $ 71,541
Shares outstanding /(2)/ 11,806 11,746 11,726 11,160 11,133
Tangible book value per common
share /(1) (2)/ $ 21.60 $ 10.04 $ 8.44 $ 7.30 $ 6.16
Ratio of earnings to fixed charges /(4)/ 1.4 1.3 1.3 1.3 1.2
</TABLE>
/(1)/ Adjusted to consider goodwill of $7,244 at June 25, 1999, $7,558 at June
26, 1998, $8,002 at June 27, 1997, $2,976 at June 28, 1996 and $2,940 at
June 30, 1995.
/(2)/ Adjusted to reflect a ten percent stock dividend which was effective
October 1, 1997, a five percent dividend which was effective August 3,
1998 and a ten percent stock dividend which was declared on May 6, 1999,
payable August 2, 1999 to shareholders of record on July 15, 1999.
/(3)/ Fiscal years 1998, 1997, 1996 and 1995 were adjusted to reflect the
implementation of Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
12
<PAGE>
/(4)/ For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before the provision for income taxes and
fixed charges consist of interest expense and one-third of rental expense
which is deemed representative of an interest factor.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
From time to time, Southwest Securities Group, Inc. (the "Parent") and
subsidiaries (collectively, the "Company") may publish "forward-looking
statements" within the meaning of section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
(the "Acts") or make oral statements that constitute forward-looking statements.
These forward-looking statements may relate to such matters as anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company cautions readers that a variety of factors could cause
the Company's actual results to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
These risks and uncertainties, many of which are beyond the Company's control,
include, but are not limited to (1) transaction volume in the securities
markets; (2) volatility of the securities markets; (3) fluctuations in interest
rates; (4) changes in regulatory requirements which could affect the cost of
doing business; (5) general economic conditions, both domestic and foreign; (6)
changes in the rate of inflation and related impact on securities markets; (7)
competition from existing financial institutions and other new participants in
the securities markets; (8) legal developments affecting the litigation
experience of the securities industry; (9) successful implementation of
technology solutions; and (10) changes in federal and state tax laws which could
affect the popularity of products sold by the Company. The Company does not
undertake any obligation to publicly update or revise any forward-looking
statements.
The Company's discussion of the issues surrounding the Year 2000 contain
forward-looking statements as defined in the Acts. These forward-looking
statements could relate to, but are not limited to (1) the financial impact of
the Year 2000 project; (2) the Company's estimated timetables for completion of
each phase of the project; (3) the Company's estimates of the availability of
vendor software upgrades and consulting services; (4) the readiness of third-
party service providers; and (5) contingency plans. The Company cautions that
many factors, including those outside of the control of the Company, could cause
actual results to be materially different than those anticipated and expressed
in the forward-looking statements.
GENERAL
The Company is primarily engaged in securities execution and clearance,
securities brokerage, investment banking, securities lending and borrowing and
trading as a principal in equity and fixed income securities. All of these
activities are highly competitive and are sensitive to many factors outside the
control of the Company, including volatility of securities prices and interest
rates; trading volume of securities; economic conditions in the regions where
the Company does business; income tax legislation; and demand for investment
banking and securities brokerage services. While revenues are dependent upon
the level of trading and underwriting volume, which may fluctuate significantly,
a large portion of the Company's expenses remain fixed. Consequently, net
earnings can vary significantly from period to period.
Effective May 1, 1997, NorAm Investment Services, Inc. ("NorAm"), formerly
Equity Securities Trading Company, Inc. ("Equity"), became a wholly owned
subsidiary of the Company through the issuance of 445,845 shares of common
stock. The acquisition was accounted for under the purchase method of accounting
and, accordingly, assets and liabilities were recorded at their fair market
values on the date of the acquisition. Goodwill relating to this acquisition of
approximately $5,113,000 is recorded in other assets in the consolidated
statements of financial condition. The Company sold NorAm in August 1999.
RESULTS OF OPERATIONS
During fiscal 1999, net income totaled $26,219,000, an increase of $5,589,000,
or 27%, from fiscal 1998, which is a Company record. In 1998, net income
totaled $20,630,000, an increase of $3,647,000, or 21%, from fiscal 1997. For
the past three years, the equity markets have experienced an unprecedented rise,
spurring record levels of transaction volume and capital market activity. These
conditions have led to
13
<PAGE>
record results in many sectors of the financial services industry, including
most of the Company's primary lines of business. These industry factors, coupled
with the Company's effort to grow into new areas of the industry, have allowed
the Company to reach earnings records.
The following is a summary of year-to-year increases (decreases) in categories
of net revenues and operating expenses (dollars in thousands):
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
Amount Percent Amount Percent
-------------------------------------------------
Net revenues
<S> <C> <C> <C> <C>
Net revenues from clearing
operations $13,511 51% $ 3,914 17%
Commissions 5,647 10% 20,519 53%
Net interest 4,638 11% 6,479 18%
Investment banking, advisory and
administrative fees 1,250 4% 11,819 74%
Net gains on principal transactions 29,113 231% 720 6%
Other (1,894) (12%) 6,437 66%
-------- -----------
52,265 28% 49,888 37%
-------- -----------
Operating expenses
Commissions and other employee
compensation 32,874 36% 26,755 41%
Occupancy, equipment and computer
service costs 3,680 21% 5,447 45%
Communications 1,229 10% 1,483 13%
Floor brokerage and clearing
organization charges 1,005 20% 943 23%
Other 4,855 19% 9,105 54%
-------- -----------
43,643 28% 43,733 40%
-------- -----------
Income before income taxes $ 8,622 27% $ 6,155 24%
======== ===========
</TABLE>
Net Revenues from Clearing Operations. Net revenues from clearing increased
$13,511,000, or 51%, from 1998 to 1999, as a result of an increase in
transaction volumes. Total transactions processed in fiscal 1999 increased 229%
to approximately 22.4 million from approximately 6.8 million in fiscal 1998.
Turbulent market conditions during the first six months of fiscal 1999 and high
trading volumes in the Internet and technology sectors lead to heavy trading
volume in securities markets. The rate of increase in transactions processed
has outpaced the increase in revenues from clearing, because, in recent years,
the Company has increased the number of high-volume trading Correspondents in
its customer base, and a substantial portion of the increase in transactions
processed were related to these Correspondents. These customers use a
relatively low level of clearing services and, accordingly, are charged
substantially discounted clearing fees from the Company's standard clearing
schedule. As transaction volumes increase, revenue per clearing transaction
tends to decrease as Correspondents take advantage of volume discounts.
Net revenues from clearing increased $3,914,000, or 17%, from 1997 to 1998,
primarily as a result of an increased number of Correspondents and an increase
in total transaction volumes. The number of Correspondents increased to 231 at
June 26, 1998 from 227 at June 27, 1997, an increase of 1.7%. Total
transactions processed in fiscal 1998 increased 106% to approximately 6.8
million from approximately 3.3 million in fiscal 1997.
Commissions. Commissions from the Company's client transactions increased
$5,647,000 to $65,048,000, an increase of 10% when compared with revenues in
fiscal 1998 of $59,401,000. This increase is primarily attributable to an
increase in fixed income sales, as well as an increase in the number of brokers
in the Company's independent contractor network. Fixed income sales increased
46% over the prior fiscal year. The number of independent contractor sales
representatives increased to 710 at June 25, 1999 from 697 at June 26, 1998.
Also contributing to the increase were increased commissions from
Mydiscountbroker.com, Inc. ("MDB"), the Company's on-line investing subsidiary
which began offering on-line trading in the third
14
<PAGE>
quarter of fiscal 1998. Commissions at MDB increased approximately 193% over the
prior year. The number of MDB on-line accounts increased approximately 393% from
June 26, 1998 to June 25, 1999.
Commissions from the Company's client transactions in fiscal 1998 increased
$20,519,000 to $59,401,000, an increase of 53% when compared with revenues in
fiscal 1997 of $38,882,000. This increase was evenly divided between the
Southwest Securities, Inc. ("Southwest") Private Client Group network and the
SWS Financial Services, Inc. ("SWSFS"), formerly Brokers Transaction Services,
independent contractor network. Commissions from account executives increased
due to increased sales to individual and institutional investors of (1)
offerings managed or co-managed by the Company, (2) over-the-counter corporate
bonds and (3) mutual funds. The increase in SWSFS commissions was primarily
related to an increased number of independent contractor sales representatives.
The number of independent contractors was 697 and 536 at June 26, 1998 and June
27, 1997, respectively.
Net Interest Income. The Company's net interest income is dependent upon the
level of customer and stock loan balances as well as the spread between the rate
it earns on those assets compared with the cost of funds. The components of
interest earnings are as follows (in thousands):
<TABLE>
<CAPTION>
June 25, June 26, June 27,
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Interest revenue:
Customer margin accounts $ 47,865 $ 39,662 $ 28,906
Assets segregated for regulatory purposes 11,511 9,806 15,190
Stock borrowed 80,688 83,332 65,906
Other 6,942 10,321 9,174
--------------- -------------- ------------
147,006 143,121 119,176
--------------- -------------- ------------
Interest expense:
Customer funds on deposit 31,870 27,723 28,365
Stock loaned 65,868 67,956 50,204
Other 2,213 5,025 4,669
--------------- -------------- ------------
99,951 100,704 83,238
--------------- -------------- ------------
Net interest $ 47,055 $ 42,417 $ 35,938
=============== ============== ============
</TABLE>
For the year ended June 25, 1999, net interest income accounted for 20% of the
Company's net revenue versus 23% in the prior fiscal year. Interest revenue from
customer margin balances and interest expense from customer funds on deposit
have fluctuated in relation to average balances over the past two fiscal years.
Net interest revenue generated from securities lending activities has remained
relatively stable in the current fiscal year versus the prior fiscal year.
Average customer balances and average balances from securities lending
activities are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
June 25, 1999 June 26, 1998
--------------------------------------
<S> <C> <C>
Average customer margin balances $ 604,000 $ 477,000
Average customer funds on deposit 699,000 544,000
Average stock borrowed 2,219,000 2,139,000
Average stock loaned 2,189,000 2,113,000
</TABLE>
Rates on customer margin balances and funds on deposit are influenced by changes
in leading market interest rates and competitive factors. Spreads on securities
lending transactions are influenced by the types of securities borrowed or
loaned, market conditions and counter-party risk. Securities lending
activities are conducted out of the Company's New York office using a highly
specialized sales force. Competition for these individuals is intense and there
can be no assurance that the Company will be able to retain these individuals.
15
<PAGE>
In fiscal 1998, net interest income accounted for 23% of the Company's net
revenue, while in fiscal 1997, net interest income was 27% of net revenue.
Interest income from customer accounts increased 37% in 1998 as compared to 1997
primarily due to increases in margin account balances as favorable market
conditions coupled with comparatively low interest rates made margin borrowing
popular. Additionally, the Company's acquisition of Equity in May of 1997
resulted in an increase in customer margin accounts of approximately $80
million. Interest expense related to customer funds on deposit in fiscal 1998
decreased 2% from 1997 due to a decrease in the average balances of customer
funds on deposit. During 1998, the Company transferred approximately $190
million of its customer funds on deposit to a money market mutual fund program
for which the Company acts as underwriter through its SWSFS subsidiary. The
transfers occurred as a result of the Company's offering new cash management
products to qualified plan customers. The decrease in average customer credit
balances caused a corresponding decrease in assets segregated for regulatory
purposes. Interest income from these assets declined $5,384,000, or 35%, in
fiscal 1998 versus fiscal 1997 as the average balance of these assets decreased
to $167,583,000 in 1998 versus $294,678,000 in 1997.
Interest income from stock borrowed transactions increased $17,426,000, or 26%,
in fiscal 1998 compared to fiscal 1997, while interest expense from stock loaned
transactions increased $17,752,000, or 35%. These increases were due to
increases in the average balances borrowed and loaned in the Company's conduit
business. Average stock borrowed balances increased 26% to $2,139,310,000 from
$1,696,668,000 in fiscal 1997 while average stock loaned balances increased 28%
to $2,112,604,000 from $1,656,708,000 in fiscal 1997.
Investment Banking, Advisory and Administrative Fees. Investment banking,
advisory and administrative fees include revenues derived from the underwriting
and distribution of corporate and municipal securities, unit trusts and money
market and other mutual funds. Investment banking, advisory and administrative
fees increased in fiscal 1999 when compared to fiscal 1998 due to increases in
fees from investment advisory services, offset by decreases in corporate and
municipal finance fees. Advisory fees earned on investment management increased
as assets under management at June 25, 1999 were approximately $3.5 billion
versus $2.9 billion at June 26, 1998. The number and offering amount of senior
and co-managed municipal finance offerings in which the Company participated
decreased 14% and 6%, respectively, over the prior year.
Investment banking, advisory and administrative fees in 1998 increased
$11,819,000, or 74%, to $27,850,000 when compared to $16,031,000 in fiscal 1997
due to increased volume of transactions in both equity and municipal investment
banking markets. Additionally, advisory fees earned on investment management
increased as average assets under management in 1998 were approximately $2.9
billion versus $2.2 billion in fiscal 1997.
Net Gains on Principal Transactions. Net gains on principal transactions have
experienced significant growth over prior year, increasing 231% to $41,689,000.
This growth is due to the expansion of the Company's equity trading area. The
number of market makers employed in this area has increased to 20 at June 25,
1999 from 15 at June 26, 1998, while coverage from market making activities has
increased to 544 over-the-counter securities and 61 exchange-listed securities
in which the Company makes a market. Revenue in this area can fluctuate
significantly from quarter to quarter based on market conditions.
Other Income. Other income decreased over the prior year due to non-recurring
revenue in fiscal 1998. The Parent owned a minority interest in Roundtable
Partners, LLC ("Roundtable"), the predecessor of Knight/Trimark Group, Inc.
("Knight"), which filed an S-1 registration statement with the U.S. Securities
and Exchange Commission on May 1, 1998 for an initial public offering of stock.
In accordance with the terms of the limited partnership agreement, prior to the
offering, previously undistributed earnings of Roundtable, approximately $3.7
million, were distributed to the Parent in fiscal 1998.
Other income increased $6,437,000, or 66%, to $16,203,000 for the year ended
June 26, 1998 primarily as a result of the transaction described above. The
remaining increase in other income was due to increased revenue from transaction
and account fees.
Commissions and Other Employee Compensation. Commissions and other employee
compensation are generally affected by the level of operating revenues, earnings
and the number of employees. During the fiscal year ended June 25, 1999,
commissions and other employee compensation expense increased over the same
periods in the prior year. This was principally due to (1) increased
commissions and benefits paid to revenue-producing employees generating higher
levels of operating revenues; (2) as previously discussed,
16
<PAGE>
increased headcount among the independent contractor network; and (3) the
addition of 149 full-time employees. The number of full-time employees increased
to 928 at June 25, 1999 compared to 779 at June 26, 1998. Approximately 57% of
the increased employee count relates to those employed in the information
technology area.
During fiscal 1998, commissions and other employee compensation expense
increased $26,755,000, or 41%, compared to the prior year. This was principally
due to (1) increased commissions and benefits paid to revenue-producing
employees generating higher levels of operating revenues; (2) increased
headcount among the Company's independent contractor network; (3) the addition
of 90 full-time employees, including 37 in the technology area; and (4)
increased incentive compensation accruals. The number of employees increased to
779 at June 26, 1998 compared to 689 at June 27, 1997.
Occupancy, Equipment and Computer Service Costs. Occupancy, equipment and
computer service costs increased primarily due to upgrades in computer
processing equipment as the Company continues to focus its resources on the
implementation of its new brokerage software, Comprehensive Software Systems,
Ltd. ("CSS") (see YEAR 2000 discussion below) as well as the redesign of the
Company's customer statements.
Occupancy, equipment and computer service costs increased $5,447,000, or 45%,
during fiscal 1998 primarily due to upgrades in computer processing equipment,
an increase in office space and the completion of the remodeling of the
Company's headquarters.
Communications. Communications expense increased 10% and 13%, respectively, in
fiscal years 1999 and 1998, due to expanded computer networking and the
expansion of the equity trading area.
Other Expenses. In fiscal 1999, other expenses increased 19% primarily due to
increases in contract labor, professional services and promotional expenses.
Contract labor and professional service expenses relate to, among other things,
the Company's involvement in developing Year 2000 compliant software (see YEAR
2000 discussion below).
In fiscal 1998, other expenses increased $9,105,000, or 54%, to $26,043,000,
primarily due to increases in expenses associated with underwriting fixed income
securities, consulting and legal services and increases in the Company's
litigation and other reserves.
FINANCIAL CONDITION
The Parent's investment in Knight is classified as marketable equity securities
available for sale, and the unrealized holding gain, net of tax, is recorded as
other comprehensive income as a part of stockholders' equity on the consolidated
statements of financial condition in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." At June 25, 1999, the Parent owned approximately 3.3 million
shares of Knight, as adjusted for the two-for-one stock split effective May 17,
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are substantially liquid in nature and consist mainly of
cash or assets readily convertible into cash. These assets are financed by the
Company's equity capital, short-term bank borrowings, interest bearing and non-
interest bearing client credit balances, correspondent deposits and other
payables. The Company maintains an allowance for doubtful accounts which
represents amounts, in the judgment of management, that are necessary to
adequately absorb losses from known and inherent risks in receivables from
clients, clients of correspondents and correspondents.
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $192,500,000. These lines of credit are used primarily to
finance securities owned, securities held for correspondent broker/dealer
accounts and receivables in customers' margin accounts. These credit
arrangements are provided on an "as offered" basis and are not committed lines
of credit. Outstanding balances under these credit arrangements are due on
demand, bear interest at rates indexed to the federal funds rate and are
collateralized by securities of the Company and its clients. At June 25, 1999,
the amount outstanding under these secured arrangements was $2,700,000 which was
collateralized by securities held for firm accounts valued at $29,724,000. In
the opinion of management, these credit arrangements are adequate to meet the
short-term operating capital needs of the Company.
17
<PAGE>
In addition to the broker loan lines, the Company also has a $20,000,000
unsecured line of credit that is due on demand and bears interest at rates
indexed to the federal funds rate. There were no amounts outstanding at June 25,
1999 under this unsecured line of credit.
On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated
Notes (the "Notes") due June 30, 2004. At maturity, the principal of the notes
will be paid in shares of the Class A common stock of Knight or, at the option
of the Company, their cash equivalent. The Notes, which are in the form of
DARTS(SM) (or, "Derivative Adjustable Ratio Securities(SM)"), were issued in
denominations of $56.6875, the closing bid price of Knight on June 10, 1999. At
maturity, Noteholders are entitled to one share of Knight common stock for each
DARTS if the average price for the 20 days immediately preceding the Note's
maturity is equal to or less than the DARTS issue price. Noteholders are
entitled to .833 shares of Knight common stock for each DARTS if the average
price of Knight's common stock is 20% or more greater than the DARTS' issue
price. If the average price of the Knight common stock is between the Note's
issue price and 20% greater than the issue price, the exchange rate will be
determined by a formula.
Net cash used in operating activities during the fiscal year ended June 25, 1999
was $47,941,000. The use of cash was due to the increase in securities owned
and assets segregated for regulatory purposes and was adequately financed by
increased customer funds on deposit and the proceeds from the issuance of the
Notes.
The Company's broker/dealer subsidiaries are subject to the requirements of the
Securities and Exchange Commission relating to liquidity, capital standards and
the use of client funds and securities. The Company has historically operated
in excess of the minimum net capital requirements.
MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates, equity prices, and changes in credit ratings of the issuer.
The Company's exposure to market risk is directly related to its role as a
financial intermediary in customer-related transactions and to its proprietary
trading activities.
Interest Rate Risk. Interest rate risk is a consequence of maintaining
inventory positions and trading in interest-rate-sensitive financial
instruments. The Company does not maintain material positions in interest-rate-
sensitive financial instruments. The Company's fixed income activities also
expose it to the risk of loss related to changes in credit spreads. Credit
spread risk arises from the potential that changes in an issuers credit rating
or credit perception could affect the value of financial instruments.
Equity Price Risk. The Company is exposed to equity price risk as a result of
making markets in equity securities. Equity price risk results from changes in
the level or volatility of equity prices, which affect the value of equity
securities or instruments that derive their value from a particular stock, a
basket of stocks or a stock index.
Credit Risk. Credit risk arises from the potential nonperformance by
counterparties, customers or debt security issuers. The Company is exposed to
credit risk as a trading counterparty to dealers and customers, as a holder of
securities and as a member of exchanges and clearing organizations.
Managing Risk Exposure. The Company manages risk exposure through the
involvement of various levels of management. Position limits in trading and
inventory accounts are well established and monitored on an ongoing basis.
Current and proposed underwriting, banking and other commitments are subject to
due diligence reviews by senior management, as well as professionals in the
appropriate business and support units involved. Credit risk related to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral. The Company monitors its exposure to counterparty risk
through the use of credit exposure information, the monitoring of collateral
values and the establishment of credit limits.
Market Risk Analysis. The Company has performed an analysis of the Company's
financial instruments and has assessed the related risk and materiality in
accordance with the rules. Based on this analysis, in the opinion of
management, the market risk associated with the Company's financial instruments
at June 25, 1999 will not have a material adverse effect on the consolidated
financial position or operating results of the Company.
18
<PAGE>
YEAR 2000
The widespread use of computer programs that rely on two-digit date programs to
perform computations and decision-making functions may cause information
technology ("IT") systems to malfunction in the Year 2000 and may lead to
significant business delays in the U.S. and internationally. The Year 2000
problem has the potential to impact the securities industry since information is
moved to and from the exchanges and trading partners on a real-time basis from
computer system to computer system with little human interaction. In addition
to potential problems from computer systems, potential problems could arise from
equipment with embedded chips, such as fax machines, elevators and other non-IT
systems.
The Company has defined a Year 2000-compliant system as one capable of correct
identification, manipulation and calculation when processing data in connection
with the year change from December 31, 1999 to January 1, 2000. A Year 2000-
compliant system is also capable of correct identification, manipulation and
calculation using leap years both alone and in conjunction with other dates.
The Company's systems are compliant under the above definition. The Company
addressed issues with regard to Year 2000 compliance as described below.
In the first stage, the Company prepared an inventory of all IT and non-IT
systems, as well as equipment that could have embedded chips, whether or not
critical to the operation of the business. The Company also compiled a listing
of material relationships with third parties. These relationships include
various exchanges, clearing houses, banks, telecommunications companies and
public utilities. This stage of the Year 2000 process is 100% complete. The
Company continually reviews areas of the business to address any new items added
since the initial inventories.
In stage two, results from the inventory discussed above were assessed to
determine the Year 2000 impact and what actions needed to be taken to obtain
Year 2000 compliance. For the Company's internal systems, actions needed ranged
from obtaining vendor certification of Year 2000 compliance, remediation of
internal systems or replacement of systems and equipment that could not be
remediated. This stage is 100% complete. The Company has determined a course
of action for remediation or replacement of all critical internal systems. The
Company continues surveying and obtaining information about Year 2000 readiness
of its material third-party relationships. Contingency plans have been
developed for those third parties who cannot satisfactorily demonstrate Year
2000 compliance. The plans are continually refined, updated and tested as
changes in third-party readiness occurs.
The third stage includes the repair, replacement or retirement of systems. This
stage of the Year 2000 process is complete. The Company has upgraded packaged
software throughout the organization. Desktop system upgrades and upgrades of
the communications infrastructure are finished. The main telephone switch and
critical branch office switches have been upgraded where necessary, and upgraded
network operating systems have been loaded into place. The rollout of the Year
2000 compliant version of the BRASS(R) Equity Trading System has also been
completed.
The primary financial system used for financial reporting purposes for the
Company was replaced during fiscal 1998 to prepare for Year 2000 as well as to
derive other benefits from the financial reporting system. Updates to this
system were installed in the second quarter of fiscal 1999 and testing was
completed in the third quarter of fiscal 1999. The financial system itself is
certified by the vendor as Year 2000 compliant.
The Company's primary operational system is the Securities Industry Software
("SIS") application, which provides both front- and back-office services to
Correspondents, customers and our internal users. For several years, the
Company has self-supported the SIS application. The Company has been pursuing a
replacement strategy for SIS and is implementing a new client-server based
information system ("CSS"). CSS is being developed by Comprehensive Software
Systems, Ltd., an entity in which several securities firms own interests,
including the Company, which owns an 8.18% interest.
While replacement of the SIS system with CSS was our primary solution for Year
2000 issues associated with the SIS system, in September 1998 the Company
engaged an independent consulting firm to begin remediation of the SIS system.
As of June 30, 1999, 100% of the code was remediated by the consulting firm,
tested by the Company and installed in the production environment.
The Company has been working on the CSS project since 1992, as implementation of
this system was in process before the Company began assessment of critical Year
2000 issues. In fiscal 1997, the Company accelerated the pace of the CSS project
so that it would be available as the Year 2000 solution for the SIS system.
Through fiscal 1997 and 1998, costs associated with the joint venture, including
personnel,
19
<PAGE>
hardware, software and related costs, were approximately $4 million. During
fiscal 1997 and 1998, the Company incurred an additional $1 million in costs
related to the Year 2000 project primarily related to compensation and benefits,
software upgrades and hardware replacement for financial and other systems. In
fiscal 1999, the Company has incurred an additional $8.4 million in expenses
related to the CSS project and other Year 2000 initiatives. Implementation of
the CSS system should result in the reduction of certain existing hardware and
software lease, maintenance and licensing costs.
In the first half of fiscal 2000, the Company expects to incur an additional
$600,000 related to Year 2000 project costs. These costs will be funded out of
working capital and substantially all will be expensed. The budgeted
expenditures include compensation and benefits for IT and other operational
staff.
The Company is also heavily dependent upon the power and telecommunications
infrastructure within the United States and would be subject to business
interruptions as a result of the failure of those systems. Additionally, the
Company would experience disruption in certain of its businesses if the various
exchanges, clearing houses or banks used by the Company reported a system
failure. The Company is communicating with these third parties in order to
obtain assurances regarding Year 2000 readiness. The Company's contingency plans
also address potential failure of these systems.
The last stage of the implementation process includes testing all of the changes
implemented individually and integrating those changes with all of the Company's
systems and those of its customers and trading partners. Testing takes on
various forms depending on the type of change implemented. Each upgrade, to the
extent economically feasible, is run through a test environment before it is
implemented. It is then tested to see how well it integrates into the Company's
overall IT environment. The Company has also engaged in point-to-point testing
with various exchanges, clearing houses and utilities and has established a
future date environment for testing the CSS and SIS applications. The Company
participated in the Securities Industry Association's industry-wide testing
which occurred over a series of weekends in March and April 1999 and simulated
the first trading cycle to settle in the Year 2000. The Company successfully
completed each phase of the testing. Additional tests have continued with
vendors not included in the industry-wide test as well as with Correspondent
customers. There are no material unresolved Year 2000 testing exceptions as of
June 25, 1999.
The Company has prepared contingency plans that deal with a variety of failures
that could potentially be caused by Year 2000 or other problems. These plans
range from global issues like the loss of a major stock exchange or utility, to
infrastructure issues like the loss of the primary data communications carrier
or regional electrical power supplier, to failures within the Company's
facilities like the loss of an owned telephone switch or the failure of an
internally maintained application. The Company will continue to refine and test
these plans up through the Year 2000 as the various exchanges and utilities
update their plans for different kinds of failures. Testing related to
contingency plans will focus on those failures we assume are more likely to
occur because of incomplete work or inadequate information on the part of
mission critical vendors. As a part of the contingency planning process, the
Company is preparing a formal command center at both the primary and backup
facilities.
Although the Company's mission critical systems are Year 2000 compliant, there
are many factors beyond the Company's control that could have an adverse effect.
The Company continues to work diligently to minimize the potential impact of
such external forces on its Year 2000 readiness.
ACQUISITION OF ASBI HOLDINGS, INC.
On August 10, 1999, the Company signed a definitive merger agreement to acquire
ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB,
Arlington, Texas. The agreement provides that the Company will issue 2.6 million
shares of its common stock to the holders of all of the outstanding stock of
ASBI. Don A. Buchholz serves as chairman of both the Company and ASBI, and is
the beneficial owner of approximately 7.0% of the Company's outstanding voting
securities. Mr. Buchholz is the beneficial owner of approximately 19.3% of the
outstanding securities of ASBI, and he exercises voting control for
approximately 58.6% of ASBI's outstanding voting securities. The acquisition is
expected to be accounted for by the pooling-of-interests method and is subject
to regulatory and shareholder approval.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" was issued in June 1997 and establishes standards for
reporting and display of comprehensive income and its
20
<PAGE>
components in a set of general-purpose financial statements. The Company adopted
SFAS 130 in the first quarter of fiscal 1999. All prior periods have been
restated to conform with SFAS 130.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in June
1997. This statement establishes standards for the way that a public business
enterprise reports information about operating segments in the annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports to shareholders. The Company adopted SFAS
131 in the fiscal 1999 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires derivatives to be recognized
in the consolidated statements of financial condition at fair value. Changes in
such fair value are required to be recognized in earnings to the extent the
derivative is not effective as a hedge. This statement will apply to the
Company's 5% Exchangeable Subordinated Notes and the Company's underlying
investment in Knight common stock. The impact on the financial statements will
depend on a variety of factors, including future interpretive guidance from the
FASB. Management is currently reviewing the impact of this new pronouncement,
and the impact on the Company's financial position is unknown at this time. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999 and should
be applied prospectively. However, the FASB has subsequently issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of
the Effective Date of FASB Statement No. 133" which postpones initial
application until fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 in fiscal 2001.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the caption Market Risk.
Item 8. Financial Statements and Supplementary Data
(a) Financial statements, schedules and exhibits filed under this item are
listed in the index appearing on page F-1 of this report.
(b) QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $73,197 $79,296 $90,042 $94,735
Income before income taxes $ 7,356 $ 9,351 $11,706 $12,107
Net income $ 4,683 $ 6,142 $ 7,533 $ 7,861
Earnings per share - basic /(2)/ $ .40 $ .52 $ .64 $ .67
Earnings per share - diluted /(2)/ $ .40 $ .52 $ .64 $ .66
Cash dividend declared per common share /(2)/ $ .063 $ .063 $ .063 $ .063
Stock Price Range /(2)/
High $ 22.90 $ 22.73 $ 36.99 $ 76.36
Low $ 14.72 $ 14.44 $ 19.15 $ 25.69
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
Revenues $65,296 $70,465 $68,841 $81,156
Income before income taxes $ 7,785 $ 8,405 $ 7,369 $ 8,339
Net income $ 5,045 $ 5,390 $ 4,863 $ 5,332
Earnings per share - basic /(1) (2) (3)/ $ .43 $ .45 $ .42 $ .45
Earnings per share - diluted /(1) (2) (3)/ $ .43 $ .45 $ .41 $ .45
Cash dividend declared per common share /(1) (2)/ $ .052 $ .052 $ .052 $ .052
Stock Price Range /(1) (2)/
High $ 21.26 $ 23.65 $ 23.81 $ 25.87
Low $ 15.25 $ 18.29 $ 19.05 $ 19.86
</TABLE>
21
<PAGE>
(1) Adjusted to reflect a ten percent stock dividend which was effective
October 1, 1997 and a five percent stock dividend which was effective
August 3, 1998.
(2) Adjusted to reflect a ten percent stock dividend declared May 6, 1999,
payable on August 2, 1999 to shareholders of record on July 15, 1999.
(3) The first quarter of fiscal 1998 was adjusted to reflect the implementation
of Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to executive officers of the registrant, see
"Executive Officers of the Registrant" at the end of Part I, Item 1 of this
report.
The information under the heading "Proposal One - Election of Directors" in the
definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders
to be filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120
days after the Company's fiscal year end is incorporated herein by reference.
Item 11. Executive Compensation
The information under the subheading "Executive Compensation" under the heading
"Management" in the definitive Proxy Statement for the Company's 1999 Annual
Meeting of Stockholders to be filed with the Commission pursuant to Regulation
240.14a (6)(c) within 120 days after the Company's fiscal year end is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the subheading "Stock Ownership of Principal Owners and
Management" under the heading "Management" in the definitive Proxy Statement for
the Company's 1999 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 240.14a (6)(c) within 120 days after the
Company's fiscal year end is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the heading "Proposal One - Election of Directors"; under
the subheadings "Background of the Transaction" and "Relationship of the Parties
and Interests of Certain Persons in the Transaction" under the heading "Proposal
Two - Issuance of 2,600,000 Shares of Common Stock in Connection with the
Proposed Acquisition of ASBI Holdings, Inc."; and under the heading "Management"
in the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 240.14a
(6)(c) within 120 days after the Company's fiscal year end is incorporated
herein by reference.
22
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as a part of the report:
1. Exhibits required by this Item are either listed in the index appearing
on page F-1 of this report or have been previously filed with the SEC.
2. The following consolidated financial statement schedules of the
Registrant and its subsidiaries, and Independent Auditors' Report
thereon, are attached hereto as required by Item 14 (d):
<TABLE>
<CAPTION>
Exhibit Number
--------------
<S> <C>
S-1 Schedule I - Condensed Financial Information of Registrant
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
3. The following exhibits of the Registrant and its subsidiaries are
attached hereto as required by Item 14(d):
<TABLE>
<CAPTION>
Exhibit Number
--------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of August
10, 1999 between the Registrant and ASBI Holdings, Inc.*
3.1 Certificate of Incorporation of the Registrant
incorporated by reference to the Registrant's
Registration Statement No. 33-42338 filed August 21, 1991
3.2 By-laws of the Registrant incorporated by reference to
Amendment No. 1 to the Registrant's Registration
Statement No. 33-42338 filed October 7, 1991
3.3 Certificate of Amendment of Certificate of
Incorporation incorporated by reference to the
Registrant's Annual Report on Form 10-K filed September 25, 1997
10.1 Deferred Compensation Plan*
10.2 Employee Stock Purchase Plan incorporated by reference
to the Registrant's Registration Statement on Form S-8,
filed November 10, 1994 (Registration No. 33-86234)
10.3 Stock Option Plan incorporated by reference to the
Registrant's Proxy Statement filed September 24, 1996
10.4 Phantom Stock Plan incorporated by reference to the
Registrant's Proxy Statement filed September 24, 1996
10.5 1997 Stock Option Plan incorporated by reference to the
Registrant's Annual Report on Form 10-K filed September24,
1998
10.6 Stock Purchase Plan (Restated) incorporated by
reference to the Registrant's Quarterly Report on Form
10-Q filed February 16, 1999
12 Computation of Ratio of Earnings to Fixed Charges*
23 Consent of KPMG LLP*
27 Financial Data Schedule*
99 Press Release dated June 6, 1999 filed as an exhibit to
Current Report on Form 8-K filed on June 7, 1999
</TABLE>
* Filed herewith
23
<PAGE>
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on June 7, 1999. Item 5 of the
referenced Report refers to the Company's press release dated June 6, 1999
announcing the execution of a Letter of Intent to acquire ASBI Holdings, Inc.
No financial statements were filed with the Report.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Southwest Securities Group, Inc.
------------------------------------------------
(Registrant)
September 23, 1999 /S/ David Glatstein
- ------------------ ------------------------------------------------
(Date) (Signature)
David Glatstein
Director and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
September 23, 1999 /S/ Don A. Buchholz
- ------------------ ------------------------------------------------
(Date) (Signature)
Don A. Buchholz
Chairman of the Board
September 23, 1999 /S/ David Glatstein
- ------------------ ------------------------------------------------
(Date) (Signature)
David Glatstein
Director and Chief Executive Officer
(Principal Executive Officer)
September 23, 1999 /S/ Stacy M. Hodges
- ------------------ ------------------------------------------------
(Date) (Signature)
Stacy M. Hodges
Treasurer and Chief Financial Officer
(Principal Financial Officer)
September 23, 1999 /S/ Laura Leventhal
- ------------------ ------------------------------------------------
(Date) (Signature)
Laura Leventhal
Controller
(Principal Accounting Officer)
September 23, 1999
- ------------------ ________________________________________________
(Date) (Signature)
Brodie L. Cobb
Director
September 23, 1999
- ------------------ ________________________________________________
(Date) (Signature)
J. Jan Collmer
Director
25
<PAGE>
September 23, 1999
- ------------------ ________________________________________________
(Date) (Signature)
R. Jan LeCroy
Director
September 23, 1999 /S/ Frederick R. Meyer
- ------------------ ------------------------------------------------
(Date) (Signature)
Frederick R. Meyer
Director
September 23, 1999 /S/ Jon L. Mosle, Jr.
- ------------------ ------------------------------------------------
(Date) (Signature)
Jon L. Mosle, Jr.
Director
26
<PAGE>
SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE(S)
<S> <C>
Consolidated Statements of Financial Condition F-2
as of June 25, 1999 and June 26, 1998
Consolidated Statements of Income and Comprehensive Income F-3
for the years ended June 25, 1999, June 26, 1998 and June 27, 1997
Consolidated Statements of Stockholders' Equity F-4
for the years ended June 25, 1999, June 26, 1998 and June 27, 1997
Consolidated Statements of Cash Flows F-5
for the years ended June 25, 1999, June 26, 1998 and June 27, 1997
Notes to Consolidated Financial Statements F-6-18
Independent Auditors' Report F-19
</TABLE>
F-1
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 25, 1999 and June 26, 1998
(In thousands, except par values and share amounts)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Assets
<S> <C> <C>
Cash $ 11,334 $ 13,706
Assets segregated for regulatory purposes 225,736 130,728
Marketable equity securities available for sale 172,928 --
Receivable from brokers, dealers and clearing organizations 3,088,005 2,365,635
Receivable from clients, net 679,652 648,464
Securities owned, at market value 74,486 32,144
Other assets 41,133 29,429
----------- -----------
$4,293,274 $3,220,106
=========== ===========
Liabilities and Stockholders' Equity
Short-term borrowings $ 2,700 $ --
Payable to brokers, dealers and clearing organizations 3,000,096 2,293,731
Payable to clients 812,559 720,813
Securities sold, not yet purchased, at market value 24,350 1,662
Drafts payable 37,013 41,688
Other liabilities 104,222 36,745
Exchangeable subordinated notes 50,000 --
----------- -----------
4,030,940 3,094,639
Minority interest in consolidated subsidiary 50 --
Stockholders' equity:
Preferred stock of $1.00 par value. Authorized 100,000 shares;
none issued -- --
Common stock of $.10 par value. Authorized 20,000,000 shares;
issued and outstanding 11,805,925 shares in 1999;
issued 10,687,583 and outstanding 10,678,406 shares in 1998. 1,180 1,069
Additional paid-in capital 127,092 69,462
Accumulated other comprehensive income - unrealized
holding gain, net of tax of $60,374 112,123 --
Retained earnings 21,896 55,022
Receivable from employees under the Employee Stock
Purchase Plan (7) (12)
Treasury stock (9,177 shares, at cost, in 1998) -- (74)
----------- -----------
Total stockholders' equity 262,284 125,467
----------- -----------
Commitments and contingencies
$4,293,274 $3,220,106
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues from clearing operations $ 40,118 $ 26,607 $ 22,693
Commissions 65,048 59,401 38,882
Interest 147,006 143,121 119,176
Investment banking, advisory and administrative fees 29,100 27,850 16,031
Net gains on principal transactions 41,689 12,576 11,856
Other 14,309 16,203 9,766
----------- ----------- -----------
337,270 285,758 218,404
----------- ----------- -----------
Commissions and other employee compensation 124,691 91,817 65,062
Interest 99,951 100,704 83,238
Occupancy, equipment and computer service costs 21,343 17,663 12,216
Communications 13,738 12,509 11,026
Floor brokerage and clearing organization charges 6,129 5,124 4,181
Other 30,898 26,043 16,938
----------- ----------- -----------
296,750 253,860 192,661
----------- ----------- -----------
Income before income taxes 40,520 31,898 25,743
Income taxes 14,301 11,268 8,760
----------- ----------- -----------
Net income 26,219 20,630 16,983
Other comprehensive income - unrealized holding gain
arising during period, net of tax of $60,374 112,123 -- --
----------- ----------- -----------
Comprehensive income $ 138,342 $ 20,630 $ 16,983
=========== =========== ===========
Earnings per share - basic $ 2.23 $ 1.76 $ 1.51
=========== =========== ===========
Earnings per share - diluted $ 2.21 $ 1.75 $ 1.51
=========== =========== ===========
Weighted average shares outstanding - basic 11,766,377 11,743,228 11,269,666
=========== =========== ===========
Weighted average shares outstanding - diluted 11,838,723 11,763,605 11,282,885
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Receivable
from
employees
under
Accumulated Employee
Additional other Stock
Common Stock paid-in comprehensive Retained Purchase Treasury
Shares Amount capital income earnings Plan stock Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 28, 1996 8,783,630 $ 879 $ 27,107 $ -- $ 56,815 $(278) $(74) $ 84,449
Net income -- -- -- -- 16,983 -- -- 16,983
Dividends ($.15/share) -- -- -- -- (1,779) -- -- (1,779)
Issuance of common stock for
acquisition 445,845 45 7,089 -- -- -- -- 7,134
Stock dividend declared on
August 28, 1997 922,947 92 21,943 -- (22,035) -- -- --
Proceeds from employees for
Employee Stock Purchase Plan -- -- -- -- -- 141 -- 141
---------------------------------------------------------------------------------------------
Balance at June 27, 1997 10,152,422 1,016 56,139 -- 49,984 (137) (74) 106,928
Net income -- -- -- -- 20,630 -- -- 20,630
Dividends ($.21/share) -- -- -- -- (2,441) -- -- (2,441)
Exercise of stock options 16,000 2 498 -- (275) -- -- 225
Stock dividend on exercised options 1,600 -- 38 -- (38) -- -- --
Adjustment for fractional shares
on stock dividend declared on
August 28, 1997 (36) -- -- -- -- -- -- --
Stock dividend declared on
May 22, 1998 508,420 51 12,787 -- (12,838) -- -- --
Proceeds from employees for
Employee Stock Purchase Plan -- -- -- -- -- 125 -- 125
---------------------------------------------------------------------------------------------
Balance at June 26, 1998 10,678,406 1,069 69,462 -- 55,022 (12) (74) 125,467
Net income -- -- -- -- 26,219 -- -- 26,219
Dividends ($.25/share) -- -- -- -- (2,997) -- -- (2,997)
Exercise of stock options 36,465 3 2,391 -- (1,285) -- -- 1,109
Stock dividend declared on
May 6, 1999 1,073,266 107 54,956 -- (55,063) -- -- --
Unrealized holding gain, net of
tax of $60,374 -- -- -- 112,123 -- -- -- 112,123
Proceeds from employees for
Employee Stock Purchase Plan -- -- -- -- -- 5 -- 5
Reissuance of treasury stock for
Stock Purchase Plan 9,177 -- 101 -- -- -- 74 175
Issuance of common stock and
amortization of deferred
compensation expense for Stock
Purchase Plan 8,611 1 182 -- -- -- -- 183
---------------------------------------------------------------------------------------------
Balance at June 25, 1999 11,805,925 $1,180 $127,092 $112,123 $ 21,896 $ (7) $ -- $262,284
=============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 26,219 $ 20,630 $ 16,983
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 3,057 3,426 2,750
Provision for doubtful accounts 625 1,241 --
Deferred income taxes (1,086) (371) (1,198)
Deferred compensation expense 62 -- --
Decrease (increase) in assets segregated for regulatory
purposes (95,008) 221,469 (128,167)
Net change in broker, dealer and clearing organization
accounts (16,005) 70,789 1,452
Net change in client accounts 59,933 (321,983) 203,161
Decrease (increase) in securities owned (42,342) (223) 2,672
Decrease (increase) in other assets (8,274) (179) 4,089
Increase (decrease) in drafts payable (4,675) 10,652 5,878
Increase (decrease) in securities sold, not yet purchased 22,688 (3,640) 4,545
Increase in other liabilities 6,865 11,556 3,770
---------- --------- ---------
Net cash provided by (used in) operating activities (47,941) 13,367 115,935
---------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets (3,472) (3,525) (7,597)
Proceeds from sale of fixed assets -- -- 96
---------- --------- ---------
Net cash used in investing activities (3,472) (3,525) (7,501)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of exchangeable subordinated notes 50,000 -- --
Debt issue costs (1,813) -- --
Net change in short-term borrowings 2,700 (4,000) (100,984)
Payments on liabilities subordinated to claims of
general creditors -- (1,400) --
Proceeds from employees for Employee Stock Purchase Plan 5 125 141
Proceeds from employees for Stock Purchase Plan 296 -- --
Net proceeds from exercise of stock options 659 225 --
Net proceeds from issuance of stock of consolidated subsidiary 50 -- --
Payment of cash dividends on common stock (2,856) (1,831) (2,130)
---------- --------- ---------
Net cash provided by (used in) financing activities 49,041 (6,881) (102,973)
---------- --------- ---------
Net increase (decrease) in cash (2,372) 2,961 5,461
Cash at beginning of year 13,706 10,745 5,284
---------- --------- ---------
Cash at end of year $ 11,334 $ 13,706 $ 10,745
========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
(a) General and Basis of Presentation
The consolidated financial statements include the accounts of Southwest
Securities Group, Inc. ("Parent") and its consolidated subsidiaries listed below
(collectively, the "Company"):
<TABLE>
<S> <C>
Southwest Securities, Inc. "Southwest"
SWS Financial Services, Inc. "SWSFS"
(formerly Brokers Transaction Services, Inc.)
Mydiscountbroker.com, Inc. "MDB"
(formerly Sovereign Securities, Inc.)
NorAm Investment Services, Inc. "NorAm"
Southwest Clearing Corporation "Clearing"
Westwood Management Corporation "Westwood"
Westwood Trust "Trust"
SW Capital Corporation "Capital"
Southwest Investment Advisors, Inc. "Advisors"
SWS Technologies Corporation "Technologies"
(formerly SWST Computer Corp.)
</TABLE>
Southwest, SWSFS, MDB and NorAm are National Association of Securities Dealers
("NASD") registered broker/dealers under the Securities Exchange Act of 1934
("1934 Act"). NorAm was acquired May 1, 1997 through the issuance of 445,845
shares of common stock. The acquisition was accounted for under the purchase
method of accounting, and, accordingly, assets and liabilities were recorded at
their fair market values on the date of acquisition. Goodwill relating to this
acquisition of approximately $5,113,000 is recorded in other assets in the
accompanying consolidated statements of financial condition. NorAm was sold in
August 1999 (Note 19). Clearing was incorporated in the State of Delaware on
September 30, 1998 and has not yet begun operations.
Advisors and Westwood are registered investment advisors under the Investment
Advisors Act of 1940. Trust is chartered and regulated by the Texas Department
of Banking. All significant intercompany balances and transactions have been
eliminated.
The annual consolidated financial statements are prepared as of the close of
business on the last Friday of June. Accordingly, the fiscal years for 1999,
1998 and 1997 ended June 25, 1999, June 26, 1998 and June 27, 1997,
respectively.
(b) Securities Transactions
Securities transactions are recorded on a settlement date basis with such
transactions generally settling three business days after trade date. Revenues
and expenses related to such transactions are also recorded on settlement date,
which is not materially different than trade date.
(c) Securities Owned
Marketable securities are carried at quoted market value. The increase or
decrease in net unrealized appreciation or depreciation of securities owned is
credited or charged to operations and is included in net gains on principal
transactions in the consolidated statements of income and comprehensive income.
As of December 31, 1998, the Company began determining the market value of these
securities on a trade date basis rather than a settlement date basis.
(d) Depreciation and Amortization
Depreciation of furniture and equipment is provided over the estimated useful
lives of the assets (5 or 7 years), and depreciation on leasehold improvements
is provided over the lease term (up to 9 years). Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is amortized on
a straight-line basis over periods to be benefited ranging from twenty-five to
forty years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation.
F-6
<PAGE>
(e) Drafts Payable
In the normal course of business, the Company uses drafts to make payments
relating to its brokerage transactions. These drafts are presented for payment
through the Company's bank and are sent to the Company daily for review and
acceptance. Upon acceptance, the drafts are paid and charged against cash.
(f) Reverse Repurchase and Repurchase Agreements
Securities purchased under agreements to resell ("Reverse Repurchase
Agreements") and securities sold under agreements to repurchase ("Repurchase
Agreements") are carried at the amounts at which these securities will be
subsequently resold or reacquired as specified in the respective agreements.
Management regularly monitors the market value of the underlying securities
relating to outstanding repurchase and reverse repurchase agreements.
(g) Federal Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) Cash Flow Reporting
For the purposes of the consolidated statements of cash flows, the Company
considers cash to include cash on hand and in depository accounts. Assets
segregated for regulatory purposes are not included as cash equivalents for
purposes of the consolidated statements of cash flows because such assets are
segregated for the benefit of customers only.
Cash paid during the year for interest was $99,935,000, $100,422,000 and
$82,936,000, in 1999, 1998 and 1997, respectively. Cash paid during the year
for income taxes was $18,691,000, $10,332,000 and $9,235,000 in 1999, 1998 and
1997, respectively.
In a non-cash transaction in 1999, the Parent received approximately 1.7 million
common shares (approximately 3.3 million shares after a two-for-one stock split
effective May 17, 1999) of Knight/Trimark Group, Inc. ("Knight") subsequent to
Knight's initial public offering completed July 10, 1998. During 1997, the
Company issued common stock valued at approximately $7,134,000 related to the
acquisition of NorAm.
(i) Earnings Per Share
The Company has adopted and retroactively applied the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" for all
periods presented. SFAS No. 128 requires dual presentation of basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing net income by
weighted average common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if contracts to issue common stock were
exercised.
(j) Minority Interest
Southwest has issued 50 shares of Series A Preferred Stock at $1,000 per share
to certain qualified broker/dealers. Qualified broker/dealers are broker/dealers
registered under the 1934 Act who clear their proprietary transactions through
Southwest and who represent that they are subject to net capital rules of the
SEC and other self-regulatory organizations to which such broker/dealers report.
A total of 5,000 shares of Series A Preferred Stock are reserved for issuance to
such broker/dealers. This investment by third-parties in Southwest is
classified as minority interest in consolidated subsidiary on the Consolidated
Statements of Financial Condition.
(k) Stock-Based Compensation
The Company accounts for employee stock-based compensation using the intrinsic
value method of accounting prescribed by Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company provides pro
forma disclosures of net income and earnings per share for stock option grants
as if the fair value based method had been applied. Prior to fiscal year 1998,
the impact of recording the compensation expense related to the stock options
granted by the Company was not material to the consolidated financial
statements.
F-7
<PAGE>
(l) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(m) Fair Value of Financial Instruments
Substantially all of the Company's financial assets and liabilities are carried
at market value or at amounts which, because of their short-term nature,
approximate current fair value. The Company's short-term borrowings, if
recalculated based on current interest rates, would not significantly differ
from the amounts recorded at June 25, 1999. The fair value of exchangeable
subordinated notes, issued on June 16, 1999 would not significantly differ from
the amount recorded at June 25, 1999.
(n) Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and
establishes standards for reporting and display of comprehensive income and its
components in a set of general-purpose financial statements. The Company
adopted SFAS 130 in the first quarter of fiscal 1999. All prior periods have
been restated to conform with SFAS 130.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997. This statement establishes standards for the
way that a public business enterprise reports information about operating
segments in the annual financial statements and requires that those enterprises
report selected information about operating segments in interim reports to
shareholders. The Company adopted SFAS 131 in the fiscal 1999 financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires derivatives to be recognized
in the consolidated statements of financial condition at fair value. Changes in
such fair value are required to be recognized in earnings to the extent the
derivative is not effective as a hedge. This statement will apply to the
Company's 5% Exchangeable Subordinated Notes and the Company's underlying
investment in Knight common stock. The impact on the financial statements will
depend on a variety of factors, including future interpretive guidance from the
FASB. Management is currently reviewing the impact of this new pronouncement,
and the impact on the Company's financial position is unknown at this time.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and
should be applied prospectively. However, the FASB has subsequently issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" which postpones
initial application until fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133 in fiscal 2001.
2. ASSETS SEGREGATED FOR REGULATORY PURPOSES
At June 25, 1999, the Company had U.S. Treasury securities with a market value
of $28,465,000 and reverse repurchase agreements of $197,271,000 segregated in
special reserve bank accounts for the exclusive benefit of customers under Rule
15c3-3 of the 1934 Act. Reverse repurchase agreements at June 25, 1999 were
collateralized by U.S. Government securities with market values of approximately
$198,298,000.
At June 26, 1998, the Company had U.S. Treasury securities with a market value
of $59,515,000 and reverse repurchase agreements of $71,213,000 segregated in
these accounts. The reverse repurchase agreements were collateralized by U.S.
Government securities with market values of approximately $71,871,000 at June
26, 1998.
3. MARKETABLE EQUITY SECURITIES
The investment in Knight is classified as marketable equity securities available
for sale, and the unrealized holding gain, net of tax, is recorded as other
comprehensive income as a part of stockholders' equity on the consolidated
statements of financial condition. Subsequent to Knight's two-for-one stock
split effective May 17, 1999, the Company owns approximately 3.3 million shares
of Knight common stock.
F-8
<PAGE>
The following table summarizes the cost and market value of the investment in
Knight at June 25, 1999 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------
<S> <C> <C> <C> <C>
Marketable equity securities $432 172,496 -- $172,928
==========================================
</TABLE>
4. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
At June 25, 1999 and June 26, 1998, the Company had receivable from and payable
to brokers, dealers and clearing organizations related to the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Receivable:
Securities failed to deliver $ 27,505 $ 18,880
Securities borrowed 2,987,910 2,229,587
Correspondent broker/dealers 47,805 62,673
Clearing organizations 1,444 1,245
Other 23,341 53,250
------------- -------------
$ 3,088,005 $ 2,365,635
============= =============
Payable:
Securities failed to receive $ 23,634 $ 45,956
Securities loaned 2,945,007 2,227,874
Correspondent broker/dealers 15,273 11,300
Other 16,182 8,601
------------- -------------
$ 3,000,096 $ 2,293,731
============= =============
</TABLE>
Securities failed to deliver and receive represent the contract value of
securities that have not been delivered or received subsequent to settlement
date. Securities borrowed and loaned represent deposits made to or received from
other broker/dealers relating to these transactions. These deposits approximate
the market value of the underlying securities.
The Company clears securities transactions for Correspondent broker/dealers.
Settled securities and related transactions for these Correspondents are
included in the receivable from and payable to brokers, dealers and clearing
organizations.
The Company participates in the securities borrowing and lending business by
borrowing and lending securities other than those of its clients. All open
positions are adjusted to market values daily. The amounts receivable and
payable, relating to open positions for the securities borrowed and securities
loaned other than those of the Company's clients, were $2,963,865,000 and
$2,926,386,000, respectively, at June 25, 1999 and $2,192,459,000 and
$2,198,278,000, respectively, at June 26, 1998.
5. RECEIVABLE FROM AND PAYABLE TO CLIENTS
Receivable from and payable to clients include amounts due on cash and margin
transactions. Included in these amounts are receivable from and payable to
noncustomers (as defined by Rule 15c3-3 of the 1934 Act, principally officers,
directors and related accounts), which aggregated approximately $2,935,000 and
$4,794,000, respectively, at June 25, 1999 and $1,916,000 and $2,649,000,
respectively, at June 26, 1998. Securities accounts of noncustomers are subject
to the same terms and regulations as those of customers. Securities owned by
customers and noncustomers that collateralize the receivable are not reflected
in the accompanying consolidated financial statements.
The Company pays interest on certain customer "free credit" balances available
for reinvestment. The aggregate balance of such funds was approximately
$699,793,000 and $542,822,000 at June 25, 1999 and June 26, 1998, respectively.
During fiscal years 1999 and 1998, the interest rates paid on these balances
ranged from 4.0% to 4.75%.
F-9
<PAGE>
The Company maintains an allowance for doubtful accounts which represents
amounts, in the judgment of management, that are necessary to adequately absorb
losses from known and inherent risks in receivables from customers. Provisions
made to this allowance are charged to operations. At June 25, 1999 and June 26,
1998, all unsecured customer receivables had been provided for in this
allowance.
6. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased at June 25, 1999 and
June 26, 1998, which are carried at market value, include the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Securities owned
Corporate equity securities $ 35,671 $ 5,220
Municipal obligations 19,391 13,633
U.S. Government and Government agency obligations 9,470 8,696
Corporate obligations 4,114 1,479
Commercial paper -- 446
Other 5,840 2,670
----------- ----------
$ 74,486 $ 32,144
=========== ==========
Securities sold, not yet purchased
Corporate equity securities $ 14,972 $ 1,208
Municipal obligations 6,184 124
U.S. Government and Government agency obligations 2,491 175
Corporate obligations 372 98
Commercial paper -- 50
Other 331 7
----------- ----------
$ 24,350 $ 1,662
=========== ==========
</TABLE>
Certain of the above securities have been pledged to secure short-term
borrowings and as security deposits at clearing organizations for the Company's
clearing business. These pledged securities amounted to $3,647,000 and
$3,572,000 at June 25, 1999 and June 26, 1998, respectively.
7. SHORT-TERM BORROWINGS
The Company has credit arrangements with commercial banks, which include broker
loan lines up to $192,500,000. These lines of credit are used primarily to
finance securities owned, securities held for Correspondent broker/dealer
accounts and receivables in customers' margin accounts. These lines may also be
used to release pledged collateral against day loans. These credit arrangements
are provided on an "as offered" basis and are not committed lines of credit.
These arrangements can be terminated at any time by the lender. Any outstanding
balances under these credit arrangements are due on demand and bear interest at
rates indexed to the federal funds rate (4.63% at June 25, 1999). At June 25,
1999, the amount outstanding under these secured arrangements was $2,700,000
which was collateralized by securities held for firm accounts valued at
$29,724,000. There were no amounts outstanding at June 26, 1998 on these credit
arrangements.
The Company also has an irrevocable letter of credit agreement aggregating
$60,000,000 at June 25, 1999 and $32,000,000 at June 26, 1998 pledged to support
its open options positions with an options clearing organization. The letter of
credit bears interest at the brokers' call rate, if drawn, and is renewable
annually. This letter of credit is fully collateralized by marketable securities
held in clients' and nonclients' margin accounts with a value of $110,719,000
and $55,328,000 at June 25, 1999 and June 26, 1998, respectively.
In addition, the Company has a $20,000,000 unsecured line of credit that is due
on demand and bears interest at rates indexed to the federal funds rate. There
were no amounts outstanding on this unsecured line of credit at either June 25,
1999 or June 26, 1998.
F-10
<PAGE>
At June 25, 1999 and June 26, 1998, the Company had no repurchase agreements
outstanding.
8. INCOME TAXES
Income tax expense for the fiscal years ended June 25, 1999, June 26, 1998 and
June 27, 1997 (effective rate of 35.3% in 1999 and 1998, and 34.0% in 1997)
differs from the amount that would otherwise have been calculated by applying
the Federal corporate tax rate (35% in 1999, 1998 and 1997) to income before
income taxes and is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense at the statutory rate $14,182 $11,164 $9,010
Tax exempt interest (242) (285) (321)
Other, net 361 389 71
--------- --------- ---------
$14,301 $11,268 $8,760
========= ========= =========
</TABLE>
Income taxes as set forth in the consolidated statements of income and
comprehensive income consisted of the following components (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Current $15,402 $11,639 $ 9,958
Deferred (1,101) (371) (1,198)
--------- --------- ---------
Total income taxes $14,301 $11,268 $ 8,760
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities as of June 25, 1999 and June 26, 1998 are
presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<C> <C>
<S>
Deferred tax assets:
Expenses for book, not deductible
until paid $ 3,567 $3,235
Management incentive compensation 1,258 910
Depreciation at rates different for tax
than for financial reporting 61 52
Stock options exercised 546 96
Other 681 446
---------- --------
Total gross deferred tax assets 6,113 4,739
Deferred tax liabilities:
Unrealized holding gain on marketable
equity securities (60,374) --
Unrealized (gains) losses 8 (11)
Other (250) (408)
---------- --------
Total gross deferred tax liabilities (60,616) (419)
---------- --------
Net deferred tax assets (liabilities) $(54,503) $4,320
========== ========
</TABLE>
As a result of the Company's history of taxable income and the nature of the
items from which deferred tax assets are derived, management believes that it is
more likely than not that the Company will realize the benefit of the deferred
tax assets.
9. EXCHANGEABLE SUBORDINATED NOTES
On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated
Notes (consisting of 882,028 Derivative Adjustable Ratio Securities(SM), each a
"DARTS(SM)"). The Notes mature on June 30, 2004, and are not redeemable or
exchangeable until that time. Interest will be paid quarterly in arrears on
March 31, June 30, September 30, and December 31, commencing September 30, 1999.
Accrued interest at June 25, 1999 totaled $104,000.
F-11
<PAGE>
Legal and accounting fees, printing costs and other expenses associated with the
issuance of the DARTS totaled $1.8 million and are being amortized on the
straight-line method over the term of the bonds. In fiscal 1999, amortization
expense charged to operations was $15,000.
At maturity, the principal of the notes will be paid in shares of the Class A
common stock of Knight or, at the option of the Company, their cash equivalent.
The Notes were issued in denominations of $56.6875, the closing bid price of
Knight on June 10, 1999. At maturity, Noteholders are entitled to one share of
Knight common stock for each DARTS if the average price for the 20 days
immediately preceding the Note's maturity is equal to or less than the DARTS
issue price. Noteholders are entitled to .833 shares of Knight common stock for
each DARTS if the average price of Knight's common stock is 20% or more greater
than the DARTS' issue price. If the average price of the Knight common stock is
between the Note's issue price and 20% greater than the issue price, the
exchange rate will be determined by a formula. The amount of Knight common stock
delivered at maturity may be adjusted as a result of certain distribution and
recapitalization events involving Knight.
The DARTS are subordinated and unsecured general debts of the Company and are
subordinated to all existing and future indebtedness of the Company and all
liabilities of the Company's subsidiaries. DARTS will rank equal to future debt
for money borrowed that is not designated as senior to the DARTS and future debt
that is exchangeable for capital stock.
10. NET CAPITAL REQUIREMENTS
The broker/dealer subsidiaries are subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (the "Rule"), which requires the
maintenance of minimum net capital. Southwest has elected to use the alternative
method, permitted by the Rule, which requires that it maintain minimum net
capital, as defined in Rule 15c3-1 under the 1934 Act, equal to the greater of
$1,500,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 under
the 1934 Act. At June 25, 1999, Southwest had net capital of $119,329,000, or
approximately 15% of aggregate debit balances, which is $103,619,000 in excess
of its minimum net capital requirement of $15,710,000 at that date.
Additionally, the net capital rule of the New York Stock Exchange, Inc. (the
"Exchange") provides that equity capital may not be withdrawn or cash dividends
paid if resulting net capital would be less than 5% of aggregate debit items. At
June 25, 1999, Southwest had net capital of $80,054,000 in excess of 5% of
aggregate debit items.
SWSFS, MDB and NorAm follow the primary (aggregate indebtedness) method under
Rule 15c3-1, which requires the maintenance of minimum net capital of $250,000.
On June 29, 1999, Clearing was approved to be a NASD broker/dealer and will
begin its filings under Rule 15c3-1 in fiscal 2000. At June 25, 1999, the net
capital and excess net capital of SWSFS, MDB and NorAm was as follows:
Net Capital Excess Net Capital
------------------------------------------
SWSFS $317,000 $ 67,000
MDB 307,000 57,000
NorAm 371,000 121,000
Trust is subject to the capital requirements of the Texas Department of Banking,
and has a minimum capital requirement of $1,000,000. Trust had total
stockholder's equity of approximately $2,671,000, which is $1,671,000 in excess
of its minimum capital requirement at June 25, 1999.
11. EMPLOYEE BENEFITS
At June 25, 1999, the Company had two stock option plans, the Southwest
Securities Group, Inc. Stock Option Plan (the "1996 Plan") and the Southwest
Securities Group, Inc. 1997 Stock Option Plan (the "1997 Plan"). The 1996 Plan
was adopted by the Board of Directors on September 17, 1996 and approved by the
shareholders on November 6, 1996. The 1996 Plan reserves 1,270,500 shares of the
Company's common stock for issuance to eligible employees of the Company or its
subsidiaries, as well as to non-employee members of the Board of Directors. On
August 20, 1997, the Board of Directors approved the 1997 Plan, which reserves
190,575 shares of the Company's common stock for eligible employees or potential
employees of the Company or its subsidiaries. Shares reserved under these option
plans reflect all stock dividends issued by the Company (Note 13). Officers and
directors are not eligible to receive options under the 1997 Plan. Options
granted under the 1996 and 1997 Plans have a maximum ten-year term, and the
vesting period is determined on an individual basis by the Stock Option
Committee. Options granted to
F-12
<PAGE>
non-employee directors under the 1996 Plan are fully vested six months after
grant and have a five-year term. The Company also has options outstanding that
were granted on May 25, 1995 in conjunction with the acquisition of Barre &
Company, Inc. ("Barre"). These options were vested immediately upon grant and
have a five-year term.
A summary of the status of the Company's outstanding stock options as of June
25, 1999, June 26, 1998 and June 27, 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Underlying Exercise Underlying Exercise Underlying Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period 253,012 $21.00 52,000 $ 11.17 32,000 $ 8.07
Granted 244,408 18.84 210,973 23.72 20,000 16.13
Exercised (36,465) 16.42 (16,000) 8.07 -- --
Forfeited (19,819) 19.58 (6,000) 23.63 -- --
Adjustment for five/ten percent
stock dividends 44,581 -- 12,039 -- -- --
--------- -------- -------
Outstanding, end of period 485,717 $19.15 253,012 $ 21.00 52,000 $ 11.17
========= ======== =======
Exercisable, end of period 75,303 46,200 52,000
Weighted-average fair value of options granted $ 18.78 $ 22.83 $ 16.13
during fiscal year
</TABLE>
The following table summarizes information for the stock options outstanding at
June 25, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.99 to $19.70 272,928 8.5 years $17.61 27,060 $10.31
$19.70 to $23.27 207,446 8.0 years 20.55 48,243 20.52
$23.27 to $50.00 5,343 7.8 years 43.26 -- --
------------- ---------
$6.99 to $50.00 485,717 8.3 years $19.15 75,303 $16.85
============= =========
</TABLE>
The Company applies APB 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its stock
options. Had compensation cost been determined consistent with SFAS 123 for the
options granted, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below for the years ended June 25,
1999 and June 26, 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net income (in thousands) As reported $26,219 $20,630
========= =========
Pro forma $25,297 $20,357
========= =========
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C> <C>
Earnings per share As reported - basic $2.23 $1.76
============ ===========
As reported - diluted $2.21 $1.75
============ ===========
Pro forma - basic $2.15 $1.74
============ ===========
Pro forma - diluted $2.14 $1.73
============ ===========
</TABLE>
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------------- -------------------
<S> <C> <C>
Expected volatility 33% 30%
Risk-free interest rate 4.50% 5.09%
Expected dividend yield .40% 1.25%
Expected life 5 to 10 years 5 to 10 years
</TABLE>
The Company has a defined contribution profit sharing plan covering
substantially all employees. Profit sharing plan benefits become fully vested
after six years of service by the participant. Costs of the profit sharing plan
are accrued and funded at the Company's discretion. Profit sharing expense for
fiscal years 1999, 1998 and 1997 was approximately $5,264,000, $4,599,000 and
$3,338,000, respectively.
On November 6, 1996, the shareholders of the Company approved the Phantom Stock
Plan ("Phantom Plan") adopted by the Board of Directors on September 17, 1996.
The Phantom Plan allows non-employee directors to receive directors fees in the
form of common stock equivalent units. As of June 25, 1999, 869 dividend
adjusted units have been issued under the Phantom Plan.
On August 20, 1997, the Board of Directors adopted a Stock Purchase Plan ("Stock
Purchase Plan") to enable employees of the Company and its subsidiaries to
purchase up to 1,270,500 shares of common stock of the Company, as adjusted for
stock dividends (Note 13). At June 25, 1999, approximately 19,000 shares were
issued under the Stock Purchase Plan, as adjusted for the most recent ten
percent stock. Subsequent to year end, an additional approximately 7,000 stock
dividend adjusted shares were issued to participants.
12. EARNINGS PER SHARE
A reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computations is as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 26,219 $ 20,630 $ 16,983
=========== =========== ===========
Weighted average shares outstanding - basic 11,766,377 11,743,228 11,269,666
Effect of dilutive securities:
Assumed exercise of stock options 72,346 20,377 13,219
----------- ----------- -----------
Weighted average shares outstanding - diluted 11,838,723 11,763,605 11,282,885
=========== =========== ===========
Earnings per share - basic $ 2.23 $ 1.76 $ 1.51
=========== =========== ===========
Earnings per share - diluted $ 2.21 $ 1.75 $ 1.51
=========== =========== ===========
</TABLE>
F-14
<PAGE>
At June 25, 1999, there were approximately 442,000 options outstanding under the
1996 Plan and approximately 27,000 options outstanding under the 1997 Plan. The
Company also has approximately 17,000 options outstanding that were granted in
conjunction with the acquisition of Barre & Company, Inc. ("Barre Options"). As
of June 25, 1999, all but 264 outstanding options were dilutive and were
included in the calculation of weighted average shares outstanding - diluted.
13. STOCK DIVIDENDS
On August 28, 1997, the Board of Directors declared a ten percent stock dividend
which was paid on October 1, 1997 to shareholders of record at the close of
business on September 15, 1997. Additionally, on May 22, 1998, the Board of
Directors declared a five percent stock dividend which was paid on August 3,
1998 to shareholders of record at the close of business on July 15, 1998. On May
6, 1999, the Board declared another ten percent stock dividend which was paid on
August 2, 1999 to shareholders of record on July 15, 1999. Per share amounts,
dividends per share and weighted average shares outstanding have been restated
in the accompanying financial statements to reflect the effect of these stock
dividends. At the discretion of the Stock Option Committee, the stock options
outstanding, as well as the options' exercise prices, were adjusted for the five
percent stock dividend effective August 3, 1998 and the ten percent stock
dividend effective August 2, 1999. The number of stock options outstanding, the
number of stock options exercisable and the weighted-average exercise prices at
June 25, 1999 and June 26, 1998, as well as the weighted-average fair value of
options granted during the fiscal years, have been restated.
14. COMMITMENTS AND CONTINGENCIES
The Company leases its offices under noncancelable operating lease agreements.
During fiscal years 1999, 1998 and 1997, the Company entered into various
noncancelable operating lease agreements relating to data processing equipment
used in the brokerage operations. Rental expense for facilities leases for
fiscal years 1999, 1998 and 1997 aggregated approximately $5,329,000, $4,833,000
and $3,172,000, respectively.
At June 25, 1999, the future rental payments for the noncancelable leases for
each of the following five fiscal years and thereafter follow (in thousands):
<TABLE>
<CAPTION>
Year ending:
<S> <C>
2000 $ 7,418
2001 5,801
2002 3,912
2003 2,940
2004 2,909
Thereafter 11,007
-------
Total payments due $33,987
=======
</TABLE>
During fiscal 1999, the Company committed approximately $10.6 million through
December 2000 to expand and promote MDB.
On April 17, 1998, a judgment was entered against the Company in connection with
a breach of contract lawsuit stemming from the 1995 acquisition of Barre. The
judge awarded the counterparty approximately $40,000 in damages and
approximately $1,700,000 in attorney's fees. The Company believes it has
substantial grounds for appeal and has begun the appellate process. The Company
also believes its reserves are adequate to cover the full amount of the
judgment.
In the general course of its brokerage business and the business of clearing for
other brokerage firms, the Company and/or its subsidiaries have been named as
defendants in various lawsuits and arbitration proceedings. These claims allege
violation of Federal and state securities laws. Management believes that
resolution of these claims will not result in any material adverse effect on the
Company's consolidated financial position or results of operations.
15. AFFILIATE TRANSACTIONS
The Company, through its principal subsidiary, Southwest, provides accounting
and administrative services for its subsidiaries and clears all customer
transactions for SWSFS, MDB and NorAm. Westwood serves as
F-15
<PAGE>
the investment manager for the assets discussed in Note 2. Trust acts as an
agent on behalf of Southwest in the direction of transactions related to these
assets. In addition, Westwood serves as the investment manager of the common
trust funds of Trust.
16. FINANCIAL INSTRUMENTS WITH OFF-STATEMENT OF FINANCIAL CONDITION RISK
In the normal course of business, the broker/dealer subsidiaries engage in
activities involving the execution, settlement and financing of various
securities transactions. These activities may expose the Company to off-
statement of financial condition credit and market risks in the event the
customer or counterparty is unable to fulfill its contractual obligation. Such
risks may be increased by volatile trading markets.
As part of its normal brokerage activities, the Company sells securities not yet
purchased (short sales) for its own account. The establishment of short
positions exposes the Company to off-statement of financial condition market
risk in the event prices increase, as the Company may be obligated to acquire
the securities at prevailing market prices.
The Company seeks to control the risks associated with its customer activities,
including customer accounts of its Correspondents for which it provides clearing
services, by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The required margin levels are
monitored daily and, pursuant to such guidelines, customers are required to
deposit additional collateral or to reduce positions when necessary.
A portion of the Company's customer activity involves short sales and the
writing of option contracts. Such transactions may require the Company to
purchase or sell financial instruments at prevailing market prices in order to
fulfill the customer's obligations.
At times, the Company lends money using reverse repurchase agreements. All
positions are collateralized by U.S. Government or U.S. Government agency
securities. Such transactions may expose the Company to off-statement of
financial condition risk in the event such borrowers do not repay the loans and
the value of collateral held is less than that of the underlying receivable.
These agreements provide the Company with the right to maintain the relationship
between market value of the collateral and the receivable.
The Company arranges secured financing by pledging securities owned and unpaid
customer securities for short-term borrowings to satisfy margin deposits of
clearing organizations. The Company also actively participates in the borrowing
and lending of securities. In the event the counterparty in these and other
securities loaned transactions is unable to return such securities pledged or
borrowed or to repay the deposit placed with them, the Company may be exposed to
the risks of acquiring the securities at prevailing market prices or holding
collateral possessing a market value less than that of the related pledged
securities. The Company seeks to control the risks by monitoring the market
value of securities pledged and requiring adjustments of collateral levels where
necessary.
17. SEGMENT REPORTING
In 1999 and prior years, the Company operated two principal segments within the
financial services industry: the Broker/Dealer Group and the Asset Management
Group. Such segments are managed separately based on types of products and
services offered and their related client bases. The Company evaluates the
performance of its segments based primarily on income before income taxes.
The Broker/Dealer Group is comprised of Southwest, SWSFS, MDB, NorAm and
Clearing. Southwest provides Correspondent clearing and execution services to
securities broker/dealers, including SWSFS, MDB and NorAm, and other financial
institutions. Southwest serves individual and institutional investors through
its 19 branch offices. Through these offices, clients gain access to Southwest's
investment research. Southwest also provides municipal finance and investment
banking and underwriting services.
SWSFS contracts with independent registered representatives for the
administration of their securities business. MDB specializes in deep discount
brokerage services over the Internet. NorAm contracts with Canadian
broker/dealers on an independent contractor basis for administration of their
U.S. securities business.
F-16
<PAGE>
The Asset Management Group is composed of Westwood and Trust (together, the
Westwood Group) and Capital. Westwood manages the Gabelli-Westwood Family of
Mutual Funds as well as equity and fixed income investments for a diverse
clientele including corporate plan sponsors, charitable institutions,
educational endowments and public funds. Trust provides trust, custodial and
other management services to high net worth individuals and corporations
throughout Texas and the Southwest. Capital administers the Local Government
Investment Cooperative ("LOGIC") fund for cities, counties, schools and other
local governments across Texas.
All accounting policies are the same as those described in the summary of
significant accounting policies. Intersegment balances that eliminate in
consolidation have been applied to the appropriate segment.
<TABLE>
<CAPTION>
Consolidated
Asset Other Southwest
Broker/Dealer Management Consolidated Securities
(in thousands) Group Group Entities Group, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 25, 1999
Net revenues from external sources $ 324,119 $12,044 $ 1,107 $ 337,270
Net intersegment revenues -- 940 2,209 --
Net interest revenue 46,846 197 12 47,055
Depreciation and amortization 2,540 201 316 3,057
Income before income taxes 41,315 3,065 (3,860) 40,520
Segment assets $4,099,509 $ 9,907 $183,858 $ 4,293,274
Expenditures for long-lived assets 3,174 274 24 3,472
June 26, 1998
Net revenues from external sources $ 271,241 $ 9,629 $ 4,888 $ 285,758
Net intersegment revenues -- 715 1,741 --
Net interest revenue 42,357 182 (122) 42,417
Depreciation and amortization 2,873 179 374 3,426
Income before income taxes 29,092 1,850 956 31,898
Segment assets $3,207,940 $ 8,276 $ 3,890 $ 3,220,106
Expenditures for long-lived assets 3,237 78 210 3,525
June 27, 1997
Net revenues from external sources $ 210,809 $ 6,521 $ 1,074 $ 218,404
Net intersegment revenues -- 648 1,867 --
Net interest revenue 35,750 278 (90) 35,938
Depreciation and amortization 2,530 190 30 2,750
Income before income taxes 26,688 203 (1,148) 25,743
Segment assets $3,263,080 $ 8,958 $ 4,354 $ 3,276,392
Expenditures for long-lived assets 7,072 155 370 7,597
</TABLE>
18. ACQUISITION OF ASBI HOLDINGS, INC.
On August 10, 1999, the Company signed a definitive merger agreement to acquire
ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB,
Arlington, Texas. The agreement provides that the Company will issue 2.6
million shares of its common stock to the holders of all of the outstanding
stock of ASBI. Don A. Buchholz serves as chairman of both the Company and ASBI,
and is the beneficial owner of approximately 7.0% of the Company's outstanding
voting securities. Mr. Buchholz is the beneficial owner of approximately 19.3%
of the outstanding securities of ASBI, and he exercises voting control for
approximately 58.6% of ASBI's outstanding voting securities. The acquisition is
expected to be accounted for by the pooling-of-interests method and is subject
to regulatory and shareholder approval.
F-17
<PAGE>
19. SUBSEQUENT EVENTS
In July 1999, the Company issued an additional $7.5 million of 5% Exchangeable
Subordinated Notes (132,304 DARTS) as the underwriters exercised their over-
allotment option. These DARTS have the same terms as the DARTS issued in June
1999 (Note 9). The Company received proceeds of $7.3 million net of
underwriters' fees.
Effective August 6, 1999, the Company sold all of its shares in NorAm for
$478,788.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Southwest Securities Group, Inc.:
We have audited the consolidated financial statements of Southwest Securities
Group, Inc. and subsidiaries as listed in the accompanying index on page F-1. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index at Part IV. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwest Securities
Group, Inc. and subsidiaries as of June 25, 1999 and June 26, 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 25, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
July 27, 1999, except as to the second
paragraph of Note 19 which is as of
August 6, 1999 and Note 18 which is
as of August 10, 1999
F-19
<PAGE>
S-1
Schedule I - Condensed Financial Information of Registrant
Southwest Securities Group, Inc.
Condensed Financial Information of Registrant
Condensed Statements of Financial Condition
-------------------------------------------
June 25, 1999 and June 26, 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Assets
Investment in subsidiaries, at equity $ 127,519 $ 98,258
Marketable equity securities 172,928 --
Notes receivable from subsidiary 58,000 19,700
Other assets 18,912 12,958
----------------- ------------------
$ 377,359 $ 130,916
================= ==================
Liabilities and Stockholders' Equity
Other liabilities $ 65,025 $ 5,449
Exchangeable subordinated notes 50,000 --
Minority interest in consolidated subsidiary 50 --
Stockholders' equity 262,284 125,467
----------------- -----------------
$ 377,359 $ 130,916
================= =================
</TABLE>
<PAGE>
S-1 (continued)
Schedule I - Condensed Financial Information of Registrant - Continued
Southwest Securities Group, Inc.
Condensed Financial Information of Registrant
Condensed Statements of Income, Comprehensive Income
-----------------------------------------------------
and Stockholders' Equity
------------------------
Years Ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Revenues - Interest and other income $ 2,366 $ 6,361 $ 2,941
--------- --------- ---------
Expenses:
Interest expense 104 90 23
Other expenses 3,780 3,293 1,972
--------- --------- ---------
3,884 3,383 1,995
--------- --------- ---------
Income (loss) before income tax expense
and equity in earnings of subsidiaries (1,518 2,978 946
Income tax (expense) benefit 341 (1,183) (400)
--------- --------- ---------
Income (loss) before equity in earnings of subsidiaries (1,177) 1,795 546
Equity in earnings of subsidiaries 27,396 18,835 16,437
--------- --------- ---------
Net income 26,219 20,630 16,983
Other comprehensive income - unrealized holding gain,
net of tax of $60,374 112,123 -- --
--------- --------- ---------
Comprehensive income 138,342 20,630 16,983
Stockholders' equity at beginning of year 125,467 106,928 84,449
Dividends (2,997) (2,441) (1,779)
Exercise of stock options 1,109 225 --
Net proceeds from employees for Employee Stock Purchase Plan 5 125 141
Reissuance of treasury stock 175 -- --
Issuance of common stock and amortization of deferred
compensation expense for Stock Purchase Plan 183 -- --
Issuance of common stock for acquisition -- -- 7,134
--------- --------- ---------
Stockholders' equity at end of year $262,284 $125,467 $106,928
========= ========= =========
</TABLE>
<PAGE>
S-1 (continued)
Schedule I - Condensed Financial Information of Registrant - Continued
Southwest Securities Group, Inc.
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
----------------------------------
Years Ended June 25, 1999, June 26, 1998 and June 27, 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 26,219 $ 20,630 $ 16,983
Adjustments:
Depreciation and amortization 241 303 --
Undistributed equity in earnings of subsidiaries (29,261) (10,180) (20,695)
Other 730 3,528 186
---------- --------- ---------
Net cash provided by (used in) operating activities (2,071) 14,281 (3,526)
---------- --------- ---------
Cash flows from investing activities:
Proceeds from (payments on) notes and other
accounts with subsidiaries (42,862) (8,800) 1,515
Purchase of investments (2,058) -- --
Return of investment 650 -- --
---------- --------- ---------
Net cash provided by (used in) investing activities (44,270) (8,800) 1,515
---------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of exchangeable subordinated notes 50,000 -- --
Debt issue costs (1,813) -- --
Net change in short-term borrowings -- (4,000) 4,000
Proceeds from employees for Employee Stock Purchase Plan 5 125 141
Net proceeds from exercise of stock options 659 225 --
Proceeds from employees for Stock Purchase Plan 296 -- --
Proceeds from issuance of stock of consolidated subsidiary 50 -- --
Payment of cash dividends on common stock (2,856) (1,831) (2,130)
---------- --------- ---------
Net cash provided by (used in) financing activities 46,341 (5,481) 2,011
---------- --------- ---------
Net change in cash -- -- --
Cash at beginning of year 1 1 1
---------- --------- ---------
Cash at end of year $ 1 $ 1 $ 1
========== ========= =========
</TABLE>
_______________
Non-cash transactions: During 1997, the Company issued common stock valued at
$7,134,000 related to the acquisition of Equity Securities Trading Company
("Equity"). At June 26, 1998, goodwill amounting to $4,729,000 related to the
acquisition was transferred to the Company from NorAm Investment Services, Inc.,
formerly Equity, a fully consolidated subsidiary. In a non-cash transaction, the
Company received approximately 1.7 million common shares (approximately 3.3
million shares after a two-for-one stock split effective May 17, 1999) of
Knight/Trimark Group, Inc. ("Knight") subsequent to Knight's initial public
offering completed July 10, 1998.
<PAGE>
EXHIBIT 2.1
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
SOUTHWEST SECURITIES GROUP, INC.
DALLAS, TEXAS
AND
ASBI HOLDINGS, INC.
ARLINGTON, TEXAS
Dated as of August 10, 1999
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I.ACQUISITION OF ASBI BY SWS............................................................. 2
SECTION 1.01 Merger of Newco with and into ASBI............................................ 2
SECTION 1.02 Effects of the Merger......................................................... 2
SECTION 1.03 Articles of Incorporation and Bylaws.......................................... 2
SECTION 1.04 Directors and Officers........................................................ 2
SECTION 1.05 Conversion of the ASBI Common Stock........................................... 2
SECTION 1.06 ASBI Dissenting Shares........................................................ 4
SECTION 1.07 SWS Common Stock.............................................................. 4
SECTION 1.08 ASBI Shareholders' Meeting.................................................... 4
SECTION 1.09 SWS Shareholders' Meeting..................................................... 5
SECTION 1.10 Exchange of Certificates...................................................... 5
SECTION 1.11 Rights of Former ASBI Shareholders............................................ 6
SECTION 1.12 Piggyback Registration........................................................ 6
SECTION 1.13 Escrow of Shares.............................................................. 7
ARTICLE II.THE CLOSING AND THE CLOSING DATE...................................................... 8
SECTION 2.01 Time and Place of the Closing and Closing Date................................ 8
SECTION 2.02 Effective Time................................................................ 8
SECTION 2.03 Actions to be Taken at the Closing by ASBI.................................... 8
SECTION 2.04 Actions to be Taken at the Closing by SWS..................................... 10
SECTION 2.05 Further Assurances............................................................ 11
ARTICLE III.REPRESENTATIONS AND WARRANTIES OF ASBI............................................... 11
SECTION 3.01 Organization and Qualification................................................ 11
SECTION 3.02 Execution and Delivery........................................................ 12
SECTION 3.03 ASBI Capitalization........................................................... 12
SECTION 3.04 ASBI Subsidiaries............................................................. 13
SECTION 3.05 Compliance with Laws, Permits and Instruments................................. 13
SECTION 3.06 ASBI Financial Statements..................................................... 14
SECTION 3.07 The Bank...................................................................... 14
SECTION 3.08 Litigation.................................................................... 15
SECTION 3.09 Consents and Approvals........................................................ 16
SECTION 3.10 Undisclosed Liabilities....................................................... 16
SECTION 3.11 Title to Assets............................................................... 16
SECTION 3.12 Absence of Certain Changes or Events.......................................... 16
SECTION 3.13 Leases, Contracts and Agreements.............................................. 19
SECTION 3.14 Taxes......................................................................... 19
SECTION 3.15 Insurance..................................................................... 21
SECTION 3.16 No Adverse Change............................................................. 21
SECTION 3.17 Proprietary Rights............................................................ 21
SECTION 3.18 Transactions with Certain Persons and Entities................................ 21
SECTION 3.19 Evidences of Indebtedness..................................................... 22
SECTION 3.20 Employee Relationships........................................................ 22
SECTION 3.21 Condition of Assets........................................................... 22
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 3.22 Environmental Compliance...................................................... 22
SECTION 3.23 Regulatory Compliance......................................................... 23
SECTION 3.24 Absence of Certain Business Practices......................................... 23
SECTION 3.25 Information for Proxy Statements.............................................. 24
SECTION 3.26 Dissenting Shareholders....................................................... 24
SECTION 3.27 Books and Records............................................................. 24
SECTION 3.28 Forms of Instruments, Etc..................................................... 24
SECTION 3.29 Fiduciary Responsibilities.................................................... 24
SECTION 3.30 Guaranties.................................................................... 24
SECTION 3.31 Voting Trust or Buy-Sell Agreements........................................... 24
SECTION 3.32 Employee Benefit Plans........................................................ 25
SECTION 3.33 Year 2000..................................................................... 26
SECTION 3.34 Accounting, Tax, and Regulatory Matters....................................... 27
SECTION 3.35 Nonaccredited Investors....................................................... 27
SECTION 3.36 Information Systems........................................................... 28
SECTION 3.37 Representations Not Misleading................................................ 28
ARTICLE IV.REPRESENTATIONS AND WARRANTIES OF SWS................................................ 28
SECTION 4.01 Organization and Qualification............................................... 28
SECTION 4.02 Execution and Delivery....................................................... 28
SECTION 4.03 Authorized and Outstanding Stock of SWS...................................... 29
SECTION 4.04 Authorized and Outstanding Stock of Newco.................................... 29
SECTION 4.05 Compliance with Laws, Permits and Instruments................................ 29
SECTION 4.06 Litigation................................................................... 29
SECTION 4.07 Consents and Approvals....................................................... 30
SECTION 4.08 SEC Filings; SWS Financial Statements........................................ 30
SECTION 4.09 Proxy Statement.............................................................. 30
SECTION 4.10 Representations Not Misleading............................................... 31
ARTICLE V.COVENANTS OF ASBI..................................................................... 31
SECTION 5.01 Best Efforts................................................................. 31
SECTION 5.02 Merger Agreement............................................................. 31
SECTION 5.03 Information for Regulatory Applications and Proxy Statements................. 31
SECTION 5.04 Required Acts of the ASBI Companies......................................... 32
SECTION 5.05 Prohibited Acts of the ASBI Companies........................................ 33
SECTION 5.06 Access; Pre-Closing Investigation............................................ 35
SECTION 5.07 Invitations to and Attendance at Directors' and Committee Meet............... 36
SECTION 5.08 Additional Financial Statements.............................................. 36
SECTION 5.09 Untrue Representations....................................................... 36
SECTION 5.10 Litigation and Claims........................................................ 36
SECTION 5.11 Notice of Material Adverse Changes........................................... 36
SECTION 5.12 No Negotiation with Others................................................... 37
SECTION 5.13 Consents and Approvals....................................................... 37
SECTION 5.14 Environmental Investigation; Right to Terminate Agreement.................... 37
SECTION 5.15 Proxies...................................................................... 38
SECTION 5.16 S Corporation Termination.................................................... 39
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 5.17 Conforming Accounting and Reserve Policies; Restructuring Expenses............ 39
SECTION 5.18 Affiliate Agreements.......................................................... 39
SECTION 5.19 Environmental Matters......................................................... 40
ARTICLE VI.COVENANTS OF SWS...................................................................... 40
SECTION 6.01 Best Efforts.................................................................. 40
SECTION 6.02 Incorporation and Organization of Newco....................................... 40
SECTION 6.03 Merger Agreement.............................................................. 40
SECTION 6.04 Information for Regulatory Applications and Proxy Statements.................. 40
SECTION 6.05 Acts of Newco................................................................. 41
SECTION 6.06 Untrue Representations........................................................ 41
SECTION 6.07 Litigation and Claims......................................................... 41
SECTION 6.08 Regulatory and Other Approvals................................................ 41
SECTION 6.09 Adverse Change................................................................ 41
SECTION 6.10 Employee Benefits and Contracts............................................... 41
ARTICLE VII.CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASBI...................................... 42
SECTION 7.01 Compliance with Representations, Warranties and Agreements.................... 42
SECTION 7.02 Shareholder Approvals......................................................... 42
SECTION 7.03 Government and Other Approvals................................................ 42
SECTION 7.04 No Litigation................................................................. 42
SECTION 7.05 Pooling Letter................................................................ 43
SECTION 7.06 SWS Common Stock.............................................................. 43
SECTION 7.07 Tax Opinion................................................................... 43
SECTION 7.08 Opinion of Counsel............................................................ 43
SECTION 7.09 Registration Rights Agreement................................................. 43
SECTION 7.10 No Material Adverse Change.................................................... 43
ARTICLE VIII.CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SWS...................................... 43
SECTION 8.01 Compliance with Representations, Warranties and Agreements.................... 43
SECTION 8.02 Shareholder Approvals......................................................... 44
SECTION 8.03 Government and Other Approvals................................................ 44
SECTION 8.04 No Litigation................................................................. 44
SECTION 8.05 Accounting Treatment.......................................................... 45
SECTION 8.06 No Material Adverse Change.................................................... 45
SECTION 8.07 Dissenters.................................................................... 45
SECTION 8.08 Tax Opinion................................................................... 45
SECTION 8.09 Pooling Letter................................................................ 45
SECTION 8.10 Fairness Opinion.............................................................. 45
SECTION 8.11 Releases of Directors and Officers of ASBI Companies.......................... 45
SECTION 8.12 Non Compete and Employment Agreements......................................... 46
SECTION 8.13 Affiliate Agreements.......................................................... 46
SECTION 8.14 Opinion of Counsel............................................................ 46
SECTION 8.15 Compliance with the 1933 Act.................................................. 46
SECTION 8.16 Termination of Shareholder Agreement and Voting Agreement.................... 46
SECTION 8.17 Escrow Agreement; Environmental Liabilities................................... 46
</TABLE>
iii
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<TABLE>
<CAPTION>
<S> <C>
ARTICLE IX.TERMINATION AND ABANDONMENT........................................................... 46
SECTION 9.01 Right of Termination.......................................................... 46
SECTION 9.02 Notice of Termination......................................................... 48
SECTION 9.03 Effect of Termination......................................................... 48
SECTION 9.04 Break-Up Fee.................................................................. 48
ARTICLE X.CONFIDENTIAL INFORMATION............................................................... 49
SECTION 10.01 Definition of "Recipient," "Disclosing Party" and" Representat............... 49
SECTION 10.02 Definition of "Subject Information".......................................... 49
SECTION 10.03 Confidentiality.............................................................. 49
SECTION 10.04 Securities Law Concerns...................................................... 49
SECTION 10.05 Return of Subject Information................................................ 50
SECTION 10.06 Specific Performance/Injunctive Relief....................................... 50
ARTICLE XI.MISCELLANEOUS......................................................................... 50
SECTION 11.01 Survival of Representations and Warranties................................... 50
SECTION 11.02 Expenses..................................................................... 50
SECTION 11.03 Brokerage Fees and Commissions............................................... 50
SECTION 11.04 Entire Agreement............................................................. 51
SECTION 11.05 Further Cooperation.......................................................... 51
SECTION 11.06 Severability................................................................. 51
SECTION 11.07 Notices...................................................................... 51
SECTION 11.08 GOVERNING LAW................................................................ 53
SECTION 11.09 Multiple Counterparts........................................................ 53
SECTION 11.10 Certain Definitions.......................................................... 53
SECTION 11.11 Specific Performance......................................................... 55
SECTION 11.12 Attorneys' Fees and Costs.................................................... 56
SECTION 11.13 Rules of Construction........................................................ 56
SECTION 11.14 Binding Effect; Assignment................................................... 56
SECTION 11.15 Public Disclosure............................................................ 56
SECTION 11.16 Extension; Waiver............................................................ 57
SECTION 11.17 Amendments................................................................... 57
SECTION 11.18 Binding Arbitration Relating to Environmental Escrow......................... 57
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of the 10th day of August, 1999, by and between SOUTHWEST
SECURITIES GROUP, INC., a Delaware corporation with its principal offices in
Dallas, Texas ("SWS"), and ASBI HOLDINGS, INC., a Texas corporation and unitary
savings and loan holding company with its principal offices in Arlington, Texas
("ASBI").
W I T N E S S E T H:
-------------------
WHEREAS, ASBI owns all of the stock of Arlington Savings Bancshares, Inc.,
a Delaware corporation and unitary savings and loan holding company ("ASBI
Delaware"), and ASBI Delaware owns all of the stock of First Savings Bank,
F.S.B., Arlington, Texas, a federal savings bank (the "Bank");
WHEREAS, SWS wishes to acquire all of the issued and outstanding shares of
ASBI Voting Common Stock, par value $0.001 per share ("ASBI Voting Common
Stock") and ASBI Non-Voting Common Stock, par value $0.001 per share (the "ASBI
Non-Voting Common Stock") (collectively, the ASBI Voting Common Stock and ASBI
Non-Voting Common Stock are referred to herein as the "ASBI Common Stock") in
exchange for shares of common stock of SWS, par value $0.10 per share ("SWS
Common Stock") in a transaction that qualifies (i) for federal tax purposes as a
reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986
(the "Code"), and (ii) for accounting purposes for pooling-of-interests
treatment;
WHEREAS, SWS desires to effect such acquisition through its wholly-owned
subsidiary, SWS Acquisition Corporation, a Texas corporation ("Newco"), by
causing Newco to be merged with and into ASBI (the "Merger");
WHEREAS, SWS and ASBI believe that the Merger, as provided for and subject
to the terms and conditions set forth in this Agreement and all exhibits,
schedules and supplements hereto, is in the best interests of SWS, ASBI and
their respective shareholders;
WHEREAS, SWS and ASBI desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
execution and delivery of this Agreement and certain additional agreements
related to the transactions contemplated hereby; and
WHEREAS, the respective boards of directors of SWS and ASBI have approved
this Agreement and the proposed transactions substantially on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
representations, warranties, covenants and agreements contained in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and subject to the conditions set
forth below, SWS and ASBI undertake, promise, covenant and agree with each other
as follows:
<PAGE>
ARTICLE I.
ACQUISITION OF ASBI BY SWS
SECTION 1.01 Merger of Newco with and into ASBI. Subject to the terms and
----------------------------------
conditions of this Agreement and the Agreement and Plan of Merger to be entered
into between ASBI and Newco and joined by SWS (the "Merger Agreement"), attached
hereto as Exhibit A, SWS shall cause Newco to be merged with and into ASBI
---------
pursuant to the provisions of Part Five of the Texas Business Corporation Act
(the "TBCA").
SECTION 1.02 Effects of the Merger. The Merger shall have the effects set
---------------------
forth in Article 5.06 of the TBCA. Following the Merger, ASBI shall continue as
the corporation resulting from the Merger (the "Surviving Corporation"), and the
separate corporate existence of Newco shall cease. The name of the Surviving
Corporation shall be "ASBI Holdings, Inc." The existing offices and facilities
of ASBI immediately preceding the Merger shall be the principal offices and
facilities of the Surviving Corporation following the Merger. At the Effective
Time (as hereinafter defined), all rights, title and interests to all real
estate and other property owned by each of Newco and ASBI shall be allocated to
and vested in the Surviving Corporation without reversion or impairment, without
further act or deed, and without any transfer or assignment having occurred, but
subject to any existing liens or encumbrances thereon. At the Effective Time,
all liabilities and obligations of Newco and ASBI shall be allocated to the
Surviving Corporation, and the Surviving Corporation shall be the primary
obligor therefor and no other party to the Merger shall be liable therefor. At
the Effective Time, a proceeding pending by or against either Newco or ASBI may
be continued as if the Merger did not occur, or the Surviving Corporation may be
substituted in the proceedings.
SECTION 1.03 Articles of Incorporation and Bylaws. The Articles of
------------------------------------
Incorporation and Bylaws, respectively, of the Surviving Corporation shall be
the Articles of Incorporation and Bylaws of ASBI (as such Articles of
Incorporation and Bylaws may be amended and restated pursuant to the terms of
the Merger Agreement).
SECTION 1.04 Directors and Officers. The directors and officers,
----------------------
respectively, of the Surviving Corporation shall be as set forth in the Merger
Agreement.
SECTION 1.05 Conversion of the ASBI Common Stock. At the Effective Time of
-----------------------------------
the Merger:
A. Subject to the terms of this Agreement and adjustment pursuant to
Section 1.05B of this Agreement, each share of ASBI Common Stock
outstanding immediately prior to the Effective Time, other than any
Dissenting Shares (as such term is defined in the Merger Agreement), shall
be converted into the right to receive shares of SWS Common Stock (the
"Merger Consideration") in the amount equal to the quotient of (i)
2,600,000 shares of SWS Common Stock divided by (ii) the number of shares
of ASBI Common Stock outstanding immediately prior to the Effective Time
(herein the "Exchange Ratio").
B. Except for payment of a 10% stock dividend payable to SWS
shareholders of record on July 15, 1999 (the "SWS Stock Dividend"), in the
event SWS changes the number of shares of SWS Common Stock issued and
outstanding prior to the Effective Time
2
<PAGE>
as a result of a stock split, stock dividend, recapitalization, or similar
transaction with respect to such stock and the record date therefor (in the
case of a stock dividend) or the effective time thereof (in the case of a
stock split or similar recapitalization for which a record date is not
established) shall be prior to the Effective Time, the Exchange Ratio shall
be proportionately adjusted. No adjustment shall be made as a result of the
SWS Stock Dividend.
C. Notwithstanding any other provision of this Agreement, each holder
of shares of ASBI Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of SWS
Common Stock (after taking into account all certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of SWS Common Stock
multiplied by the market value of one share of SWS Common Stock at the
Effective Time. The market value of one share of SWS Common Stock at the
Effective Time shall be the last sale price of SWS Common Stock on the New
York Stock Exchange (as reported by The Wall Street Journal or, if not
reported thereby, any other authoritative source selected by SWS) on the
last trading day preceding the Effective Time. No such holder will be
entitled to dividends, voting rights, or any other rights as a shareholder
in respect of any fractional shares.
D. Each Dissenting Share shall be converted into the right to receive
payment from the Surviving Corporation with respect thereto in accordance
with the provisions of the TBCA;
E. The shares of Newco (the "Newco Stock") outstanding at the
Effective Time shall, at the Effective Time and by virtue of the Merger and
without any action on the part of SWS or any other party as holder thereof,
be converted into a like number of shares of common stock of the Surviving
Corporation with a par value of $0.001 per share, with the effect that the
number of shares of the common stock of the Surviving Corporation
outstanding immediately after the Effective Time shall be equal to the
aggregate number of shares of Newco Stock outstanding immediately before
the Effective Time. The authorized number of shares of common stock of the
Surviving Corporation shall be the same as the authorized number of shares
of Newco Stock immediately prior to the Effective Time.
F. The shares of ASBI Common Stock issued and outstanding at the
Effective Time shall, by operation of law and without any action on the
part of the holder thereof, unless dissenters' rights under applicable law
are being perfected with respect thereto, be converted into the right to
receive the Merger Consideration.
G. On or following the Effective Time, each holder of ASBI Common
Stock shall be required to surrender, in accordance with Section 1.10, his
or her shares of ASBI Common Stock to the exchange agent designated by SWS
(the "Exchange Agent"), and upon such surrender, each such holder shall be
entitled to receive from SWS within ten (10) business days thereafter, the
Merger Consideration which such holder is entitled to receive as described
in Section 1.05A of this Agreement. Until so surrendered, each such
outstanding certificate representing shares of ASBI Common Stock shall be
deemed for all
3
<PAGE>
purposes, subject only to dissenters' rights under applicable law, to
evidence solely the right to receive such Merger Consideration from SWS.
SECTION 1.06 ASBI Dissenting Shares. ASBI shall give SWS prompt notice
----------------------
upon receipt by ASBI of any written notice from any ASBI shareholder of such
shareholder's intent to dissent from the Merger pursuant to Articles 5.11 and
5.12 of the TBCA, and will keep SWS apprised of all details known to ASBI
relating to all such notices of intent to dissent including but not limited to
informing SWS of the names of all shareholders providing such notice, the number
of shares owned by such shareholders and the dates of their respective notices.
SECTION 1.07 SWS Common Stock. ASBI acknowledges and agrees that the
----------------
shares of SWS Common Stock to be issued in the Merger will not have been
registered under the Securities Act of 1933, as amended (the "1933 Act"), or
under any state securities laws, and the certificates representing shares of SWS
Common Stock will bear an appropriate legend substantially in the following
form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities laws and neither such securities
nor any interest therein may be offered, sold, pledged, assigned
or otherwise transferred unless (1) a registration statement with
respect thereto is effective under the Act and any applicable
state securities laws or (2) the Company receives an opinion of
counsel, which counsel and opinion are reasonably satisfactory to
the Company, that such securities may be offered, sold, pledged,
assigned or transferred in the manner contemplated without an
effective registration statement under the Act or applicable
state securities laws."
SECTION 1.08 ASBI Shareholders' Meeting'. ASBI, acting through its board
---------------------------
of directors, shall, in accordance with applicable law:
A. Duly call, give notice of, convene and hold a meeting of its
shareholders (the "ASBI Shareholders' Meeting") as soon as practicable for
the purpose of approving and adopting the Merger and the Merger Agreement
and the transactions contemplated hereby and thereby;
B. Require no greater than the minimum vote of the holders of ASBI
Common Stock required by applicable law in order to approve the Merger and
the Merger Agreement;
C. Subject to its fiduciary duties to the shareholders of ASBI,
include in the ASBI Proxy Statement/PPM (defined in Section 1.08D below)
the recommendation of its board of directors that the shareholders of ASBI
vote in favor of the approval and adoption of the Merger and the Merger
Agreement and the transactions contemplated hereby and thereby; and
D. Cause the ASBI Proxy Statement/PPM to be mailed to the
shareholders of ASBI as soon as practicable, and use its best efforts to
obtain the approval and adoption of the Merger and the Merger Agreement by
shareholders holding at least the minimum number of shares of ASBI Common
Stock entitled to vote at the ASBI Shareholders' Meeting
4
<PAGE>
necessary to approve the Merger and the Merger Agreement under applicable
law. The letter to ASBI shareholders, notice of meeting, proxy
statement/private placement memorandum and form of proxy to be distributed
to shareholders in connection with the Merger and the Merger Agreement
shall be in form and substance satisfactory to SWS and are collectively
referred to herein as the "ASBI Proxy Statement/PPM."
SECTION 1.09 SWS Shareholders' Meeting. SWS, acting through its board of
-------------------------
directors, shall, in accordance with applicable law:
A. Duly call, give notice of, convene and hold a meeting of its
shareholders (the "SWS Shareholders' Meeting") for the purpose of obtaining
the shareholder approval in connection with the transactions contemplated
by this Agreement and the Merger Agreement, including without limitation,
approving the issuance of the SWS Common Stock pursuant to the terms of
this Agreement and increasing the number of authorized shares of SWS, if
necessary;
B. Subject to its fiduciary duties to the shareholders of SWS,
include in the SWS Proxy Statement (defined in Section 1.09C below) the
recommendation of its board of directors that the shareholders of SWS vote
in favor of the approval of the issuance of the SWS Common Stock and the
transactions contemplated by this Agreement and the Merger Agreement; and
C. Prepare and file with the Securities and Exchange Commission
("SEC") the SWS Proxy Statement in accordance with Regulation 14A of the
Securities Exchange Act of 1934 (the "1934 Act"), and once SWS is permitted
pursuant to Regulation 14 to mail it shareholders the SWS Proxy Statement
as a definitive proxy statement, SWS shall mail the SWS Proxy Statement to
the shareholders of SWS as soon as practicable, and use its best efforts to
obtain the approval of the issuance of the SWS Common Stock and the
transactions contemplated by this Agreement and the Merger Agreement by SWS
shareholders holding at least the minimum number of shares required by
applicable law of SWS Common Stock entitled to vote at the SWS
Shareholders' Meeting. The letter to SWS shareholders, notice of meeting,
proxy statement and form of proxy to be distributed to shareholders in
connection with the Merger and the Merger Agreement are collectively
referred to herein as the "SWS Proxy Statement."
SECTION 1.10 Exchange of Certificates. Promptly after the Effective Time,
------------------------
SWS and ASBI shall cause the Exchange Agent to mail to the former shareholders
of ASBI appropriate transmittal materials (which shall specify that delivery
shall be effected, and risk of loss and title to the certificates theretofore
representing shares of ASBI Common Stock shall pass, only upon proper delivery
of such certificates to the Exchange Agent). After the Effective Time, each
holder of shares of ASBI Common Stock issued and outstanding at the Effective
Time shall surrender the certificate or certificates representing such shares to
the Exchange Agent and shall promptly upon surrender thereof receive in exchange
therefor the Merger Consideration provided in Section 1.05A of this Agreement,
together with all undelivered dividends or distributions in respect of such
shares (without interest thereon) pursuant to Section 1.11 of this Agreement,
subject to any shares of the Merger Consideration being placed in escrow
pursuant to Section 1.13 of this Agreement. To the
5
<PAGE>
extent required by Section 1.05C of this Agreement, each holder of shares of
ASBI Common Stock issued and outstanding at the Effective Time also shall
receive, upon surrender of the certificate or certificates representing such
shares, cash in lieu of any fractional share of SWS Common Stock to which such
holder may be otherwise entitled (without interest). SWS shall not be obligated
to deliver the consideration to which any former holder of ASBI Common Stock is
entitled as a result of the Merger until such holder surrenders such holder's
certificate or certificates representing the shares of ASBI Common Stock for
exchange as provided in this Section 1.10. If any record shareholder of ASBI is
unable to locate any certificate evidencing the ASBI Common Stock, such
shareholder shall submit to the Exchange Agent an affidavit of lost certificate
and indemnification agreement in form reasonably acceptable to SWS and, if
required by SWS, a surety bond in an amount equal to the amount to be delivered
to such shareholder, in lieu of such certificate. The certificate or
certificates of ASBI Common Stock so surrendered shall be duly endorsed as the
Exchange Agent may require. Any other provision of this Agreement
notwithstanding, neither the Surviving Corporation, SWS nor the Exchange Agent
shall be liable to a holder of ASBI Common Stock for any amounts paid or
property delivered in good faith to a public official pursuant to any applicable
abandoned property law.
SECTION 1.11 Rights of Former ASBI Shareholders. At the Effective Time,
----------------------------------
the stock transfer books of ASBI shall be closed as to holders of ASBI Common
Stock immediately prior to the Effective Time and no transfer of ASBI Common
Stock by any such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of Section 1.10 of
this Agreement, each certificate theretofore representing shares of ASBI Common
Stock shall from and after the Effective Time represent for all purposes only
the right to receive the Merger Consideration, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which have been
declared or made by ASBI in respect of such shares of ASBI Common Stock in
accordance with the terms of this Agreement and which remain unpaid at the
Effective Time. To the extent permitted by law, former shareholders of record
of ASBI shall be entitled to vote after the Effective Time at any meeting of SWS
shareholders the number of whole shares of SWS Common Stock into which their
respective shares of ASBI Common Stock are converted, regardless of whether such
holders have exchanged their certificates representing ASBI Common Stock for
certificates representing SWS Common Stock in accordance with the provisions of
this Agreement. Whenever a dividend or other distribution is declared by SWS on
the SWS Common Stock, the record date for which is at or after the Effective
Time, the declaration shall include dividends or other distributions on all
shares of SWS Common Stock issuable pursuant to this Agreement, but no dividend
or other distribution payable to the holders of record of SWS Common Stock as of
any time subsequent to the Effective Time shall be delivered to the holder of
any certificate representing shares of ASBI Common Stock issued and outstanding
at the Effective Time until such holder surrenders such certificate for exchange
as provided in Section 1.10 of this Agreement. However, upon surrender of such
ASBI Common Stock certificate, both the SWS Common Stock certificate (together
with all such undelivered dividends or other distributions without interest) and
any undelivered dividends and cash payments to be paid for fractional share
interests (without interest) shall be delivered and paid with respect to each
share represented by such certificate.
SECTION 1.12 Piggyback Registration. If at any time within the five (5)
----------------------
year period after the Effective Time, SWS shall determine to register any of its
securities (for itself or for any other
6
<PAGE>
holder of securities of SWS) under the 1933 Act or any successor legislation
(other than a registration relating to stock option plans, employee benefit
plans or a transaction pursuant to Rule 145 under the 1933 Act), and in
connection therewith SWS may lawfully register the SWS Common Stock acquired by
the ASBI shareholders in connection with the Merger (the "Registrable
Securities"), SWS will promptly give written notice to the then holders (the
"Holders") of all outstanding Registrable Securities and will include in such
registration and effect the registration under the 1933 Act of all Registrable
Securities that such Holders may request in writing by notice delivered to SWS
within 20 days after receipt by such Holder of the notice given by SWS;
provided, however, that in connection with any such offering by SWS of any of
its securities, no such registration of Registrable Securities shall be required
if the managing underwriter, if any, for SWS advises SWS in writing that
including all or part of the Registrable Securities in such offering will
materially adversely affect the offering price of securities proposed to be sold
pursuant to the registration statement. If such managing underwriter advises SWS
that, in its opinion, part of the Registrable Securities may be included in such
offering without having a such material adverse effect on the proposed offering,
then SWS shall be obligated to include such limited number of shares of SWS
Common Stock in such offering, which shares shall be taken from those owned and
held by a group consisting of the Holders and other holders of SWS Common Stock
having registration rights that are pari passu with those of the Holders, and
such limitation shall be imposed upon the Holders and such other holders pro
rata on the basis of the total number of shares of SWS Common Stock owned by the
Holders and such other holders or obtainable by them upon the exercise of rights
with respect to other securities owned by them. All expenses of such
registration and offering (including SWS's attorneys' fees) shall be borne by
SWS, except that the Holders shall bear underwriting commissions and discounts
attributable to their Registrable Securities being registered and the fees and
expenses of separate counsel, if any, for such Holders. The Holders shall be
entitled to an unlimited number of registrations under this Section 1.12. The
rights and obligations of SWS under this Section 1.12 shall be governed by that
certain Registration Rights Agreement attached as Exhibit H hereto.
---------
SECTION 1.13 Escrow of Shares. Prior to execution of this Agreement, SWS
----------------
has identified certain potential Environmental Liabilities (as defined in
Section 11.10) relating to those properties described on Schedule 1.13 of this
-------------
Agreement (the "Environmental Properties"). Pursuant to Section 5.19, prior to
November 1, 1999 ASBI has agreed to use its best efforts to eliminate potential
Environmental Liabilities relating to the Environmental Properties to the
satisfaction of SWS, in its sole discretion. In addition, under Section 5.14,
SWS has the right to conduct additional environmental investigations with
respect to the Environmental Properties. If prior to November 1, 1999, SWS has
determined, in its sole discretion, that ASBI's actions have eliminated any
potential Environmental Liabilities, all shares of SWS Common Stock constituting
the Merger Consideration shall be delivered to the ASBI shareholders in
accordance with Section 1.10 of this Agreement and no shares of SWS Common Stock
constituting the Merger Consideration shall be placed in escrow. If, however,
prior to November 1, 1999, SWS has determined, in its sole discretion, that ASBI
has been unable to eliminate any Environmental Liabilities relating to the
Environmental Properties or that, as a result of SWS's subsequent environmental
investigations, that any Environmental Liabilities exist with respect to the
Environmental Properties, SWS and ASBI shall negotiate in good faith to
establish a mutually agreeable dollar amount sufficient to protect the SWS
Companies or the ASBI Companies from the Environmental Liabilities (the
"Environmental Escrow Amount") and the appropriate time period pursuant to which
shares of SWS Common Stock
7
<PAGE>
constituting the Merger Consideration should be escrowed (the "Escrow Period").
In such event, at the Effective Time, shares of SWS Common Stock constituting
the Merger consideration shall be placed into escrow (the "Escrow Shares") in an
amount equal to the quotient of (i) the Environmental Escrow Amount and (ii) the
Average Closing Price (as defined in Section 11.10) of SWS Common Stock at the
end of the fifth business day prior to the Closing Date (rounded to the nearest
whole share of SWS Common Stock). The Escrow Shares shall be deposited with a
mutually agreeable escrow agent (the "Escrow Agent") in accordance with the
terms of the Escrow Agreement attached as Exhibit J hereto for the purpose of
---------
protecting the SWS Companies and the ASBI Companies against the Environmental
Liabilities relating to the Environmental Properties and such Escrow Shares
shall either be (i) delivered to the former ASBI shareholders or (ii) returned
to SWS solely in accordance with the terms of the Escrow Agreement attached as
Exhibit J hereto. If prior to November 1, 1999, ASBI and SWS cannot reach a
- ---------
mutual agreement on the Environmental Escrow Amount and/or the appropriate
Escrow Period, then either SWS or ASBI may refer such dispute to binding
arbitration in accordance with Section 11.18 of this Agreement.
ARTICLE II.
THE CLOSING AND THE CLOSING DATE
SECTION 2.01 Time and Place of the Closing and Closing Date. On a date
----------------------------------------------
mutually determined by SWS and ASBI (herein called the "Closing Date"), which
date shall be within thirty (30) days after the receipt of all necessary
regulatory, corporate and other approvals and the expiration of any mandatory
waiting periods (unless extended as provided below), a meeting (the "Closing")
will take place at which the parties to this Agreement will exchange
certificates, letters and other documents in order to determine whether all of
the conditions set forth in Articles VII and VIII of this Agreement have been
satisfied or waived or whether any condition exists that would permit a party to
this Agreement to terminate this Agreement. If no such condition then exists or
if no party elects to exercise any right it may have to terminate this
Agreement, then and thereupon the appropriate parties shall execute such
documents and instruments as may be necessary or appropriate in order to effect
the transactions contemplated by this Agreement. The Closing shall take place
at a location mutually agreeable to the parties hereto.
SECTION 2.02 Effective Time. The Merger and the other transactions
--------------
contemplated by this Agreement shall become effective on the date and at the
time the Articles of Merger reflecting the Merger shall become effective with
the Secretary of State of the State of Texas (the "Effective Time"). The
Articles of Merger shall be filed as soon as practicable after the Closing.
SECTION 2.03 Actions to be Taken at the Closing by ASBI. At the Closing,
------------------------------------------
ASBI shall execute and acknowledge (where appropriate) and deliver to SWS, such
documents and certificates necessary to carry out the terms and provisions of
this Agreement, including without limitation, the following (all of such actions
constituting conditions precedent to SWS's obligations to close hereunder):
A. True, correct and complete copies of the Articles of Incorporation
of ASBI and all amendments thereto, duly certified as of a recent date by
the Secretary of State of the State of Texas;
8
<PAGE>
B. True, correct and complete copies of the Certificate of
Incorporation of ASBI Delaware and all amendments thereto, duly certified
as of a recent date by the Secretary of State of the State of Delaware;
C. True, correct and complete copies of the Charter of the Bank and
all amendments thereto, duly certified as of a recent date by the Office of
Thrift Supervision ("OTS");
D. Good standing and existence certificates of a recent date, issued
by the appropriate state officials, duly certifying as to the existence and
good standing of ASBI in the State of Texas;
E. A certificate to do business, dated as of a recent date, issued by
the OTS, duly certifying as to the authority of the Bank to transact the
business of operating as a thrift under the laws of the United States;
F. A certificate of good standing, dated as of a recent date, issued
by the Texas Comptroller of Public Accounts, duly certifying as to the good
standing of the Bank in the State of Texas;
G. A certificate, dated as of a recent date, issued by the Federal
Deposit Insurance Corporation (the "FDIC"), duly certifying that the
deposits of the Bank are insured by the FDIC pursuant to the Federal
Deposit Insurance Act (the "FDIA");
H. A certificate, dated as of the Closing Date, duly executed by the
Secretary or an Assistant Secretary of ASBI, acting solely in his or her
capacity as an officer of ASBI, pursuant to which ASBI shall certify (i)
the due adoption by the board of directors of ASBI of corporate resolutions
attached to such certificate authorizing the execution and delivery of this
Agreement and the other agreements and documents contemplated hereby,
including, but not limited to, the Merger Agreement, and the taking of all
actions contemplated hereby and thereby; (ii) the due adoption by the
shareholders of ASBI authorizing the transactions and the execution and
delivery of this Agreement and the other agreements and documents
contemplated hereby and the taking of all actions contemplated hereby and
thereby; (iii) the incumbency and true signatures of those officers of ASBI
duly authorized to act on its behalf in connection with the transactions
contemplated by this Agreement and to execute and deliver this Agreement
and other agreements and documents contemplated hereby and the taking of
all actions contemplated hereby and thereby on behalf of ASBI; and (iv)
that the copy of the Bylaws of ASBI attached to such certificate is true
and correct and such Bylaws have not been amended except as reflected in
such copy;
I. A certificate duly executed by the Cashier or an Assistant Cashier
of the Bank, acting solely in his or her capacity as an officer of the
Bank, pursuant to which the Bank shall certify that the copy of the Bylaws
attached to such certificate is true and correct and such Bylaws have not
been amended except as reflected in such copy;
9
<PAGE>
J. A certificate duly executed by a duly authorized officer of ASBI,
acting solely in his or her capacity as an officer of ASBI, dated as of the
Closing Date, pursuant to which ASBI shall certify that all of the
representations and warranties made in Article III of this Agreement are
true and correct on and as of the date of such certificate as if made on
such date and except as expressly permitted by this Agreement there shall
have been no Material Adverse Change since March 31, 1999;
K. All consents and approvals required to be obtained by ASBI from
third parties to consummate the transactions contemplated by this
Agreement, including, but not limited to, those listed on Schedule 3.09;
-------------
and
L. All other documents required to be delivered to SWS by ASBI under
the provisions of this Agreement, and all other documents, certificates and
instruments as are reasonably requested by SWS or its counsel.
SECTION 2.04 Actions to be Taken at the Closing by SWS. At the Closing,
-----------------------------------------
SWS shall execute and acknowledge (where appropriate) and deliver to ASBI, such
documents and certificates necessary to carry out the terms and provisions of
this Agreement, including without limitation, the following (all of such actions
constituting conditions precedent to ASBI's obligations to close hereunder):
A. True, correct and complete copies of SWS's Certificate of
Incorporation and all amendments thereto, duly certified as of a recent
date by the Secretary of State of the State of Delaware;
B. True, correct and complete copies of Newco's Articles of
Incorporation and all amendments thereto, duly certified as of a recent
date by the Secretary of State of the State of Texas;
C. Good standing and existence certificates for SWS, dated as of a
recent date, issued by the appropriate state officials, duly certifying as
to the authority to do business and good standing of SWS in the State of
Delaware and the State of Texas;
D. A certificate, dated as of the Closing Date, executed by the
Secretary or an Assistant Secretary of SWS, acting solely in his or her
capacity as an officer of SWS, pursuant to which SWS shall certify (i) the
due adoption by the board of directors of SWS of corporate resolutions
attached to such certificate authorizing the execution and delivery of this
Agreement and the other agreements and documents contemplated hereby and
the taking of all actions contemplated hereby and thereby; (ii) the due
adoption by the shareholders of SWS authorizing issuance of the shares of
SWS Common Stock and the other transactions contemplated by this Agreement;
(iii) the incumbency and true signatures of those officers of SWS duly
authorized to act on its behalf in connection with the transactions
contemplated by this Agreement and to execute and deliver this Agreement
and other agreements and documents contemplated hereby and the taking of
all actions contemplated hereby and thereby on behalf of SWS; and (iv) that
the copy of the Bylaws of
10
<PAGE>
SWS attached to such certificate is true and correct and such Bylaws have
not been amended except as reflected in such copy;
E. A certificate duly executed by the Secretary or an Assistant
Secretary of Newco, acting solely in his or her capacity as an officer of
Newco, pursuant to which Newco shall certify (i) the due adoption by the
board of directors of Newco of corporate resolutions attached to such
certificate authorizing the execution and delivery of the Merger Agreement
and the taking of all actions contemplated thereby; (ii) the due adoption
by the sole shareholder of Newco approving the Merger Agreement and the
Merger; (iii) the incumbency and true signatures of those officers of Newco
duly authorized to act on its behalf in connection with the transactions
contemplated by the Merger Agreement and to execute and deliver the Merger
Agreement and the taking of all actions contemplated thereby on behalf of
Newco; and (iv) that the copy of the Bylaws of Newco attached to such
certificate is true and correct and such Bylaws have not been amended
except as reflected in such copy;
F. True, correct and complete copies of the Certificate of Merger of
Newco with and into ASBI, duly certified as of a recent date by the
Secretary of State of the State of Texas;
G. A certificate, dated as of the Closing Date, executed by a duly
authorized officer of SWS, acting solely in his or her capacity as an
officer of SWS, pursuant to which SWS shall certify that all of the
representations and warranties made in Article IV of this Agreement are
true and correct on and as of the date of such certificate as if made on
such date and except as expressly permitted by this Agreement there shall
have been no Material Adverse Change since March 31, 1999;
H. All consents and approvals required to be obtained by SWS or Newco
from third parties to consummate the transactions contemplated by this
Agreement, including, but not limited to, those listed on Schedule 4.07;
-------------
and
I. All other documents required to be delivered to ASBI by SWS under
the provisions of this Agreement, and all other documents, certificates and
instruments as are reasonably requested by ASBI or its counsel.
SECTION 2.05 Further Assurances. At any time and from time to time after
------------------
the Closing, at the request of any party to this Agreement and without further
consideration, any party so requested will execute and deliver such other
instruments and take such other action as the requesting party may reasonably
deem necessary or desirable in order to effectuate the transactions contemplated
hereby. In the event that, at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, each party
hereto shall take or cause to be taken all such action.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF ASBI
11
<PAGE>
ASBI hereby makes the representations and warranties set forth in this
Article III to SWS. ASBI agrees at the Closing to provide SWS with supplemental
schedules reflecting any material changes thereto between the date of this
Agreement and the Closing Date.
SECTION 3.01 Organization and Qualification. ASBI is a federal unitary
------------------------------
savings and loan holding company registered under the Home Owners' Loan Act
("HOLA"). ASBI is a corporation, duly organized, validly existing and in good
standing under all laws, rules and regulations of the State of Texas. ASBI is
duly qualified to transact business as a foreign entity in each jurisdiction in
which a failure to be so qualified could have a Material Adverse Effect. ASBI
has all requisite corporate power and authority (including all licenses,
franchises, permits and other governmental authorizations as are legally
required) to carry on its business as now being conducted, to own, lease and
operate its properties and assets, including, but not limited to, the ASBI
Subsidiaries, as now owned, leased or operated and to enter into and carry out
its obligations under this Agreement and the Merger Agreement. True and
complete copies of the Articles of Incorporation and Bylaws of ASBI as amended
to date, certified by the Secretary of ASBI, have been delivered to SWS. ASBI
does not own or control any Affiliate (as defined in Section 11.10) or
Subsidiary (as defined in Section 11.10), other than ASBI Subsidiaries disclosed
on Schedule 3.04 hereto. The nature of the business of ASBI and its activities
-------------
do not require it to be qualified to do business in any jurisdiction other than
the State of Texas. Except as set forth on Schedule 3.04, ASBI has no equity
-------------
interest, direct or indirect, in any other bank or corporation or in any
partnership, joint venture or other business enterprise or entity, and the
business carried on by ASBI has not been conducted through any other direct or
indirect Subsidiary or Affiliate of ASBI other than the ASBI Subsidiaries
disclosed on Schedule 3.04 hereto.
-------------
SECTION 3.02 Execution and Delivery. ASBI has taken all corporate action
----------------------
necessary to authorize the execution, delivery and (provided the required
regulatory and shareholder approvals are obtained) performance of this Agreement
and the other agreements and documents contemplated hereby to which it is a
party, including, but not limited to, the Merger Agreement. This Agreement has
been, and the other agreements and documents contemplated hereby, including, but
not limited to, the Merger Agreement, have been or at Closing will be, duly
executed by ASBI and each constitutes the legal, valid and binding obligation of
ASBI, enforceable in accordance with its respective terms and conditions, except
as enforceability may be limited by bankruptcy, conservatorship, insolvency,
moratorium, reorganization, receivership or similar laws and judicial decisions
affecting the rights of creditors generally and by general principles of equity
(whether applied in a proceeding at law or in equity).
SECTION 3.03 ASBI Capitalization. The authorized capital stock of ASBI
-------------------
consists of (i) 1,000,000 shares of ASBI Voting Common Stock, (ii) 100,000,000
shares of ASBI Non-Voting Common Stock, and (iii) 5,000,000 shares of preferred
stock, par value $1.00 per share ("ASBI Preferred Stock"), of which 3,500,000 is
designated as Series A Preferred Stock. As of the date hereof, 272,064 shares
of ASBI Voting Common Stock are issued and outstanding and 26,934,336 shares of
ASBI Non-Voting Common Stock are issued and outstanding. All of such issued
shares are validly issued, fully paid and nonassessable. As of the date hereof,
no shares of ASBI Preferred Stock are issued or outstanding. Except as
disclosed on Schedule 3.03, there are no (A) other outstanding equity securities
-------------
of any kind or character, or (B) outstanding subscriptions, options, convertible
securities, rights, warrants, calls or other agreements or commitments of any
kind issued or granted by, or binding upon, ASBI to purchase or otherwise
acquire any security of or equity
12
<PAGE>
interest in ASBI, obligating ASBI to issue any shares of, restricting the
transfer of or otherwise relating to shares of its capital stock of any class.
All of the issued and outstanding shares of ASBI Common Stock have been duly
authorized, validly issued and are fully paid and nonassessable, and have not
been issued in violation of the preemptive rights of any person. Such shares of
ASBI Common Stock have been issued in compliance with the securities laws of the
United States and other jurisdictions having applicable securities laws. There
are no restrictions applicable to the payment of dividends on the shares of ASBI
Common Stock except pursuant to applicable laws and regulations, and all
dividends declared prior to the date of this Agreement have been paid.
SECTION 3.04 ASBI Subsidiaries. ASBI has disclosed in Schedule 3.04 all
----------------- -------------
of the ASBI Subsidiaries as of the date of this Agreement. Except as disclosed
on Schedule 3.04, no ASBI Company owns any equity interest in any other
-------------
corporation, partnership, limited liability company, or other entity of any kind
or nature and ASBI or one of the ASBI Subsidiaries owns all of the issued and
outstanding shares of capital stock of each ASBI Subsidiary. No equity
securities of any ASBI Subsidiary are or may become required to be issued (other
than to another ASBI Company) by reason of any outstanding subscriptions,
options, convertible securities, rights, warrants, calls or other agreements or
commitments, and there are no contracts or agreement by which any ASBI
Subsidiary is bound to issue (other than to another ASBI Company) additional
shares of its capital stock or outstanding subscriptions, options, convertible
securities, rights, warrants, calls or other agreements or commitments or by
which any ASBI Company is or may be bound to transfer any shares of the capital
stock of any ASBI Subsidiary (other than to another ASBI Company). There are no
contracts or agreements relating to the rights of any ASBI Company to vote or to
dispose of any shares of the capital stock of any ASBI Subsidiary. All of the
shares of capital stock of each ASBI Subsidiary held by an ASBI Company are duly
authorized, validly issued, and fully paid and, except as provided in statutes
pursuant to which depository institution Subsidiaries are organized,
nonassessable under the applicable corporation law of the jurisdiction in which
such Subsidiary is incorporated or organized and are owned by the ASBI Company
free and clear of any lien or encumbrance. Each ASBI Subsidiary is either a
bank or a corporation, and is duly organized, validly existing, and (as to
corporations) in good standing under the laws of the jurisdiction in which it is
incorporated or organized, and has the corporate power and authority necessary
for it to own, lease, and operate its assets and to carry on its business as now
conducted. Each ASBI Subsidiary is duly qualified or licensed to transact
business as a foreign corporation in good standing in the States of the United
States and foreign jurisdictions where the character of its assets or the nature
or conduct of its business requires it to be so qualified or licensed, except
for such jurisdictions in which the failure to be so qualified or licensed is
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on ASBI. Each ASBI Subsidiary that is a depository institution
is an "insured depository institution" as defined in the FDIA and applicable
regulations thereunder, and the deposits in which are insured by the Bank
Insurance Fund or Savings Association Insurance Fund.
SECTION 3.05 Compliance with Laws, Permits and Instruments. Except as
---------------------------------------------
disclosed on Schedule 3.05, each of the ASBI Companies has in all material
-------------
respects performed and abided by all obligations required to be performed by it
to the date hereof, and has complied with, and is in compliance with, and is not
in default (or with the giving of notice or the passage of time will be in
default) under, or in violation of, (i) any provision of the Articles, Charters,
Certificates or Bylaws of the ASBI Companies, (ii) any material provision of any
contract, agreement or instrument
13
<PAGE>
applicable to the ASBI Companies or their respective assets, operations,
properties or businesses now conducted or heretofore conducted or (iii) any
material permit, concession, grant, franchise, license, authorization, judgment,
writ, injunction, order, decree, award, statute, federal, state or local law,
ordinance, rule or regulation of any court, arbitrator or any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality applicable to any of the ASBI Companies or their respective
assets, operations, properties or businesses now conducted or heretofore
conducted.
Except as set forth on Schedule 3.05, the execution, delivery and (provided
-------------
the required regulatory and shareholder approvals are obtained) performance of
this Agreement and the other agreements contemplated hereby, including, but not
limited to the Merger Agreement, and the consummation of the transactions
contemplated hereby and thereby will not conflict with, or result, by itself or
with the giving of notice or the passage of time, in any violation of or default
or loss of a benefit under, (i) any provision of the Articles, Charter,
Certificate or Bylaws of the ASBI Companies, (ii) any material contract or
agreement applicable to the ASBI Companies or their respective assets,
operations, properties or businesses or (iii) any material permit, concession,
grant, franchise, license, authorization, judgment, writ, injunction, order,
decree, statute, law, ordinance, rule or regulation applicable to the ASBI
Companies or their respective assets, operations, properties or businesses.
SECTION 3.06 ASBI Financial Statements. ASBI has furnished to SWS true
-------------------------
and complete copies of the audited consolidated balance sheets for the fiscal
year-ended as of September 30, 1996, 1997 and 1998, and the related audited
consolidated statements of income, shareholders' equity and cash flows for the
fiscal years ended September 30, 1996, 1997 and 1998 and unaudited consolidated
balance sheets of ASBI as of March 31, 1999, and the related unaudited
consolidated statements of income and cash flows for the six-month period ended
March 31, 1999 (such consolidated balance sheets and the related statements of
income, shareholders' equity and cash flows are collectively referred to herein
as the "ASBI Financial Statements"). Except as described in the notes to the
ASBI Financial Statements, the ASBI Financial Statements fairly present, in all
material respects, the financial position of ASBI as of the respective dates
thereof and the results of operations and changes in financial position of ASBI
for the periods then ended, in conformity with generally accepted accounting
principles ("GAAP"), applied on a basis consistent with prior periods (subject,
in the case of the unaudited interim financial statements, to normal year-end
adjustments and the fact that they do not contain all of the footnote
disclosures required by GAAP), except as otherwise noted therein, and the
accounting records underlying the ASBI Financial Statements accurately and
fairly reflect in all material respects the transactions of ASBI. The ASBI
Financial Statements do not contain any items of special or nonrecurring income
or any other income not earned in the ordinary course of business except as
expressly specified therein or as set forth on Schedule 3.06.
-------------
SECTION 3.07 The Bank.
--------
14
<PAGE>
A. The Bank is a federal savings bank, validly existing and in good
standing under the laws of the United States, and duly organized and in
good standing under all laws, rules, and regulations of the United States.
The Bank has all requisite corporate power and authority (including all
licenses, franchises, permits and other governmental authorizations as are
legally required) to carry on its business as now being conducted, to own,
lease and operate its properties and assets as now owned, leased or
operated and to enter into and to carry on the business and activities now
conducted by it. True and complete copies of the Charter and Bylaws of the
Bank, as amended to date, have been delivered to SWS. The Bank is an
insured savings and loan association as defined in the FDIA . The nature
of the business of the Bank does not require it to be qualified to do
business in any jurisdiction other than the State of Texas. Except as set
forth on Schedule 3.07, the Bank has no equity interest, direct or
-------------
indirect, in any other bank or corporation or in any partnership, joint
venture or other business enterprise or entity, except as acquired through
settlement of indebtedness, foreclosure, the exercise of creditors'
remedies or in a fiduciary capacity, and the business carried on by the
Bank has not been conducted through any other direct or indirect Subsidiary
or Affiliate of the Bank.
B. The entire authorized capital stock of the Bank consists solely
of 300,000 shares of common stock of the Bank, par value $8.00 per share
(the "Bank Stock"), all of which are issued and outstanding. All of the
issued and outstanding shares of the Bank Stock have been duly authorized,
validly issued and are fully paid and nonassessable, and have not and will
not have been issued in violation of the preemptive rights of any person.
The securities of the Bank have been issued in compliance with the
securities laws of the United States and applicable state securities laws.
ASBI Delaware is, and as of the Closing Date will be, the lawful record and
beneficial owner of all of the outstanding securities of the Bank, free and
clear of any liens, claims, encumbrances, security interests or
restrictions of any kind. There are no outstanding subscriptions, options,
warrants, calls, contracts, demands, commitments, convertible securities or
other agreements or arrangements of any character or nature whatever under
which the ASBI Companies are or may become obligated to issue, assign or
transfer any securities of the Bank. There are no restrictions applicable
to the payment of dividends on the shares of the Bank Stock except pursuant
to applicable laws and regulations.
C. ASBI has furnished SWS with a true and complete copy of the
Thrift Financial Reports as of March 31, 1999 and June 30, 1999 (the
"TFRs"), for the Bank. The TFRs fairly presents, in all material respects,
the financial position of the Bank and the results of its operations at the
date and for the period indicated in conformity with the instructions for
the preparation of TFRs as promulgated by applicable regulatory
authorities. The TFRs do not contain any items of special or nonrecurring
income or any other income not earned in the ordinary course of business
except as expressly specified therein. The Bank has calculated its
allowance for loan losses in accordance with GAAP and, to the extent
applicable, regulatory accounting principles ("RAP") as applied to savings
and loan institutions and in accordance with all applicable rules and
regulations. To the best knowledge of ASBI, the allowance for loan losses
account for the Bank is, and as of the Closing Date should be, adequate in
all material respects to provide for all losses, net of recoveries relating
to loans previously charged off, on all outstanding loans of the Bank.
15
<PAGE>
SECTION 3.08 Litigation. Except as set forth on Schedule 3.08, there are
---------- -------------
no actions, claims, suits, investigations, reviews or other legal, quasi-
judicial or administrative proceedings of any kind or nature now pending or
threatened against or affecting the ASBI Companies at law or in equity, or by or
before any federal, state or municipal court or other governmental or
administrative department, commission, board, bureau, agency or instrumentality,
domestic or foreign, that in any manner involve the ASBI Companies or any of
their properties or capital stock that might reasonably be anticipated to result
in a Material Adverse Change or have a Material Adverse Effect on the
transactions contemplated by this Agreement or the Merger Agreement, and none of
the ASBI Companies knows or has any reason to be aware of any basis for the
same. No legal action, suit or proceeding or judicial, administrative or
governmental investigation is pending or, to the knowledge of ASBI, threatened
against the ASBI Companies that questions or might question the validity of this
Agreement or the agreements contemplated hereby, including, but not limited to,
the Merger Agreement, or any actions taken or to be taken by the ASBI Companies
pursuant hereto or thereto or seeks to enjoin or otherwise restrain the
transactions contemplated hereby or thereby.
SECTION 3.09 Consents and Approvals. ASBI's board of directors (at a
----------------------
meeting duly called and held) has resolved to recommend to the shareholders of
ASBI approval and adoption of the Merger and the Merger Agreement. Except as
disclosed in Schedule 3.09, no approval, consent, order or authorization of, or
-------------
registration, declaration or filing with, any governmental authority or other
third party is required on the part of the ASBI Companies in connection with the
execution, delivery or performance of this Agreement or the agreements
contemplated hereby, including, but not limited to, the Merger Agreement or the
consummation by the ASBI Companies of the transactions contemplated hereby or
thereby.
SECTION 3.10 Undisclosed Liabilities. Except as disclosed on Schedule
----------------------- --------
3.10, none of the ASBI Companies have any material liability or obligation,
- ----
accrued, absolute, contingent or otherwise and whether due or to become due
(including, without limitation, unfunded obligations under any ASBI Employee
Plans (as defined in Section 3.32 of this Agreement) or liabilities for federal,
state or local taxes or assessments or liabilities under any tax sharing
agreements that are not reflected in or disclosed in the Financial Statements or
the TFRs, except those liabilities and expenses incurred in the ordinary course
of business and consistent with prudent business practices since the date of
ASBI Financial Statements or the TFRs, respectively.
SECTION 3.11 Title to Assets. True and complete copies of all existing
---------------
deeds, leases and title insurance policies for all real property owned or leased
by the ASBI Companies, including all other real estate, and all mortgages, deeds
of trust, security agreements and other documents describing encumbrances to
which such property is subject have been made available to SWS. Each of the
ASBI Companies has good and indefeasible title to all of its assets and
properties used or useful in connection with the businesses of the ASBI
Companies including, without limitation, all personal and intangible properties
reflected in the Financial Statements or the TFRs or acquired subsequent
thereto, subject to no liens, mortgages, security interests, encumbrances or
charges of any kind except (A) as described in Schedule 3.11, (B) as noted in
-------------
the Financial Statements or the TFRs or as set forth in the documents delivered
to SWS pursuant to this Section 3.11, (C) statutory liens not yet delinquent,
(D) consensual landlord liens, (E) minor defects and irregularities in title and
encumbrances that do not materially impair the use thereof for the purpose for
which they are
16
<PAGE>
held, (F) pledges of assets in the ordinary course of business to secure public
funds deposits, and (G) those assets and properties disposed of for fair value
in the ordinary course of business since the dates of the ASBI Financial
Statements or the TFRs.
SECTION 3.12 Absence of Certain Changes or Events. Except as disclosed on
------------------------------------
Schedule 3.12 or as permitted in writing by SWS, since March 31, 1999, each of
- -------------
the ASBI Companies has conducted its business only in the ordinary course and
has not, other than in the ordinary course of business and consistent with past
practices and safe and sound banking practices:
A. Incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except deposits
taken and federal funds purchased and current liabilities for trade or
business obligations, none of which, individually or in the aggregate,
result in a Material Adverse Change;
B. Discharged or satisfied any lien, charge or encumbrance or paid
any obligation or liability, whether absolute or contingent, due or to
become due;
C. Declared or made any payment of dividends or other distribution
to its shareholders, or purchased, retired or redeemed, or obligated itself
to purchase, retire or redeem, any of its shares of capital stock or other
securities;
D. Issued, reserved for issuance, granted, sold or authorized the
issuance of any shares of its capital stock or other securities or
subscriptions, options, warrants, calls, rights or commitments of any kind
relating to the issuance thereof;
E. Acquired any capital stock or other equity securities or acquired
any ownership interest in any bank, corporation, partnership or other
entity (except (i) through settlement of indebtedness, foreclosure, or the
exercise of creditors' remedies or (ii) in a fiduciary capacity, the
ownership of which does not expose it to any liability from the business,
operations or liabilities of such person);
F. Mortgaged, pledged or subjected to lien, charge, security
interest or any other encumbrance or restriction any of its property,
business or assets, tangible or intangible except (i) as described in
Schedule 3.11, (ii) statutory liens not yet delinquent, (iii) consensual
-------------
landlord liens, (iv) minor defects and irregularities in title and
encumbrances that do not materially impair the use thereof for the purpose
for which they are held, (v) pledges of assets to secure public funds
deposits, and (vi) those assets and properties disposed of for fair value
since the dates of the ASBI Financial Statements or the TFRs;
G. Sold, transferred, leased to others or otherwise disposed of any
of their assets or canceled or compromised any debt or claim, or waived or
released any right or claim, which individually or in the aggregate would
constitute a Material Adverse Change;
H. Terminated, canceled or surrendered, or received any notice of or
threat of termination or cancellation of any contract, lease or other
agreement or suffered any damage,
17
<PAGE>
destruction or loss which, individually or in the aggregate, would
constitute a Material Adverse Change;
I. Disposed of, permitted to lapse, transferred or granted any
rights under, or entered into any settlement regarding the breach or
infringement of, any United States or foreign license or Proprietary Right
(as defined in Section 3.17) or modified any existing rights with respect
thereto;
J. Made any change in the rate of compensation, commission, bonus or
other direct or indirect remuneration payable, paid or agreed or orally
promised to pay, conditionally or otherwise, any bonus, extra compensation,
pension or severance or vacation pay, to or for the benefit of any of their
shareholders, directors, officers, employees or agents, or entered into any
employment or consulting contract or other agreement with any director,
officer or employee or adopted, amended in any material respect or
terminated any pension, employee welfare, retirement, stock purchase, stock
option, stock appreciation rights, termination, severance, income
protection, golden parachute, savings or profit-sharing plan (including
trust agreements and insurance contracts embodying such plans), any
deferred compensation, or collective bargaining agreement, any group
insurance contract or any other incentive, welfare or employee benefit plan
or agreement maintained by the ASBI Companies for the benefit of their
directors, employees or former employees;
K. Except for improvements or betterments relating to Properties (as
defined in Section 11.10) and the completion of the Bank's new branch
facility located at Matlock Road and Stephens Street in Arlington, Texas
consistent with the plans and specifications disclosed to SWS, made any
capital expenditures or capital additions or betterments in excess of an
aggregate of $25,000;
L. Instituted, had instituted against them, settled or agreed to
settle any litigation, action or proceeding before any court or
governmental body relating to their property other than routine collection
suits instituted by them to collect amounts owed or suits in which the
amount in controversy is less than $25,000;
M. Suffered any change, event or condition that, in any case or in
the aggregate, has caused or may result in a Material Adverse Change, or
any Material Adverse Change in earnings or costs or relations with their
employees (provided, however, that the Bank shall continue to have the
right to terminate employees in accordance with their existing policies and
procedures), agents, depositors, loan customers, correspondent banks or
suppliers;
N. Except for the transactions contemplated by this Agreement or as
otherwise permitted hereunder, entered into any transaction, or entered
into, modified or amended any contract or commitment;
O. Entered into or given any promise, assurance or guarantee of the
payment, discharge or fulfillment of any undertaking or promise made by any
person, firm or corporation;
18
<PAGE>
P. Sold, or knowingly disposed of, or otherwise divested of the
ownership, possession, custody or control, of any corporate books or
records of any nature that, in accordance with sound business practice,
normally are retained for a period of time after their use, creation or
receipt, except at the end of the normal retention period;
Q. Made any, or acquiesced with any, change in any accounting
methods, principles or material practices except as required by GAAP or
RAP;
R. Except for transactions made through SWS in the ordinary course
of business, sold (provided, however, that payment at maturity is not
deemed a sale) or purchased any Investment Securities (as defined in
Section 11.10);
S. Made, renewed, extended the maturity of, or altered any of the
material terms of any loan to any single borrower and his related interests
in excess of the principal amount of $500,000; or
T. Entered into any agreement or made any commitment whether in
writing or otherwise to take any of the types of action described in
subsections A through S above.
SECTION 3.13 Leases, Contracts and Agreements. Schedule 3.13 sets forth
-------------------------------- -------------
an accurate and complete description of all leases, subleases, licenses,
contracts and agreements to which the ASBI Companies are parties or by which the
ASBI Companies are bound that obligate or may obligate the ASBI Companies in the
aggregate for an amount in excess of $25,000 over the entire term of any such
agreement or related contracts of a similar nature which in the aggregate
obligate or may obligate the ASBI Companies for an amount in excess of $25,000
over the entire term of such related contracts (the "ASBI Contracts"). ASBI has
delivered true and correct copies of all ASBI Contracts to SWS. For the
purposes of this Agreement, the ASBI Contracts shall be deemed not to include
loans made by, repurchase agreements made by, spot foreign exchange transactions
of, bankers acceptances of or deposits by the Bank, but does include unfunded
loan commitments and letters of credit issued by the Bank where the borrowers'
total direct and indirect indebtedness to the Bank is in excess of $50,000.
Except as set forth in Schedule 3.13, no participations or loans have been sold
-------------
that have buy back, recourse or guaranty provisions that create contingent or
direct liabilities of the ASBI Companies. To the knowledge of the ASBI
Companies, all of the ASBI Contracts are legal, valid and binding obligations of
the parties to the ASBI Contracts enforceable in accordance with their terms,
subject to the effects of bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to creditors' rights generally and to general
equitable principles, and are in full force and effect. Except as described in
Schedule 3.13, all rent and other payments by the ASBI Companies under the ASBI
- -------------
Contracts are current, there are no existing defaults by the ASBI Companies
under the ASBI Contracts and no termination, condition or other event has
occurred which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute a default. Each of the ASBI
Companies, respectively, has good and indefeasible leasehold interest in each
parcel of real property leased by it free and clear of all mortgages, pledges,
liens, encumbrances and security interests.
SECTION 3.14 Taxes.
-----
19
<PAGE>
A. Each of the ASBI Companies has duly and timely filed with the
appropriate federal, state and local governmental agencies all tax returns
and reports required to be filed, including, without limitation, income,
excise, property, sales, use, franchise, value added, unemployment,
employees' income withholding and social security taxes, imposed by the
United States or by any foreign country or by any state, municipality,
subdivision or instrumentality of the United States or of any foreign
country, or by any other taxing authority, and has paid, or has established
adequate reserves for the payment of, all taxes and assessments that are or
are claimed to be due, payable or owed by the ASBI Companies, or for which
the ASBI Companies may have liability, whether as a result of their own
activities or by virtue of their affiliation with other entities and all
interest and penalties thereon, whether disputed or not. All such tax
returns and reports are accurately prepared and all deposits required by
law to be made by the ASBI Companies with respect to employees' withholding
taxes have been duly made. No ASBI Company is or has been delinquent in
the payment of any foreign or domestic tax, assessment or governmental
charge or deposit and has no tax deficiency or claim outstanding, proposed
or assessed against it, and there is no basis for any such deficiency or
claim. Within the last four (4) years, no ASBI Company's federal income
tax return has been audited or examined and no such audit is currently
pending or threatened. Except as disclosed in Schedule 3.14, no ASBI
-------------
Company has been granted any extension of time with respect to any ASBI
Company or the date on which any tax return was or is due to be filed by or
with respect to any ASBI Company or any waiver or agreement by any ASBI
Company for the extension of time for the assessment or collection of any
tax. No ASBI Company has committed any violation of any applicable
federal, state, local or foreign tax laws.
B. No claim has ever been made by an authority in a jurisdiction
where the ASBI Companies do not file tax returns that an ASBI Company is or
may be subject to taxation by that jurisdiction. There are no liens for
taxes due and payable on, or any liens that have been improperly or
erroneously filed against, the assets of the ASBI Companies. ASBI has
disclosed on its federal income tax returns all positions taken therein
that could give rise to a substantial understatement of federal income tax
within the meaning of Section 6662 of the Code.
C. The amounts set up as provisions for current or deferred taxes on
the ASBI Financial Statements and the TFRs are sufficient for the payment
of all unpaid federal, state, county, local, foreign or other taxes
(including any interest or penalties) of or on behalf of the ASBI Companies
applicable to the periods covered by each entity's financial statements,
and all years and periods prior thereto.
D. No ASBI Company, nor any director or officer (or employee
responsible for tax matters) of any ASBI Company expects any authority to
assess any additional taxes for any period for which tax returns have been
filed. There is no dispute or claim concerning any tax liability of any
ASBI Company either (i) claimed or raised by any authority in writing or
(ii) as to which ASBI and the directors and officers (and employees
responsible for tax matters) of ASBI has knowledge based upon personal
contact with any agent of such authority. ASBI has delivered to SWS
correct and complete copies of all federal income tax returns filed with
the Internal Revenue Service ("IRS"), examination reports, and statements
20
<PAGE>
of deficiencies assessed against or agreed to by any ASBI Company since
December 31, 1995.
E. No ASBI Company has waived any statute of limitations in respect
of taxes or agreed to any extension of time with respect to a tax
assessment or deficiency.
F. ASBI has been a validly electing Subchapter S corporation within
the meaning of Sections 1361 and 1362 of the Code at all times after
December 31, 1996 and will be a validly electing Subchapter S corporation
up to and including the Closing Date.
G. Each ASBI Subsidiary has been a validly electing Qualified
Subchapter S Subsidiary ("QSSS") within the meaning of Section 1361(b)(3)
of the Code at all times after December 31, 1997, and each will be a
validly electing QSSS up to and including the Closing Date. Except as
disclosed in Schedule 3.14, the ASBI Subsidiaries have never agreed to
-------------
make, nor is any ASBI Subsidiary required to make, any adjustment under
Section 481(a) of the Code by reason of a change in method of accounting or
otherwise.
SECTION 3.15 Insurance. Schedule 3.15 contains an accurate and complete
--------- -------------
list and brief description of all policies of insurance, including fidelity and
bond insurance, of the ASBI Companies. Except as set forth on Schedule 3.15,
-------------
all such policies (A) are sufficient for compliance by the ASBI Companies with
all requirements of law and all agreements to which the ASBI Companies are a
party, (B) are valid, outstanding and enforceable except as enforceability may
be limited by bankruptcy, conservatorship, insolvency, moratorium,
reorganization, receivership, or similar laws and judicial decisions affecting
the rights of creditors generally and by general principles of equity (whether
applied in a proceeding at law or equity), (C) will not in any significant
respect be affected by, and will not terminate or lapse by reason of, the
transactions contemplated by this Agreement, and (D) are presently in full force
and effect, no notice has been received of the cancellation, or threatened or
proposed cancellation, of any such policy and there are no unpaid premiums due
thereon. To the best of their knowledge, no ASBI Company is in default with
respect to the provisions of any such policy and has not failed to give any
notice or present any claim thereunder in a due and timely fashion. Each
material property of the ASBI Companies is insured for the benefit of the ASBI
Companies in amounts deemed adequate by ASBI's management against risks
customarily insured against. Except as set forth on Schedule 3.15, there have
-------------
been no claims under any fidelity bonds of the ASBI Companies within the last
three (3) years, and ASBI is not aware of any facts that would form the basis of
a claim under such bonds.
SECTION 3.16 No Adverse Change. Except as disclosed in the
-----------------
representations and warranties made in this Article III, there has not been any
Material Adverse Change since March 31, 1999, nor has any event or condition
occurred that has resulted in, or has a reasonable possibility of resulting in
the future, in a Material Adverse Change.
SECTION 3.17 Proprietary Rights. Except as set forth on Schedule 3.17, no
------------------ -------------
ASBI Company owns or requires the use of any patent, patent application, patent
right, invention, process, trademark (whether registered or unregistered),
trademark application, trademark right, trade name, service name, service mark,
copyright or any trade secret ("Proprietary Rights") for the business or
operations of the ASBI Companies. To the best knowledge of ASBI, no ASBI
Company is
21
<PAGE>
infringing upon or otherwise acting adversely to, and have not in the past three
(3) years infringed upon or otherwise acted adversely to, any Proprietary Right
owned by any other person or persons. There is no claim or action by any such
person pending, or to the knowledge of ASBI threatened, with respect thereto.
SECTION 3.18 Transactions with Certain Persons and Entities. Except as
----------------------------------------------
disclosed in Schedule 3.18, no ASBI Company owes any amount to (excluding
-------------
deposit liabilities), or has any loan, contract, lease, commitment or other
obligation from or to any of the present or former directors or officers (other
than compensation for current services not yet due and payable and reimbursement
of expenses arising in the ordinary course of business) of the ASBI Companies,
and none of such persons owes any amount to the ASBI Companies. Except as set
forth on Schedule 3.18, there are no agreements, instruments, commitments,
-------------
extensions of credit, tax sharing or allocation agreements or other contractual
agreements of any kind between or among any ASBI Company, whether on their own
behalf or in their capacity as trustee or custodian for the funds of any ASBI
Employee Plan (as defined in the Section 3.32 of this Agreement) and any of
their Affiliates.
SECTION 3.19 Evidences of Indebtedness. All evidences of indebtedness and
-------------------------
leases that are reflected as assets of the ASBI Companies are legal, valid and
binding obligations of the respective obligors thereof, enforceable in
accordance with their respective terms (except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors generally and the availability of injunctive relief, specific
performance and other equitable remedies) and are not subject to any known or
threatened defenses, offsets or counterclaims that may be asserted against, the
ASBI Companies or the present holder thereof, except as disclosed in Schedule
--------
3.19; provided, however, that the foregoing sentence shall not be deemed to be a
- ----
representation or warranty of collectibility of any of the assets. The credit
files of the Bank contain all material information (excluding general, local or
national industry, economic or similar conditions) known to the ASBI Companies
that is reasonably required to evaluate in accordance with generally prevailing
practices in the banking industry the collectibility of the loan portfolio of
the Bank (including loans that will be outstanding if any of them advances funds
they are obligated to advance). ASBI has disclosed all of the substandard,
doubtful, loss, nonperforming or problem loans on the internal watch list of the
Bank, a copy of which as of March 31, 1999, has been provided to SWS.
SECTION 3.20 Employee Relationships. Each of the ASBI Companies has
----------------------
complied with all applicable material laws relating to its relationships with
its employees, and ASBI believes that the relationships between the ASBI
Companies and their respective employees are good. To the best knowledge of
ASBI, no key executive officer or manager of any of the operations operated by
the ASBI Companies or any group of employees of the ASBI Companies has or have
any present plans to terminate their employment with the ASBI Companies.
SECTION 3.21 Condition of Assets. Except as set forth on Schedule 3.21,
------------------- -------------
all furniture, fixtures and equipment used by the ASBI Companies are in good
operating condition, ordinary wear and tear excepted, and conform with all
material ordinances, regulations, zoning and other laws, whether federal, state
or local. No ASBI Company's premises or equipment are in need of
22
<PAGE>
maintenance or repairs other than ordinary routine maintenance and repairs that
are not material in nature or cost.
SECTION 3.22 Environmental Compliance. Except as disclosed on Schedule
------------------------ --------
3.22:
- ----
A. The ASBI Companies and all of their respective Properties and the
ASBI Companies' operations are in material compliance with all
Environmental Laws (as defined in Section 11.10). The ASBI Companies are
not aware of, nor has any ASBI Company received notice of, any past,
present, or future conditions, events, activities, practices or incidents
that may interfere with or prevent the compliance of the ASBI Companies
with all Environmental Laws.
B. The ASBI Companies have obtained all material permits, licenses
and authorizations that are required under all Environmental Laws.
C. No Hazardous Materials (as defined in Section 11.10) exist on,
about or within any of the Properties, nor have any Hazardous Materials
previously existed on, about or within or been used, generated, stored,
transported, disposed of, on or released from any of the Properties. The
use that the ASBI Companies make and intend to make of the Properties will
not result in the use, generation, storage, transportation, accumulation,
disposal or release of any Hazardous Material on, in or from any of the
Properties.
D. Except as disclosed on Schedule 3.22, there is no action, suit,
-------------
proceeding, investigation, or inquiry before any court, administrative
agency or other governmental authority pending or, to the knowledge of
ASBI, threatened against the ASBI Companies relating in any way to any
Environmental Law. No ASBI Company has any liability for remedial action
under any Environmental Law. No ASBI Company has received any request for
information by any governmental authority with respect to the condition,
use or operation of any of the Properties nor has any ASBI Company received
any notice of any kind from any governmental authority or other person with
respect to any violation of or claimed or potential liability of any kind
under any Environmental Law (including, without limitation, any letter,
notice or inquiry from any person or governmental entity informing the ASBI
Companies that they are or may be liable in any way under CERCLA (as
defined in Section 11.10) or requesting information to enable such a
determination to be made).
SECTION 3.23 Regulatory Compliance. Except as set forth on Schedule 3.23,
--------------------- -------------
all reports, records, registrations, statements, notices and other documents or
information required to be filed by the ASBI Companies with any federal or state
regulatory authority, including, without limitation, the OTS, the FDIC and the
IRS have been duly and timely filed and all information and data contained in
such reports, records or other documents are substantially true, accurate,
correct and complete. Except as set forth on Schedule 3.23, no ASBI Company is
-------------
now or has been within the last four (4) years subject to any commitment letter,
memorandum of understanding, cease and desist order, written agreement or other
formal or informal administrative action with any such regulatory bodies. ASBI
does not believe any such regulatory bodies have any present intent to place the
ASBI Companies under any such administrative action. Except as set forth on
Schedule 3.23, there are no actions or proceedings pending or threatened against
- -------------
any ASBI Company by or before any such
23
<PAGE>
regulatory bodies or any other nation, state or subdivision thereof, or any
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
SECTION 3.24 Absence of Certain Business Practices. To the best knowledge
-------------------------------------
of ASBI, none of the ASBI Companies, nor any officer, employee or agent of the
ASBI Companies, nor any other person acting on their behalf, has, directly or
indirectly, within the past five (5) years, given or agreed to give any gift or
similar benefit to any customer, supplier, governmental employee or other
person who is or may be in a position to help or hinder the business of the ASBI
Companies (or assist the ASBI Companies in connection with any actual or
proposed transaction) that (A) might subject the ASBI Companies to any damage or
penalty in any civil, criminal or governmental litigation or proceeding, (B) if
not given in the past, might have resulted in a Material Adverse Change or (C)
if not continued in the future might result in a Material Adverse Change or
might subject the ASBI Companies to suit or penalty in any private or
governmental litigation or proceeding.
SECTION 3.25 Information for Proxy Statements. None of the information
--------------------------------
supplied or to be supplied by the ASBI Companies, or any of their directors,
officers, employees or agents for inclusion in the SWS Proxy Statement or the
ASBI Proxy Statement/PPM, or any amendment thereof or supplement thereto, will
be false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or at the time of the
SWS Shareholders' Meeting or the ASBI Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the SWS Shareholders' Meeting or the ASBI
Shareholders' Meeting. All documents that the ASBI Companies are responsible
for filing with any regulatory or governmental agency in connection with the
Merger will comply in all material respects with the provisions of applicable
law.
SECTION 3.26 Dissenting Shareholders. ASBI has no knowledge of any plan
-----------------------
or intention on the part of any ASBI shareholders to make written demand for
payment of the fair value of their shares of the ASBI Common Stock in the manner
provided by applicable law.
SECTION 3.27 Books and Records. The minute books, stock certificate books
-----------------
and stock transfer ledgers of the ASBI Companies (A) have been kept accurately
in the ordinary course of business, (B) are complete and correct in all material
respects, (C) the transactions entered therein represent bona fide transactions,
and (D) there have been no transactions involving the business of the ASBI
Companies that properly should have been set forth therein and that have not
been accurately so set forth.
SECTION 3.28 Forms of Instruments, Etc. ASBI has made, and will make,
-------------------------
available to SWS copies of all standard forms of notes, mortgages, deeds of
trust and other routine documents of a like nature used on a regular and
recurring basis by the ASBI Companies in the ordinary course of their business.
SECTION 3.29 Fiduciary Responsibilities. The ASBI Companies have
--------------------------
performed in all material respects all of their respective duties as a trustee,
custodian, guardian or as an escrow agent
24
<PAGE>
in a manner that complies in all material respects with all applicable laws,
regulations, orders, agreements, instruments and common law standards, where the
failure to so perform would result in a Material Adverse Change or have a
Material Adverse Effect on transactions contemplated by this Agreement, and no
ASBI Company has any reason to be aware of any basis for the same.
SECTION 3.30 Guaranties. Except for items in the process of collection in
----------
the ordinary course of the Bank's business, none of the obligations or
liabilities of the ASBI Companies are guaranteed by any other person, firm or
corporation, nor, except in the ordinary course of business, according to
prudent business practices and in compliance with applicable law, have the ASBI
Companies guaranteed the obligations or liabilities of any other person, firm or
corporation.
SECTION 3.31 Voting Trust or Buy-Sell Agreements. Except as set forth on
------------------------------------
Schedule 3.31, ASBI is not aware of any agreement between any of its
- -------------
shareholders relating to a right of first refusal with respect to the purchase
or sale by any such shareholder of capital stock of ASBI or any voting agreement
or voting trust with respect to shares of capital stock of ASBI. All of such
agreements will be terminated or canceled at or prior to the Effective Time.
SECTION 3.32 Employee Benefit Plans.
----------------------
A. Set forth on Schedule 3.32 is a complete and correct list of all
-------------
"employee benefit plans" (as defined in the Employee Retirement Income
Security Act of 1974, as amended ["ERISA"]), all specified fringe benefit
plans as defined in Section 6039D of the Code, and all other bonus,
incentive, compensation, deferred compensation, profit sharing, stock
option, stock appreciation right, stock bonus, stock purchase, employee
stock ownership, savings, severance, supplemental unemployment, layoff,
salary continuation, retirement, pension, health, life insurance,
disability, group insurance, vacation, holiday, sick leave, fringe benefit
or welfare plan, or any other similar plan, agreement, policy or
understanding (whether written or oral, qualified or nonqualified,
currently effective or terminated), and any trust, escrow or other
agreement related thereto, which (a) is currently or has been at any time
within the last sixty months, maintained or contributed to by the ASBI
Companies, or with respect to which any ASBI Company has any liability, and
(b) provides benefits, or describes policies or procedures applicable to
any officer, employee, service provider, former officer or former employee
of the ASBI Company, or the dependents of any thereof, regardless of
whether funded (the "ASBI Employee Plans").
B. No ASBI Employee Plan is a defined benefit plan within the
meaning of Section 3(35) of ERISA. ASBI has delivered or made available to
SWS true, accurate and complete copies of the documents comprising each
ASBI Employee Plan and any related trust agreements, annuity contracts or
any other funding instruments ("Funding Arrangements"), any contracts with
independent contractors (without limitation, actuaries, investment
managers, etc.) that relate to any ASBI Employee Plan, the Form 5500 filed
in each of the most recent plan years with respect to each ASBI Employee
Plan, and related schedules and opinions, and such other documents, records
or other materials related thereto reasonably requested by SWS. There have
been no prohibited transactions (described under Section 406 of ERISA or
Section 4975(c) of the Code) breaches of fiduciary duty or any other
breaches or violations of any law applicable to the ASBI Employee Plans and
related
25
<PAGE>
Funding Arrangements that would subject SWS or the ASBI Companies to any
liabilities in excess of $25,000 in the aggregate. Each ASBI Employee Plan
intended to be qualified under Code Section 401(a) has a current favorable
determination letter and has been operated in compliance with applicable
law, and in accordance with its terms, and all reports and filings required
by any government agency with respect to each ASBI Employee Plan have been
timely and completely filed. There are no pending claims, lawsuits or
actions relating to any ASBI Employee Plan (other than ordinary course
claims for benefits) and, to the best knowledge of ASBI, none are
threatened. No written or oral representations have been made to any
employee or former employee of the ASBI Companies promising or guaranteeing
any employer payment or funding for the continuation of medical, dental,
life or disability coverage for any period of time beyond the end of the
current plan year, or beyond termination of employment, (except to the
extent of coverage required under Code Section 4980B). Compliance with FAS
106 will not create any material change to the ASBI Financial Statements.
Except as required in connection with qualified plan amendments required by
tax law changes, the consummation of the transactions contemplated by this
Agreement will not accelerate the time of payment or vesting, or increase
the amount, of compensation due to any employee, officer, former employee
or former officer of the ASBI Companies and there are no contracts or
arrangements providing for payments that will be subject to excise tax
under Code Section 4999.
C. With respect to each "employee benefit plan" (as defined in
ERISA) maintained or contributed to or required to be contributed to,
currently or in the past, by any trade or business with which any ASBI
Company is required by any of the rules contained in the Code or ERISA to
be treated as a single employer (the "Controlled Group Plans"):
(i) All Controlled Group Plans which are "group health plans" (as defined
in the Code and ERISA) have been operated to the Closing such that
failures to operate such group health plans in full compliance with
Part 6 of Subtitle B of Title 1 of ERISA and Section 4980B of the
Code would not subject the ASBI Companies to liability in excess of
$25,000 in the aggregate; and
(ii) There is no Controlled Group Plan that is a defined benefit plan (as
defined in Section 3(35) of ERISA), nor has there been in the last
five (5) calendar years.)
(iii) There is no Controlled Group Plan that is a "multiple employer plan"
or "multiemployer plan" (as either such term is defined in ERISA),
nor has there been since 1974.
D. Each ASBI Company is completely insured for all health insurance
claims. No event has occurred or circumstances exist that could result in a
material increase in premium costs of ASBI Employee Plans that are insured
or a material increase in self-insured costs.
SECTION 3.33 Year 2000.
---------
26
<PAGE>
A. ASBI has disclosed to SWS a complete and accurate copy of ASBI's
plan (the "Year 2000 Plan"), including an estimate of the anticipated
associated costs, for implementing modifications to the ASBI Companies'
hardware, software, and computer systems, chips, and microprocessors, to
ensure proper execution and accurate processing of all date-related data,
whether from years in the same century or in different centuries. ASBI
represents and warrants to SWS that all ASBI Companies are "Year 2000
Compliant." The term "Year 2000 Compliant" means that all programs,
systems, services, or other technology will: (i) accept and process date
and time data accurately and without interruption (including, but not
limited to, calculating, comparing, and sequencing) from, into, and between
the years 1999 and 2000, using the correct century and year, and accurately
calculating leap year dates; (ii) when used in combination with other
information technology, process date and time data accurately and without
interruption if the other information technology properly exchanges date
and time data with it; (iii) respond to two-digit-year date input in a way
that resolves the ambiguity as to century in a disclosed, defined, and
predetermined manner; and (iv) store and provide output of date information
in ways that are unambiguous as to century.
B. In accordance with those certain guidances and statements issued
by the Federal Financial Institutions Examination Council ("FFIEC") in
connection with the century date change that will take place on January 1,
2000, dated as of June 1996, May 5, 1997, December 17, 1997, March 17,
1998, April 10, 1998, May 13, 1998, August 31, 1998, September 2, 1998,
October 15, 1998, December 11, 1998, February 17, 1999, and May 6, 1999
(together with any subsequent FFIEC issuances on the Year 2000, the
"Interagency Statements"), ASBI has:
(i) Inventoried and assessed the technologies it uses, particularly its
computer hardware and software, to identify potential problems areas
related to the Year 2000;
(ii) Developed and implemented a Year 2000 Plan, including comprehensive
testing plans, to prepare its information technology to: (a) process
date/time data accurately and without interruption (including, but
not limited to, calculating, comparing, and sequencing) from, into,
and between the years 1999 and 2000, and leap year calculations; (b)
when used in combination with other information technology, process
date/time data accurately and without interruption if the other
information technology properly exchanges date/time data with it; (c)
respond to two-digit year-date input in a way that resolves the
ambiguity as to century in a disclosed, defined, and predetermined
manner; and (d) store and provide output of date information in ways
that are unambiguous as to century; and
(iii) Developed contingency plans to ensure continuity of business in the
event of: (a) failure to complete any tasks required by the Year 2000
Plan, such as remediation or validation; or (b) any externally caused
business interruption related to the century date change.
C. ASBI is in compliance with the Interagency Statements.
27
<PAGE>
D. If the Bank has been examined by the OTS for Year 2000 readiness,
it has not received a rating that would cause delay or denial of any
regulatory approval of this Agreement.
E. ASBI's estimate of the costs (on a consolidated basis) to complete
its Year 2000 compliance efforts is $10,000.
F. Between the date of this Agreement and the Effective Time, ASBI
shall endeavor to continue its efforts to implement such Year 2000 Plan.
SECTION 3.34 Accounting, Tax, and Regulatory Matters. No ASBI Company or
---------------------------------------
any Affiliate thereof has taken or agreed to take any action, and ASBI has no
knowledge of any fact or circumstance that is reasonably likely to (i) prevent
the transactions contemplated hereby, including the Merger, from qualifying for
pooling-of-interests accounting treatment or as a reorganization within the
meaning of Section 368(a) of the Code, or (ii) materially impede or delay
receipt of any of the consents and approvals referred to on Schedules 3.09 and
------------------
4.07 of this Agreement.
- ----
SECTION 3.35 Nonaccredited Investors. To the best knowledge of ASBI, no
-----------------------
more than thirty-five (35) of the ASBI shareholders will not qualify as
"Accredited Investors" as such term is defined in Rule 501(a) of Regulation D
of the 1933 Act.
SECTION 3.36 Information Systems. Each of the ASBI Companies has the
-------------------
ability to provide all computer, telecommunications, software and other
equipment and technology or resources (collectively, "Systems") necessary to
conduct its current and planned business, and the Systems possess the necessary
capacity, functionality, and compatibility for such purposes. Qualified
maintenance personnel, employed by or on contract with ASBI, are available to
keep the Systems in good working order. The Systems and the Bank's
transactional web site incorporate security measures that are at least as good
as those that are standard in the banking industry, and the Bank's web site is
reasonably available and accessible by Internet users. None of the ASBI
Companies has received a rating lower than "satisfactory" in its most recent
information systems examination by banking regulators.
SECTION 3.37 Representations Not Misleading. To the best knowledge of
------------------------------
ASBI, all material facts relating to the business operations, properties,
assets, liabilities (contingent or otherwise) and financial condition of the
ASBI Companies have been disclosed to SWS in or in connection with this
Agreement. No representation or warranty by ASBI contained in this Agreement,
nor any statement, exhibit or schedule furnished to SWS by ASBI under and
pursuant to, or in anticipation of this Agreement, contains or will contain on
the Closing Date any untrue statement of a material fact or omits or will omit
to state a material fact necessary to make the statements contained herein or
therein, in light of the circumstances under which it was or will be made, not
misleading and such representations and warranties would continue to be true and
correct following disclosure to any governmental authority having jurisdiction
over ASBI or its properties of the facts and circumstances upon which they were
based. Except as disclosed herein, there is no matter that will have a Material
Adverse Effect on the ASBI Companies or ASBI's ability to perform the
transactions contemplated by this Agreement or the other agreements contemplated
hereby, or to the knowledge of ASBI, will in the future result in a Material
Adverse Change, other than general
28
<PAGE>
economic conditions. No information material to the Merger, and that is
necessary to make the representations and warranties herein contained not
misleading, has been withheld by ASBI.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SWS
SWS hereby makes the representations and warranties set forth in this
Article IV to ASBI.
SECTION 4.01 Organization and Qualification. SWS is a corporation, duly
------------------------------
organized, validly existing and in good standing under all laws, rules, and
regulations applicable to corporations located or organized in the State of
Delaware. SWS is duly qualified to transact business as a foreign entity in
each jurisdiction in which a failure to be so qualified could have a Material
Adverse Effect. SWS has all requisite corporate power and authority (including
all licenses, franchises, permits and other governmental authorizations as are
legally required) to carry on its business as now being conducted, to own, lease
and operate its properties and assets as now owned, leased or operated and to
enter into and carry out its obligations under this Agreement.
SECTION 4.02 Execution and Delivery. SWS has taken all corporate action
----------------------
necessary to authorize the execution, delivery and (provided the required
regulatory and shareholder approvals are obtained) performance of this Agreement
and the other agreements and documents contemplated hereby to which it is a
party, including, but not limited to, the Merger Agreement. This Agreement has
been, and the other agreements and documents contemplated hereby, including, but
not limited to, the Merger Agreement, have been or at Closing will be, duly
executed by SWS and each constitutes the valid and binding obligation of SWS,
enforceable in accordance with its respective terms and conditions, except as
enforceability may be limited by bankruptcy, conservatorship, insolvency,
moratorium, reorganization, receivership or similar laws and judicial decisions
affecting the rights of creditors generally and by general principles of equity
(whether applied in a proceeding at law or in equity).
SECTION 4.03 Authorized and Outstanding Stock of SWS. The authorized
---------------------------------------
capital stock of SWS consists of (i) 20,000,000 shares of common stock, par
value $0.10 per share (the "SWS Common Stock"), and (ii) 100,000 shares of
preferred stock, par value $1.00 per share ("SWS Preferred Stock"). As of the
date hereof, 11,813,780 shares of SWS Common Stock are issued and outstanding.
All of such issued shares are validly issued, fully paid and nonassessable. As
of the date hereof, none of the SWS Preferred Stock is issued or outstanding.
Except as set forth on Schedule 4.03, SWS does not have outstanding, and is not
-------------
bound by, any subscriptions, options, warrants, calls, commitments or agreements
to issue any additional shares of its capital stock, including any right of
conversion or exchange under any outstanding security or other instrument, and
SWS is not obligated to issue any shares of its capital stock for any purpose.
There are no unsatisfied preemptive rights in respect to the capital stock of
SWS. SWS has no obligation to repurchase any of its securities, and there are
no agreements restricting the transfer of or otherwise relating to shares of its
capital stock of any class.
SECTION 4.04 Authorized and Outstanding Stock of Newco. The authorized
-----------------------------------------
capital stock of Newco will consist of 100,000 shares of common stock, par value
$1.00 per share (the "Newco
29
<PAGE>
Common Stock") and 1,000 shares of the Newco Common Stock will be issued and
outstanding and held by SWS.
SECTION 4.05 Compliance with Laws, Permits and Instruments. The
---------------------------------------------
execution, delivery and (provided the required regulatory approvals are
obtained) performance of this Agreement and the other agreements contemplated
hereby, including, but not limited to the Merger Agreement, and the consummation
of the transactions contemplated hereby and thereby, will not conflict with, or
result, by itself or with the giving of notice or the passage of time, in any
violation of or default or loss of a benefit under, (A) any provision of the
Certificate of Incorporation or Bylaws of SWS, (B) any material provision of any
mortgage, indenture, lease, contract, agreement or other instrument applicable
to SWS or its assets, operations, properties or businesses now conducted or
heretofore conducted or (C) any statute, law, ordinance, rule or regulation
applicable to SWS.
SECTION 4.06 Litigation. Except as set forth on Schedule 4.06, there are
---------- -------------
no actions, claims, suits, investigations, reviews or other legal, quasi-
judicial or administrative proceedings of any kind or nature now pending or
threatened against or affecting any SWS Company at law or in equity, or by or
before any federal, state or municipal court or other governmental or
administrative department, commission, board, bureau, agency or instrumentality,
domestic or foreign, that in any manner involve any SWS Company or any of their
properties or capital stock that might reasonably be anticipated to result in a
Material Adverse Change or have a material Adverse Effect on the transactions
contemplated by this Agreement or the Merger Agreement, and SWS does not know or
have any reason to be aware of any basis for the same. No legal action, suit or
proceeding or judicial, administrative or governmental investigation is pending
or, to the knowledge of SWS, threatened against any SWS Company that questions
or might question the validity of this Agreement or the agreements contemplated
hereby, including, but not limited to, the Merger Agreement, or any actions
taken or to be taken by SWS or its Subsidiaries pursuant hereto or thereto or
seeks to enjoin or otherwise restrain the transactions contemplated hereby or
thereby.
SECTION 4.07 Consents and Approvals. SWS's board of directors (at a
----------------------
meeting duly called and held) has resolved to recommend to the shareholders of
SWS approval for the issuance of the SWS Common Stock and other transactions
contemplated pursuant to this Agreement. Except for regulatory approvals as
disclosed in Schedule 4.07, no approval, consent, order or authorization of, or
-------------
registration, declaration or filing with, any governmental authority or other
third party is required on the part of SWS in connection with the execution,
delivery or performance of this Agreement or the agreements contemplated hereby,
including, but not limited to, the Merger Agreement or the consummation by SWS
of the transactions contemplated hereby or thereby.
SECTION 4.08 SEC Filings; SWS Financial Statements.
-------------------------------------
A. SWS has timely filed with the SEC all forms, reports and financial
statements and documents required to be filed by it since December 31,
1995. SWS has made available to ASBI all forms, reports, financial
statements (the "SWS Financial Statements") and documents required to be
filed by SWS with the SEC since December 31, 1998 (collectively, the "SWS
SEC Reports"). The SWS SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the 1933 Act and the
1934 Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a
30
<PAGE>
filing prior to the date of this Agreement, then on the date of such
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such SWS SEC Reports or necessary in
order to make the statements in such SWS SEC Reports, in light of the
circumstances under which they were made, not misleading. Except for SWS
Subsidiaries that are registered as a broker, dealer, or investment advisor
or filings required due to fiduciary holdings of the SWS Subsidiaries, none
of SWS Subsidiaries is required to file any forms, reports, or other
documents with the SEC.
B. Each of the SWS Financial Statements (including, in each case, any
related notes) contained in the SWS SEC Reports, including any SWS SEC
Reports filed after the date of this Agreement until the Effective Time,
complied or will comply as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto,
was or will be prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except as may be indicated in the
notes to such financial statements or, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC), and fairly presented or will fairly
present the consolidated financial position of SWS and its Subsidiaries as
at the respective dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount or
effect.
SECTION 4.09 Proxy Statement. None of the information supplied or to be
---------------
supplied by SWS or any of its directors, officers, employees or agents for
inclusion in the ASBI Proxy Statement/PPM, or any amendment thereof or
supplement thereto, will be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or at the time of the ASBI Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy or offering of SWS Common Stock for the ASBI
Shareholders' Meeting. All documents that SWS is responsible for filing with
any regulatory or governmental agency in connection with the Merger will comply
in all material respects with the provisions of applicable law.
SECTION 4.10 Representations Not Misleading. No representation or
------------------------------
warranty by SWS contained in this Agreement, or any statement, exhibit or
schedule furnished to ASBI by SWS under and pursuant to, or in anticipation of
this Agreement, contains or will contain on the Closing Date any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances under which it was or will be made, not misleading and such
representations and warranties would continue to be true and correct following
disclosure to any governmental authority having jurisdiction over SWS of the
facts and circumstances upon which they were based. Except as disclosed herein,
there is no matter that will have a Material Adverse Effect on the SWS Companies
or SWS's ability to perform the transactions contemplated by this Agreement or
the other agreements contemplated hereby, or to the knowledge of SWS, will in
the future result in a Material Adverse Change, other than general economic
conditions. No information material to the Merger, and that is necessary to
make the representations and warranties herein contained not misleading, has
been withheld by SWS.
31
<PAGE>
ARTICLE V.
COVENANTS OF ASBI
ASBI hereby makes the covenants set forth in this Article V to SWS.
SECTION 5.01 Best Efforts. ASBI will use its best efforts to cause the
------------
consummation of the transactions contemplated hereby in accordance with the
terms and conditions of this Agreement.
SECTION 5.02 Merger Agreement. ASBI will, as soon as practicable after
----------------
the execution of this Agreement, duly authorize and enter into the Merger
Agreement, the form of which is attached hereto as Exhibit A, and perform all of
---------
its obligations thereunder.
SECTION 5.03 Information for Regulatory Applications and Proxy Statements.
------------------------------------------------------------
ASBI will, and will cause the ASBI Subsidiaries to, promptly furnish to SWS all
information concerning the ASBI Companies, including, but not limited to,
financial statements required for inclusion in (A) any proxy statement to be
used by SWS in connection with the approval of the shareholders of SWS of the
transactions contemplated hereby and (B) any application or statement to be made
by SWS or filed by SWS with any governmental body in connection with the
transactions contemplated by this Agreement, or in connection with any unrelated
transactions during the pendency of this Agreement, and ASBI represents and
warrants that all information so furnished for such statements and applications
shall be true and correct in all material respects and shall not omit any
material fact required to be stated therein or necessary to make the statements
made, in light of the circumstances under which they were made, not misleading.
The ASBI Companies shall otherwise fully cooperate with SWS in the filing of any
applications or other documents necessary to consummate the transactions
contemplated by this Agreement.
SECTION 5.04 Required Acts of the ASBI Companies. Prior to the Closing,
------------------------------------
each of the ASBI Companies shall, unless otherwise permitted in writing by SWS:
A. Operate only in the ordinary course of business and consistent
with normal banking practices;
B. Except as required by normal business practices, use all
reasonable efforts to preserve its business organization intact and to
retain its present customers, depositors, suppliers, correspondent banks,
officers, directors, employees and agents;
C. Act in a manner intended to preserve or attempt to preserve its
goodwill;
D. Perform all of its obligations under contracts, leases and
documents relating to or affecting its assets, properties and business
except such obligations as ASBI may in good faith reasonably dispute;
E. Except as required by normal business practices, maintain all
offices, machinery, equipment, materials, supplies, inventories, vehicles
and other properties owned, leased or used by it (whether under its control
or the control of others), in good operating condition and repair, ordinary
wear and tear excepted;
32
<PAGE>
F. Maintain in full force and effect all insurance policies now in
effect or renewals thereof and, except as required by normal business
practices that do not jeopardize insurance coverage, give all notices and
present all claims under all insurance policies in due and timely fashion;
G. Timely file all reports required to be filed with governmental
authorities and observe and conform to all applicable laws, rules,
regulations, ordinances, codes, orders, licenses and permits, except those
being contested in good faith by appropriate proceedings;
H. Timely file all tax returns required to be filed by it and
promptly pay all taxes, assessments, governmental charges, duties,
penalties, interest and fines that become due and payable, except those
being contested in good faith by appropriate proceedings;
I. Withhold from each payment made to each of its employees the
amount of all taxes (including, but not limited to, federal income taxes,
FICA taxes and state and local income and wage taxes) required to be
withheld therefrom and pay the same to the proper tax receiving officers;
J. Continue to follow and implement policies, procedures and
practices regarding the identification, monitoring, classification and
treatment of all assets in substantially the same manner as it has in the
past; and
K. Account for all transactions in accordance with GAAP (unless
otherwise instructed by RAP, in which instance account for such transaction
in accordance with RAP), and maintain the allowance for loan losses account
for the Bank in an adequate amount to provide for all losses, net of
recoveries relating to loans previously charged off, on all outstanding
loans of the Bank.
SECTION 5.05 Prohibited Acts of the ASBI Companies. After the date of
-------------------------------------
this Agreement and prior to the Closing, ASBI shall not (and cause the ASBI
Subsidiaries to not), without the prior written consent of SWS (which consent
shall be deemed to have been given five (5) business days after actual receipt
by SWS of notice given pursuant to Section 11.07 with respect to such act,
unless SWS sooner objects to such act):
A. Introduce any new material method of management or operation;
B. Other than actions required by this Agreement, take any action
that could reasonably be anticipated to result in a Material Adverse
Change;
C. Take or fail to take any action that would reasonably cause or
permit the representations and warranties made in Article III hereof to be
inaccurate at the time of the Closing or preclude ASBI from making such
representations and warranties at the time of the Closing;
33
<PAGE>
D. Mortgage, pledge or subject to lien, charge, security interest or
any other encumbrance or restriction any of its property, business or
assets, tangible or intangible except in the ordinary course of business
and consistent with normal banking practices;
E. Cause or allow the loss of insurance coverage, unless replaced
with coverage which is substantially similar (in amount and insurer) to
that now in effect;
F. Incur any obligation or liability, whether absolute or contingent,
except in the ordinary course of business and consistent with normal
banking practices;
G. Discharge or satisfy any lien, charge or encumbrance or pay any
obligation or liability, whether absolute or contingent, due or to become
due, except in the ordinary course of business consistent with normal
banking practices;
H. Issue, reserve for issuance, grant, sell or authorize the issuance
of any shares of its capital stock or other securities or subscriptions,
options, warrants, calls, rights or commitments of any kind relating to the
issuance thereto;
I. Purchase or redeem any of its stock or options thereon or declare
or pay any distribution on its outstanding capital stock, except for
dividends by the Bank to and from ASBI and dividends paid in accordance
and consistent with past practices of ASBI not to exceed 60% of ASBI's
taxable income, on a consolidated basis, calculated in accordance with
GAAP; provided, however, that ASBI shall not declare or pay any dividend
without the prior written consent of KPMG, LLP, the accountants for SWS,
confirming that such dividend payments, if any, will not prevent the
transactions contemplated by this Agreement from qualifying for pooling-of-
interests accounting treatment;
J. Change its Articles, Charter, Certificate or Bylaws or its
authorized capital stock;
K. Sell, transfer, lease to others or otherwise dispose of any of its
assets or cancel or compromise any debt or claim, or waive or release any
right or claim, which, individually or in the aggregate, would constitute a
Material Adverse Change, except in the ordinary course of business and
consistent with past practices and safe and sound banking principles;
L. Enter into any transaction other than in the ordinary course of
business;
M. Except in the ordinary course of the ASBI Companies' business and
consistent with past practices, enter into or give any promise, assurance
or guarantee of the payment, discharge or fulfillment of any undertaking
or promise made by any other person, firm or corporation;
N. Sell or knowingly dispose of, or otherwise divest itself of the
ownership, possession, custody or control, of any corporate books or
records of any nature that, in accordance with sound business practice,
normally are retained for a period of time after their use, creation or
receipt, except at the end of the normal retention period;
34
<PAGE>
O. Make any change in the rate of compensation, commission, bonus or
other direct or indirect remuneration payable, or pay or agree or orally
promise to pay, conditionally or otherwise, any bonus, extra compensation,
extra pension or extra severance or extra vacation pay, to or for the
benefit of any of its shareholders, directors, officers, employees or
agents, or enter into any employment or consulting contract (other than as
contemplated by this Agreement) or other agreement with any director,
officer or employee or adopt, amend in any material respect or terminate
any pension, employee welfare, retirement, stock purchase, stock option,
stock appreciation rights, termination, severance, income protection,
golden parachute, savings or profit-sharing plan (including trust
agreements and insurance contracts embodying such plans), any deferred
compensation, or collective bargaining agreement, any group insurance
contract or any other incentive, welfare or employee benefit plan or
agreement maintained by it for the benefit of its directors, employees or
former employees, except in the ordinary course of business and consistent
with past practices and safe and sound banking principles, and except
normal periodic increases in the compensation payable to officers or
salaried employees, consistent with past practices and made in the ordinary
course of business;
P. Engage in any transaction with any affiliated person or create any
liability of the ASBI Companies owed to such persons other than in the form
of loans, deposits, wages, salaries and reimbursement of expenses created
in the ordinary course of business and consistent with past practices;
Q. Acquire any capital stock or other equity securities or acquire
any equity or ownership interest in any bank, corporation, partnership or
other entity (except (i) through settlement of indebtedness, foreclosure,
or the exercise of creditors' remedies or (ii) in a fiduciary capacity, the
ownership of which does not expose it to any liability from the business,
operations or liabilities of such person);
R. Terminate, cancel or surrender any contract, lease or other
agreement or suffer any damage, destruction or loss that, in any case or in
the aggregate, would constitute a Material Adverse Change;
S. Dispose of, permit to lapse, transfer or grant any rights under,
or breach or infringe upon, any United States or foreign license or
Proprietary Right or modify any existing rights with respect thereto,
except in the ordinary course of business and consistent with past
practices and safe and sound banking principles;
T. Make any capital expenditures or capital additions or betterments
in excess of an aggregate of $20,000, except for expenditures in connection
with the construction of the new branch location of the Bank at Matlock
Road and Stephens Street in Arlington, Texas consistent with the plans and
specifications disclosed to SWS;
U. Hire or employ any person with an annual salary equal to or
greater than $50,000;
35
<PAGE>
V. Make any, or acquiesce with any, change in any accounting methods,
principles or material practices;
W. Except for transactions through SWS in the ordinary course of
business, between the date of the Agreement and the Closing Date, sell any
Investment Securities or purchase any Investment Securities in excess of an
aggregate amount of $100,000 (other than U.S. Treasuries with a maturity of
less than one year);
X. Other than loans fully secured by certificates of deposit or
liquid, readily marketable collateral, make or alter any of the material
terms of any loan to any single borrower and his related interests in
excess of the principal amount of $500,000, or renew or extend the maturity
of any loan to any single borrower and his related interests in excess of
the principal amount of $500,000; or
Y. Make, or renew or extend the maturity of, or alter any of the
material terms of any classified loan in excess of the principal amount of
$100,000.
SECTION 5.06 Access; Pre-Closing Investigation. Subject to the
----------------------------------
provisions of Article XI, ASBI shall afford the officers, directors, employees,
attorneys, accountants, investment bankers and authorized representatives of SWS
full access to the properties, books, contracts and records of the ASBI
Companies, permit SWS to make such inspections (including without limitation
with regard to such properties physical inspection of the surface and subsurface
thereof and any structure thereon) as they may require and furnish to SWS during
such period all such information concerning the ASBI Companies and their
respective affairs as SWS may reasonably request, in order that SWS may have
full opportunity to make such reasonable investigation as it shall desire to
make of the affairs of the ASBI Companies, including, without limitation, access
sufficient to verify the value of the assets and the liabilities of the ASBI
Companies and the satisfaction of the conditions precedent to SWS's obligations
described in Article VIII of this Agreement; provided that such investigation
shall be conducted in the manner least disruptive to the business and operations
of the ASBI Companies. ASBI agrees at any time, and from time to time, to
furnish to SWS as soon as practicable, any additional information that SWS may
reasonably request.
SECTION 5.07 Invitations to and Attendance at Directors' and Committee
---------------------------------------------------------
Meetings. ASBI shall give notice, and shall cause the ASBI Subsidiaries to
- ---------
give notice, to two (2) designees of SWS (which designees shall be reasonably
acceptable to ASBI), and shall invite such persons to attend all regular and
special meetings of the board of directors of the ASBI Companies and all regular
and special meetings of any senior management committee (including but not
limited to the executive committee and the loan and discount committee of the
Bank) of the ASBI Companies. If the Merger is finally disapproved by any
appropriate regulatory authority or if this Agreement is terminated pursuant to
its terms, SWS's designees will no longer be entitled to notice of and
permission to attend such meetings.
SECTION 5.08 Additional Financial Statements. ASBI shall promptly
-------------------------------
furnish, when available, SWS with (A) unaudited statements of condition and
income of ASBI as of June 30, 1999 and September 30, 1999, and (B) true and
complete copies of additional TFRs prepared by the Bank.
36
<PAGE>
SECTION 5.09 Untrue Representations. ASBI shall promptly notify SWS in
----------------------
writing if ASBI becomes aware of any fact or condition that makes untrue, or
shows to have been untrue, in any material respect, any schedule or any other
information furnished to SWS or any representation or warranty made in or
pursuant to this Agreement or that results in ASBI's failure to comply with any
covenant, condition or agreement contained in this Agreement.
SECTION 5.10 Litigation and Claims. ASBI shall promptly notify SWS in
---------------------
writing of any litigation, or of any claim, controversy or contingent liability
that might be expected to become the subject of litigation, against any ASBI
Company or affecting any of their properties, if such litigation or potential
litigation might, in the event of an unfavorable outcome, result in a Material
Adverse Change, and ASBI shall promptly notify SWS of any legal action, suit or
proceeding or judicial, administrative or governmental investigation, pending
or, to the knowledge of ASBI, threatened against any ASBI Company that questions
or might question the validity of this Agreement or the agreements contemplated
hereby, including, but not limited to, the Merger Agreement, or any actions
taken or to be taken by the ASBI Companies pursuant hereto or thereto or seeks
to enjoin or otherwise restrain the transactions contemplated hereby or thereby.
SECTION 5.11 Notice of Material Adverse Changes. ASBI shall promptly
----------------------------------
notify SWS in writing if any change shall have occurred or been threatened (or
any development shall have occurred or been threatened involving a prospective
change) in the business, financial condition, operations or prospects of the
ASBI Companies that has or may reasonably be expected to have or lead to a
Material Adverse Change.
SECTION 5.12 No Negotiation with Others. ASBI shall not, directly or
--------------------------
indirectly, nor shall it permit the ASBI Subsidiaries or their officers,
directors, employees, representatives or agents to, directly or indirectly (A)
encourage, solicit or initiate discussions or negotiations with, or (B) except
upon advice of counsel to the extent required to fulfill the fiduciary duties
owed to the shareholders of ASBI, entertain, discuss or negotiate with, or
provide any information to, or cooperate with, any corporation, partnership,
person or other entity or group (other than SWS or its Affiliates or associates
or officers, partners, employees or other authorized representatives of SWS or
such Affiliates or associates) concerning any merger, tender offer or other
takeover offer, sale of substantial assets, sale of shares of capital stock or
similar transaction involving the ASBI Companies. Immediately upon receipt of
any unsolicited offer, ASBI will communicate to SWS the terms of any proposal or
request for information and the identity of the parties involved.
SECTION 5.13 Consents and Approvals. ASBI shall use its best efforts to
----------------------
obtain all consents and approvals from third parties, including those listed on
Schedule 3.09, at the earliest practicable time.
- -------------
SECTION 5.14 Environmental Investigation; Right to Terminate Agreement.
---------------------------------------------------------
37
<PAGE>
A. SWS and its consultants, agents and representatives, at the sole
cost and expense of SWS, shall have the right to the same extent that the
ASBI Companies have such right, but not the obligation or responsibility,
to inspect any Property, including, without limitation, conducting asbestos
surveys and sampling, environmental assessments and investigation, and
other environmental surveys and analyses including soil and ground sampling
("Environmental Inspections") at any time on or prior to August 31, 1999.
SWS shall notify ASBI prior to any physical inspections of the Property,
and ASBI may place reasonable restrictions on the time of such inspections.
If, as a result of any such Environmental Inspection, further investigation
("secondary investigation") including, without limitation, test borings,
soil, water and other sampling is deemed desirable by SWS, SWS shall (i)
notify ASBI of any Property for which it intends to conduct such a
secondary investigation and the reasons for such secondary investigation,
and (ii) at the sole cost and expense of SWS, commence such secondary
investigation, on or prior to September 30, 1999. SWS shall give
reasonable notice to ASBI of such secondary investigations, and ASBI may
place reasonable time and place restrictions on such secondary
investigations.
B. ASBI agrees to indemnify and hold harmless SWS for any claims for
damage to property, or injury or death to persons, made as a result of any
Environmental Inspection or secondary investigation conducted by SWS or its
agents, which damage or injury is attributable to the negligent actions of
the ASBI Companies or their agents. SWS agrees to indemnify and hold
harmless ASBI for any claims for damage to property, or injury or death to
persons, attributable to the negligent actions of SWS or its agents in
performing any Environmental Inspection or secondary investigation except
to the extent caused in whole or in part by the negligence of the ASBI
Companies. SWS shall not have any liability or responsibility of any
nature whatsoever for the results, conclusions or other findings related to
any Environmental Inspection, secondary investigation or other
environmental survey. If this Agreement is terminated, then except as
otherwise required by law, reports to any governmental authority of the
results of any Environmental Inspection, secondary investigation or other
environmental survey shall not be made by SWS. SWS shall make no such
report prior to Closing unless required to do so by law, and in such case
will give ASBI reasonable notice of SWS's intentions.
C. SWS shall have the right to terminate this Agreement if (i) the
factual substance of any warranty or representation set forth in Section
3.22 is not materially true and accurate; (ii) the results of such
Environmental Inspection, secondary investigation or other environmental
survey are disapproved by SWS because the environmental inspection,
secondary investigation or other environmental survey identifies material
violations or potential violations of Environmental Laws; (iii) the ASBI
Companies have refused to allow SWS to conduct an Environmental Inspection
or secondary investigation in a manner that SWS reasonably considers
necessary; (iv) the Environmental Inspection, secondary investigation or
other environmental survey identifies any past or present event, condition
or circumstance that would or potentially would require remedial or cleanup
action or result in a Material Adverse Change; (v) the Environmental
Inspection, secondary investigation or other environmental survey
identifies the presence of any underground or above ground storage tank in,
on or under any Property that is not shown to be in compliance with all
Environmental Laws applicable to the tank either now or at a future time
certain, or that has
38
<PAGE>
had a release of petroleum or some other Hazardous Material that has not
been cleaned up to the satisfaction of the relevant governmental authority
or any other party with a legal right to compel cleanup; or (vi) the
Environmental Inspection, secondary investigation or other environmental
survey identifies the presence of any asbestos-containing material in, on
or under any Property, the removal of which would result in a Material
Adverse Change. On or prior to October 31, 1999, SWS shall advise ASBI in
writing as to whether SWS intends to terminate this Agreement because SWS
disapproves of the results of the Environmental Inspection, secondary
investigation or other environmental survey. ASBI shall have the
opportunity to correct any objected to violations or conditions to SWS's
reasonable satisfaction prior to November 30, 1999. In the event that ASBI
fails to demonstrate its satisfactory correction of the violations or
conditions to SWS, SWS may terminate the Agreement on or before December
15, 1999.
D. ASBI agrees to make available to SWS and its consultants, agents
and representatives all documents and other material relating to
environmental conditions of any Property including, without limitation, the
results of other environmental inspections and surveys. ASBI also agrees
that all engineers and consultants who prepared or furnished such reports
may discuss such reports and information with SWS and shall be entitled to
certify the same in favor of SWS and its consultants, agents and
representatives and make all other data available to SWS and its
consultants, agents and representatives.
SECTION 5.15 Proxies. Within ten (10) days of the date of the execution
-------
of this Agreement, ASBI and each of the persons set forth on Schedule 5.15 shall
-------------
execute the Voting Agreement and Irrevocable Proxy in the form of Exhibit B
---------
attached hereto, and ASBI acknowledges that such persons have agreed that they
will vote the shares of the ASBI Common Stock owned by them in favor of the
Merger Agreement and the Merger and the transactions contemplated hereby and
thereby, subject to required regulatory approvals.
SECTION 5.16 S Corporation Termination. The ASBI Companies shall
-------------------------
terminate their respective Subchapter S and Qualified Subchapter S Subsidiary
elections under the Code as of the Closing Date. In connection with the
foregoing, each of the ASBI Companies agrees to make an election to close the
books of ASBI Companies with all federal tax items allocable to the "S short
year" and the "C short year" (as those terms are defined in Section 1362(e)(3)
of the Code).
SECTION 5.17 Conforming Accounting and Reserve Policies; Restructuring
---------------------------------------------------------
Expenses.
- --------
A. From and after the date of this Agreement to the Effective Time,
ASBI and SWS shall consult and cooperate with each other with respect to
conforming, as specified in a written notice from SWS to ASBI as provided
in Section 5.17D, the loan, accrual and reserve policies of the Bank to
those policies of SWS.
B. In addition, from and after the date of this Agreement to the
Effective Time, ASBI and SWS shall consult and cooperate with each other
with respect to determining, as specified in a written notice from SWS to
ASBI, as provided in Section 5.17D, appropriate accruals, reserves and
charges to establish and take in respect of excess equipment write-off
39
<PAGE>
or write-down of various assets and other appropriate charges and
accounting adjustments taking into account the parties' business plans
following the Merger.
C. ASBI and SWS shall consult and cooperate with each other with
respect to determining, as specified in a written notice from SWS to ASBI,
as provided in Section 5.17D, the amount and the timing for recognizing for
financial accounting purposes the expenses of the Merger and the
restructuring charges related to or to be incurred in connection with the
Merger.
D. At the written request of SWS given within ten calendar days of
Closing, ASBI shall establish and take such reserves and accruals
immediately prior to the Effective Time as SWS shall request to conform the
ASBI's loan, accrual and reserve policies to SWS's policies, shall
establish and take such accruals, reserves and charges in order to
implement such policies in respect of excess facilities and equipment
capacity, severance costs, litigation matters, write-off or write-down of
various assets and other appropriate accounting adjustments, and to
recognize for financial accounting purposes such expenses of the Merger and
restructuring charges related to or to be incurred in connection with the
Merger, in each case at such times as are mutually agreeable to SWS and
ASBI; provided, however, that ASBI shall not be required to take any such
action that is not consistent with GAAP; and provided further, however,
that any such accrual, reserve or charge made at the request of SWS in
accordance with this Section 5.17 shall not constitute a Material Adverse
Change or be deemed to have a Material Adverse Effect and shall not be
considered for the purposes of calculating the taxable income for purposes
of Section 5.05I.
SECTION 5.18 Affiliate Agreements. ASBI has disclosed in Schedule 5.18
-------------------- -------------
each person or entity whom it reasonably believes may be deemed an "affiliate"
of ASBI for purposes of Rule 145 under the 1933 Act. ASBI shall use its
reasonable efforts to cause each such person or entity to deliver to SWS not
later than 30 days prior to the Effective Time, a written agreement, in
substantially the form of Exhibit G, providing that such person or entity will
---------
not sell, pledge, transfer, or otherwise dispose of the shares of ASBI Common
Stock held by such person or entity except as contemplated by such agreement or
by this Agreement and will not sell, pledge, transfer, or otherwise dispose of
the shares of SWS Common Stock to be received by such person or entity upon
consummation of the Merger except in compliance with applicable provisions of
the 1933 Act and the rules and regulations thereunder and applicable rules and
pronouncements relating to pooling-of-interest accounting.
SECTION 5.19 Environmental Matters. On or before November 1, 1999, ASBI
---------------------
shall use its best efforts to eliminate any Environmental Liability relating to
the Environmental Properties.
ARTICLE VI.
COVENANTS OF SWS
SWS hereby makes the covenants set forth in this Article VI to ASBI.
40
<PAGE>
SECTION 6.01 Best Efforts. SWS agrees to use its best efforts to cause
------------
the consummation of the transactions contemplated hereby in accordance with the
terms and conditions of this Agreement.
SECTION 6.02 Incorporation and Organization of Newco. SWS will
---------------------------------------
incorporate, charter and organize Newco as a Texas corporation.
SECTION 6.03 Merger Agreement. SWS will, as soon as practicable after the
----------------
execution of this Agreement, enter into the Merger Agreement, the form of which
is attached hereto as Exhibit A, and shall perform all of its obligations
---------
thereunder. SWS will, as soon as practicable after the execution of this
Agreement, cause Newco to duly authorize and enter into the Merger Agreement and
shall cause Newco to perform all of its obligations thereunder. SWS shall vote
all of the stock of Newco in favor of the Merger and the Merger Agreement.
SECTION 6.04 Information for Regulatory Applications and Proxy Statements.
------------------------------------------------------------
SWS will promptly furnish to ASBI all information concerning SWS and the SWS
Subsidiaries, including, but not limited to, financial statements, required for
inclusion in (A) any proxy statement to be used by ASBI in connection with the
approval of the shareholders of ASBI of the transactions contemplated hereby and
(B) any application or statement to be made by ASBI or filed by ASBI with any
governmental body in connection with the transactions contemplated by this
Agreement, or in connection with any unrelated transactions during the pendency
of this Agreement, and SWS represents and warrants that all information so
furnished for such statements and applications shall be true and correct in all
material respects and shall not omit any material fact required to be stated
therein or necessary to make the statements made, in light of the circumstances
under which they were made, not misleading. SWS shall otherwise fully cooperate
with the ASBI Companies in the filing of any applications or other documents
necessary to consummate the transactions contemplated by this Agreement,
including the Merger.
SECTION 6.05 Acts of Newco. Prior to the Closing, SWS shall not cause
-------------
Newco to take any action or execute any agreement, document or certificate
except as contemplated by this Agreement and the other agreements contemplated
hereby, including, but not limited to, the Merger Agreement.
SECTION 6.06 Untrue Representations. SWS shall promptly notify ASBI in
----------------------
writing if SWS becomes aware of any fact or condition that makes untrue, or
shows to have been untrue, in any material respect, any schedule or any other
information furnished to ASBI or any representation or warranty made in or
pursuant to this Agreement or that results in SWS's failure to comply with any
covenant, condition or agreement contained in this Agreement.
SECTION 6.07 Litigation and Claims. SWS shall promptly notify ASBI of any
---------------------
legal action, suit or proceeding or judicial, administrative or governmental
investigation, pending or, to the knowledge of SWS, threatened against any SWS
Company that questions or might question the validity of this Agreement or the
agreements contemplated hereby, including, but not limited to, the Merger
Agreement, or any actions taken or to be taken by the SWS Companies pursuant
hereto or thereto or seeks to enjoin or otherwise restrain the transactions
contemplated hereby or thereby.
41
<PAGE>
SECTION 6.08 Regulatory and Other Approvals. SWS shall promptly, but in
------------------------------
no event later than thirty (30) days after execution of this Agreement, file or
cause to be filed applications for all regulatory approvals required to be
obtained by SWS in connection with this Agreement and the other agreements
contemplated hereby. SWS shall promptly furnish ASBI with copies of all such
regulatory filings and all correspondence for which confidential treatment has
not been requested. SWS shall use its best efforts to obtain all such
regulatory approvals and any other approvals from third parties, including those
listed on Schedule 4.07, at the earliest practicable time.
-------------
SECTION 6.09 Adverse Change. SWS shall promptly notify ASBI in writing if
--------------
any change shall have occurred or been threatened (or any development shall have
occurred or been threatened involving a prospective change) that would adversely
affect, prevent or delay consummation of the transactions contemplated by this
Agreement or the other agreements contemplated hereby.
SECTION 6.10 Employee Benefits and Contracts. Following the Effective
-------------------------------
Time, SWS shall provide generally to officers and employees of the ASBI
Companies, who after the Effective Time remain employees of an ASBI Company,
employee benefits under employee benefit plans (other than stock option or other
plans involving the potential issuance of SWS Common Stock), on terms and
conditions which when taken as a whole are substantially similar to those
currently provided by the SWS Companies to their similarly situated officers and
employees. For purposes of participation and vesting (but not accrual of
benefits) under such employee benefit plans, (i) service under any qualified
defined contribution plans of ASBI shall be treated as service under SWS's
qualified defined contribution plans, and (ii) service under any other employee
benefit plans of ASBI shall be treated as service under any similar employee
benefit plans maintained by SWS. SWS also shall cause ASBI and its Subsidiaries
to honor all employment, severance, consulting, and other compensation related
agreement or contracts disclosed on Schedule 3.32 between any ASBI Company and
-------------
any current or former director, officer, or employee thereof, and all provisions
for vested benefits or other vested amounts earned or accrued through the
Effective Time under the ASBI Employee Plans.
ARTICLE VII.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASBI
All obligations of ASBI under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions,
any or all of which may be waived in whole or in part by ASBI:
SECTION 7.01 Compliance with Representations, Warranties and Agreements.
----------------------------------------------------------
All representations and warranties made by SWS in this Agreement or in any
document or schedule delivered to ASBI pursuant hereto shall have been true and
correct in all material respects when made and shall be true and correct in all
material respects as of the Closing with the same force and effect as if such
representations and warranties were made at and as of the Closing, except with
respect to those representations and warranties specifically made as of an
earlier date (in which case such representations and warranties shall be true as
of such earlier date). SWS shall have performed or complied in all material
respects with all agreements, terms, covenants and conditions required by this
Agreement to be performed or complied with by SWS prior to or at the Closing.
42
<PAGE>
SECTION 7.02 Shareholder Approvals. The Merger and other transaction
---------------------
contemplated by this Agreement shall have been approved by the shareholders of
ASBI and SWS, and the sole shareholder of Newco.
SECTION 7.03 Government and Other Approvals. SWS shall have received
------------------------------
approvals, acquiescence or consents of the transactions contemplated by this
Agreement and the Merger Agreement, from all necessary governmental agencies and
authorities and other third parties, including but not limited to the OTS, and
all applicable waiting periods shall have expired, and the approvals and
consents of all third parties required to consummate this Agreement and the
other agreements contemplated hereby, including, but not limited to, the Merger
Agreement and the transactions contemplated hereby and thereby, including all
consents described on Schedules 3.09 and 4.07. Such approvals and the
-----------------------
transactions contemplated hereby shall not have been contested or threatened to
be contested by any federal or state governmental authority or by any other
third party (except shareholders asserting statutory dissenters' appraisal
rights) by formal proceedings.
SECTION 7.04 No Litigation. No action shall have been taken, and no
-------------
statute, rule, regulation or order shall have been promulgated, enacted,
entered, enforced or deemed applicable to the acquisition by any federal, state
or foreign government or governmental authority or by any court, domestic or
foreign, including the entry of a preliminary or permanent injunction, that
would (A) make the Agreement or any other agreement contemplated hereby,
including, but not limited to, the Merger Agreement, or the transactions
contemplated hereby or thereby illegal, invalid or unenforceable, (B) impose
material limits in the ability of any party to this Agreement to consummate the
Agreement or any other agreement contemplated hereby, including, but not limited
to, the Merger Agreement, or the transactions contemplated hereby or thereby, or
(C) if the Agreement or any other agreement contemplated hereby, including, but
not limited to, the Merger Agreement, or the transactions contemplated hereby or
thereby are consummated, subject the ASBI Companies or subject any officer,
director, shareholder or employee of the ASBI Companies to criminal or civil
liability. No action or proceeding before any court or governmental authority,
domestic or foreign, by any government or governmental authority or by any other
person, domestic or foreign, shall be threatened, instituted or pending that
would reasonably be expected to result in any of the consequences referred to in
clauses (A) through (C) above.
SECTION 7.05 Pooling Letter. ASBI shall have received a letter, dated as
--------------
of the Effective Time, in a form reasonably acceptable to ASBI, from Fisk &
Robinson, LLP to the effect that ASBI qualifies as an entity that may be a party
to a business combination that will qualify for pooling-of-interests accounting
treatment and, to the effect that the Merger, as it impacts ASBI, will qualify
for pooling-of-interests accounting treatment. In addition, there shall have
been no determination by any court, tribunal, regulatory agency or other
governmental entity, that the Merger fails or will fail to qualify for pooling-
of-interests accounting treatment.
SECTION 7.06 SWS Common Stock. The shares of SWS Common Stock to be issued
----------------
in connection herewith shall be duly authorized and validly issued and, fully
paid and nonassessable, issued free of preemptive rights and free and clear of
all liens and encumbrances created by or through SWS. The SWS Common Stock to
be issued pursuant to the Merger shall have been authorized for listing on the
New York Stock Exchange.
43
<PAGE>
SECTION 7.07 Tax Opinion. ASBI shall have received an opinion of Jenkens &
-----------
Gilchrist, P.C. or ASBI's independent public accountants, on or before the
Closing Date, to the effect, among others, that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and that no gain
or loss will be recognized by the shareholders of ASBI to the extent that they
receive SWS Common Stock in exchange for their ASBI Common Stock in the Merger.
SECTION 7.08 Opinion of Counsel. ASBI shall have received an opinion of
------------------
counsel from Gardere & Wynne or other counsel to SWS acceptable to ASBI in
substantially the form set forth in Exhibit E hereof.
---------
SECTION 7.09 Registration Rights Agreement. ASBI and such Shareholders of
-----------------------------
ASBI shall have received a duly executed Registration Rights Agreement in the
form attached as Exhibit H hereof.
---------
SECTION 7.10 No Material Adverse Change. There shall have been no
--------------------------
Material Adverse Change in SWS since March 31, 1999.
ARTICLE VIII.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SWS
All obligations of SWS under this Agreement are subject to the fulfillment,
prior to or at the Closing, of each of the following conditions, any or all of
which may be waived in whole or in part by SWS.
SECTION 8.01 Compliance with Representations, Warranties and Agreements.
----------------------------------------------------------
All representations and warranties made by ASBI in this Agreement or in any
schedule delivered to SWS pursuant hereto shall have been true and correct when
made and shall be true and correct as of the Closing with the same force and
effect as if such representations and warranties were made at and as of the
Closing, except with respect to those representations and warranties
specifically made as of an earlier date (in which case such representations and
warranties shall be true as of such earlier date). ASBI shall have performed or
complied in all material respects with all agreements, terms, covenants and
conditions required by this Agreement to be performed or complied with by ASBI
prior to or at the Closing.
SECTION 8.02 Shareholder Approvals. The Merger and other transactions
---------------------
contemplated by this Agreement shall have been approved by the shareholders of
ASBI and SWS, and the sole shareholder of Newco in the manner prescribed by
applicable law and the Board of Directors of SWS and/or the Special Committee of
the Board of Directors ("SWS Special Committee") established for the purposes of
evaluating the terms of the Merger. All shares of SWS Common Stock owned by Mr.
Don Buchholz, Buchholz Arlington Bancshares, a limited partnership, and
Buchholz Investments, a partnership, will be voted proportionately at such SWS
Shareholder Meeting in the same manner as the other shareholders of SWS Common
Stock vote on the Merger.
44
<PAGE>
SECTION 8.03 Government and Other Approvals. SWS shall have received
------------------------------
approvals, acquiescence or consents, all on terms and conditions acceptable to
SWS in its sole discretion, of the transactions contemplated by this Agreement
and the Merger Agreement from all necessary governmental agencies and
authorities, including but not limited to the OTS, and all applicable waiting
periods shall have expired, and the approvals and consents of all third parties
required to consummate this Agreement and the other agreements contemplated
hereby, including, but not limited to, the Merger Agreement and the transactions
contemplated hereby and thereby, including all consents described on Schedules
---------
3.09 and 4.07. Such approvals and consents shall not have imposed, in the
- -------------
judgment of SWS, any material requirement upon SWS or the SWS Subsidiaries,
including, without limitation, any requirement that SWS sell or dispose of any
significant amount of its assets or any SWS Subsidiary. Such approvals and the
transactions contemplated hereby shall not have been contested or threatened to
be contested by any federal or state governmental authority or by any other
third party (except shareholders asserting statutory dissenters' appraisal
rights) by formal proceedings. It is understood that, if such contest is
brought by formal proceedings, the SWS may, but shall not be obligated to,
answer and defend such contest or otherwise pursue this transaction over such
objection.
SECTION 8.04 No Litigation. No action shall have been taken, and no
-------------
statute, rule, regulation or order shall have been promulgated, enacted,
entered, enforced or deemed applicable to this Agreement, the Merger, or the
transactions contemplated hereby or thereby by any federal, state or foreign
government or governmental authority or by any court, domestic or foreign,
including the entry of a preliminary or permanent injunction, that would (A)
make this Agreement or any other agreement contemplated hereby, including, but
not limited to, the Merger Agreement, or the transactions contemplated hereby or
thereby illegal, invalid or unenforceable, (B) require the divestiture of a
material portion of the assets of any ASBI Company, (C) impose material limits
in the ability of any party to this Agreement to consummate the Agreement or any
other agreement contemplated hereby, including, but not limited to, the Merger
Agreement, or the transactions contemplated hereby or thereby, (D) otherwise
result in a Material Adverse Change or (E) if this Agreement or any other
agreement contemplated hereby, including, but not limited to, the Merger
Agreement, or the transactions contemplated hereby or thereby are consummated,
subject the SWS Companies or subject any officer, director, shareholder or
employee of the SWS Companies to criminal or civil liability. No action or
proceeding before any court or governmental authority, domestic or foreign, by
any government or governmental authority or by any other person, domestic or
foreign, shall be threatened, instituted or pending that would reasonably be
expected to result in any of the consequences referred to in clauses (A) through
(E) above.
SECTION 8.05 Accounting Treatment. All accounting and tax treatment,
--------------------
entries and adjustments in connection with the transactions contemplated by this
Agreement and the other agreements contemplated hereby shall be satisfactory to
SWS. SWS shall not have received notification from any proper regulatory
authority that SWS's accounting and tax treatment, entries and adjustments used
in connection with the Merger are improper, and SWS shall not have been required
by any such regulatory authority to make any accounting or tax adjustments that
would constitute a Material Adverse Change.
SECTION 8.06 No Material Adverse Change. There shall have been no
--------------------------
Material Adverse Change in ASBI since March 31, 1999.
45
<PAGE>
SECTION 8.07 Dissenters. The holders of not more than a certain percentage
----------
(not to exceed 9.9%) of the issued and outstanding shares of ASBI Common Stock
shall have elected to exercise their right to dissent from the Merger and demand
payment in cash for the fair or appraised value of their shares under the
applicable provision of the TBCA such that their receipt of cash pursuant to the
exercise of their appraisal rights, when combined with all other cash
transactions required to be considered under GAAP, would result in the Merger
not qualifying for pooling-of-interests accounting treatment under GAAP.
SECTION 8.08 Tax Opinion. SWS shall have received an opinion of Jenkens &
-----------
Gilchrist, P.C. or ASBI's independent public accountants, on or before the
Closing Date, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code and that no gain or loss will
be recognized by any SWS Company or ASBI Company as a result of the Merger.
SECTION 8.09 Pooling Letter. SWS shall have received a letter, dated as
--------------
of the Effective Time, in a form reasonably acceptable to SWS, from Fisk &
Robinson, LLP, independent public accountant to ASBI, to the effect that ASBI
qualifies as an entity that may be a party to a business combination that will
qualify for pooling-of-interests accounting treatment. SWS shall have received
a letter, dated as of the Effective Time, in a form reasonably acceptable to
SWS, from KPMG, LLP to the effect that the Merger, as it impacts SWS, will
qualify for pooling-of-interests accounting treatment. In addition, there shall
have been no determination by any court, tribunal, regulatory agency or other
governmental entity, that the Merger fails or will fail to qualify for pooling-
of-interests accounting treatment.
SECTION 8.10 Fairness Opinion. SWS shall have received an opinion from
----------------
Friedman, Billings, Ramsey & Co., Inc. dated as of the date of this Agreement
to the effect that in the opinion of such firm, the Exchange Ratio contemplated
by this Agreement is fair to all the shareholders of SWS from a financial point
of view.
SECTION 8.11 Releases of Directors and Officers of ASBI Companies. SWS
----------------------------------------------------
shall have received from each of the directors of the ASBI Companies an
instrument dated the Closing Date releasing the ASBI Companies from any and all
claims of such directors (except to certain matters described therein), the form
of which is attached as Exhibit C. SWS shall have received from each officer
---------
with a title of senior vice president or higher of the ASBI Companies an
instrument dated the Closing Date releasing the ASBI Companies from any and all
claims of such officers (except as to certain matters described therein), the
form of which is attached as Exhibit D.
---------
SECTION 8.12 Non Compete and Employment Agreements. SWS shall have reached
-------------------------------------
satisfactory non compete agreements with respect to those individuals listed on
Schedule 8.12 of this Agreement in form and substance as Exhibit I attached
- ------------- ---------
hereto. Within thirty (30) days from the date of this Agreement, SWS and
Richard J. Driscoll shall have agreed to the terms and conditions of a mutually
agreeable employment and noncompete agreement.
SECTION 8.13 Affiliate Agreements. SWS shall have received from each
--------------------
affiliate of ASBI the affiliates agreement referred to in Section 5.18 of this
Agreement in the form attached as Exhibit
-------
46
<PAGE>
G to this Agreement, to the extent necessary to assure in the reasonable
- -
judgment of SWS that the transactions contemplated hereby will qualify for
pooling-of-interests accounting treatment.
SECTION 8.14 Opinion of Counsel. SWS shall have received an opinion of
------------------
counsel from Haynie, Rake & Repass, P.C. or other counsel to ASBI acceptable to
SWS in substantially the form set forth in Exhibit F hereof.
---------
SECTION 8.15 Compliance with the 1933 Act. SWS shall have received
----------------------------
satisfactory evidence that the offering of the SWS Common Stock pursuant to this
Agreement shall have qualified for an exemption from registration under the 1933
Act and any applicable state securities laws.
SECTION 8.16 Termination of Shareholder Agreement and Voting Agreement.
---------------------------------------------------------
SWS shall have received satisfactory evidence that each agreement listed on
Schedule 3.31 of this Agreement has been duly terminated in accordance with the
- -------------
provisions thereof.
SECTION 8.17 Escrow Agreement; Environmental Liabilities. ASBI shall have
-------------------------------------------
taken all steps required under Section 5.19 of this Agreement and SWS shall have
determined, in its sole discretion, that upon consummation of the transactions
contemplated by this Agreement, none of the SWS Companies or the ASBI Companies
shall have any Environmental Liability of any kind or nature relating to the
Environmental Properties; or SWS shall have received an executed Escrow
Agreement referred to in Section 1.13 of this Agreement in the form attached as
Exhibit J to this Agreement.
- ---------
ARTICLE IX.
TERMINATION AND ABANDONMENT
SECTION 9.01 Right of Termination. This Agreement and the transactions
--------------------
contemplated hereby may be terminated and abandoned at any time prior to or at
the Closing (notwithstanding approval thereof by the shareholders of ASBI or
SWS), as follows, and in no other manner:
A. By the mutual consent of ASBI and SWS, duly authorized by the
board of directors of each of ASBI and SWS.
B. By either ASBI or SWS if the conditions precedent to such
parties' obligations to close specified in Articles VII and VIII,
respectively, hereof have not been met or waived by June 6, 2000, or such
later date as has been approved by ASBI and SWS.
C. By either ASBI or SWS if any of the transactions contemplated by
this Agreement or the Merger Agreement are disapproved by any regulatory
authority whose approval is required to consummate such transactions or if
any court of competent jurisdiction in the United States or other United
States (federal or state) governmental body shall have issued an order,
decree or ruling or taken any other action restraining, enjoining,
invalidating or otherwise prohibiting the Agreement or the transactions
contemplated hereby and such order, decree, ruling or other action shall
have been final and nonappealable.
47
<PAGE>
D. By SWS if it reasonably determines, in good faith and after
consulting with counsel, there is substantial likelihood that any necessary
regulatory approval will not be obtained or will be obtained only upon a
condition or conditions that make it inadvisable to proceed with the
transactions contemplated by this Agreement.
E. By SWS if there shall have been any Material Adverse Change with
respect to ASBI, or by ASBI if there shall have been any Material Adverse
Change with respect to SWS.
F. By SWS if the board of directors of SWS or the SWS Special
Committee has determined, in good faith and following consultation with
and after considering the advice of outside counsel, that in order to
comply with its fiduciary duties to shareholders under applicable law, it
is advisable for the SWS Special Committee or the full board of directors
of SWS to withdraw or modify, in a manner materially adverse to ASBI, its
approval or recommendation of the Merger; provided that such a
determination shall not constitute a breach of Section 4.07 of this
Agreement.
G. By SWS if ASBI shall fail to comply in any material respect with
any of its covenants or agreements contained in this Agreement or in any
other agreement contemplated hereby, including, but not limited to, the
Merger Agreement, and such failure shall not have been cured within a
period of thirty (30) calendar days after notice from SWS, or if any of the
representations or warranties of ASBI contained herein or therein shall be
inaccurate in any material respect.
H. By ASBI if SWS shall fail to comply in any material respect with
any of its covenants or agreements contained in this Agreement or in any
other agreement contemplated hereby and such failure shall not have been
cured within a period of thirty (30) calendar days after notice from ASBI,
or if any of the representations or warranties of SWS contained herein or
therein shall be inaccurate in any material respect.
I. By SWS, if the holders of more than a certain percentage (not to
exceed 9.9%) of the issued and outstanding shares of ASBI Common Stock
shall have elected to exercise their right to dissent from the Merger and
demand payment in cash for the fair or appraised value of their shares
under the applicable provision of the TBCA such that their receipt of cash
pursuant to the exercise of their appraisal rights, when combined with all
other cash transactions required to be considered under GAAP, would result
in the Merger not qualifying for pooling-of-interests accounting treatment
under GAAP.
SECTION 9.02 Notice of Termination. The power of termination provided for
---------------------
by Section 9.01 hereof may be exercised only by a notice given in writing, as
provided in Section 11.07 of this Agreement.
SECTION 9.03 Effect of Termination. Without limiting any other relief to
---------------------
which either party hereto may be entitled for breach of this Agreement, in the
event of the termination and abandonment of this Agreement pursuant to the
provisions of Section 9.01 hereof, no party to this
48
<PAGE>
Agreement shall have any further liability or obligation in respect of this
Agreement, except for (A) liability of a party for expenses pursuant to Section
11.02 hereof, and (B) the provisions of Article X hereof shall remain
applicable.
SECTION 9.04 Break-Up Fee. Nothing contained in this Agreement shall be
------------
deemed to prohibit any director or officer of ASBI or SWS from fulfilling his
or her fiduciary duties to the ASBI or SWS shareholders or from taking any
action required by law. Except for a breach of the covenant in Section 5.12, in
lieu of any payment required by Section 9.03 of this Agreement and as the sole
and exclusive remedy for any actual damages resulting from wrongful termination,
misrepresentation or other breach of this Agreement, in the event that this
Agreement is terminated by:
(i) SWS pursuant to (a) Sections 9.01G, 9.01I or (b) pursuant 9.01B
as a result of the failure of conditions set forth in 8.01, 8.07, 8.11,
8.12, 8.13, 8.14, 8.15, 8.16, and 8.17 to be satisfied, ASBI shall
immediately, upon receipt of such written notice of termination from SWS,
pay to SWS, by wire transfer, $2,500,000; or
(ii) ASBI pursuant to (a) Sections 9.01H or (b) pursuant 9.01B as a
result of the failure of conditions set forth in Sections 7.01, 7.06, 7.08,
and 7.09 to be satisfied, SWS shall immediately, upon receipt of such
written notice of termination from ASBI, pay to ASBI, by wire transfer,
$2,500,000; or
(iii) SWS pursuant to Section 9.01F, SWS shall immediately, upon
delivery of such written notice of termination to ASBI, pay to ASBI, by
wire transfer, $2,500,000.
Notwithstanding the foregoing, no break-up fee shall be payable by either SWS or
ASBI under this Section 9.04 in the event that the Agreement is terminated as a
result of a breach of the representations or warranties made by either party, if
such representation or warranty was true and correct as of the date of this
Agreement and became untrue or inaccurate after the date of this Agreement,
except for breaches and misrepresentations caused by the intentional acts or
omissions of a party.
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ARTICLE X.
CONFIDENTIAL INFORMATION
SECTION 10.01 Definition of "Recipient," "Disclosing Party" and
-------------------------------------------------
"Representative". For purposes of this Article X, the term "Recipient" shall
--------------
mean the party receiving the Subject Information (as defined in Section 10.02)
and the term "Disclosing Party" shall mean the party furnishing the Subject
Information. The terms "Recipient" or "Disclosing Party", as used herein,
include: (A) all persons and entities related to or affiliated in any way with
the Recipient or the Disclosing Party, as the case may be, and (B) any person or
entity controlling, controlled by or under common control with the Recipient or
the Disclosing Party, as the case may be. The term "Representative" as used
herein, shall include all directors, officers, shareholders, employees,
representatives, advisors, attorneys, accountants and agents of any of the
foregoing. The term "person" as used in this Article X shall be broadly
interpreted to include, without limitation, any corporation, company, group,
partnership, governmental agency or individual.
SECTION 10.02 Definition of "Subject Information". For purposes of this
-----------------------------------
Article X, the term "Subject Information" shall mean all information furnished
to the Recipient or its Representatives (whether prepared by the Disclosing
Party, its Representatives or otherwise and whether or not identified as being
non public, confidential or proprietary) by or on behalf of the Disclosing Party
or its Representatives relating to or involving the business, operations or
affairs of the Disclosing Party or otherwise in possession of the Disclosing
Party. The term "Subject Information" shall not include information that (A)
was already in the Recipient's possession at the time it was first furnished to
Recipient by or on behalf of Disclosing Party, provided that such information is
not known by the Recipient to be subject to another confidentiality agreement
with or other obligation of secrecy to the Disclosing Party, its Subsidiaries or
another party, or (B) becomes generally available to the public other than as a
result of a disclosure by the Recipient or its Representatives, or (C) becomes
available to the Recipient on a non-confidential basis from a source other than
the Disclosing Party, its Representative or otherwise, provided that such source
is not known by the Recipient to be bound by a confidentiality agreement with or
other obligation of secrecy to the Disclosing Party, its Representative or
another party.
SECTION 10.03 Confidentiality. Each Recipient hereby agrees that the
---------------
Subject Information will be used solely for the purpose of reviewing and
evaluating the transactions contemplated by this Agreement and the other
agreements contemplated hereby, including the Merger Agreement, and that the
Subject Information will be kept confidential by the Recipient and the
Recipient's Representatives; provided, however, that (A) any of such Subject
Information may be disclosed to the Recipient's Representatives (including, but
not limited to, the Recipient's accountants, attorneys and investment bankers)
who need to know such information for the purpose of evaluating any such
possible transaction between the Disclosing Party and the Recipient (it being
understood that such Representatives shall be informed by the Recipient of the
confidential nature of such information and that the Recipient shall direct and
cause such persons to treat such information confidentially); and (B) any
disclosure of such Subject Information may be made to which the Disclosing Party
consents in writing prior to any such disclosure by Recipient.
SECTION 10.04 Securities Law Concerns. Each Recipient hereby acknowledges
-----------------------
that the Recipient is aware, and the Recipient will advise the Recipient's
Representatives who are informed
50
<PAGE>
as to the matters that are the subject of this Agreement, that the United States
securities laws prohibit any person who has received material, non-public
information from an issuer of securities from purchasing or selling securities
of such issuer or from communicating such information to any other person under
circumstances in which it is reasonably foreseeable that such person is likely
to purchase or sell such securities.
SECTION 10.05 Return of Subject Information. In the event of termination
-----------------------------
of this Agreement or the Merger Agreement, for any reason, the Recipient shall
promptly return to the Disclosing Party all written material containing or
reflecting any of the Subject Information other than information contained in
any application, notice or other document filed with any governmental agency and
not returned to the Recipient by such governmental agency. In making any such
filing, the Recipient will request confidential treatment of such Subject
Information included in any application, notice or other document filed with any
governmental agency.
SECTION 10.06 Specific Performance/Injunctive Relief. Each Recipient
--------------------------------------
acknowledges that the Subject Information constitutes valuable, special and
unique property of the Disclosing Party critical to its business and that any
breach of Article X of this Agreement by it will give rise to irreparable injury
to the Disclosing Party that is not compensable in damages. Accordingly, each
Recipient agrees that the Disclosing Party shall be entitled to obtain specific
performance and/or injunctive relief against the breach or threatened breach of
Article X of this Agreement by the Recipient or its Representatives. Each
Recipient further agrees to waive, and use its reasonable efforts to cause its
Representatives to waive, any requirement for the securing or posting of any
bond in connection with such remedies. Such remedies shall not be deemed the
exclusive remedies for a breach of Article X of this Agreement, but shall be in
addition to all other remedies available at law or in equity to the Disclosing
Party.
ARTICLE XI.
MISCELLANEOUS
SECTION 11.01 Survival of Representations and Warranties. The parties
------------------------------------------
hereto agree that all of their respective representations and warranties
contained in this Agreement shall not survive the Closing Date.
SECTION 11.02 Expenses. SWS shall pay all of its expenses and costs
--------
(including, without limitation, all counsel fees and expenses), and ASBI shall
pay all of its expenses and costs (including, without limitation, all counsel
fees and expenses), incurred in connection with this Agreement and the
consummation of the transactions contemplated hereby.
SECTION 11.03 Brokerage Fees and Commissions. SWS hereby represents to
------------------------------
ASBI that no agent, representative or broker has represented SWS in connection
with the transactions described in this Agreement. ASBI shall not have any
responsibility or liability for any fees, expenses or commissions payable to any
agent, representative or broker of SWS, and SWS hereby agrees to indemnify and
hold ASBI harmless for any amounts owed to any agent, representative or broker
of SWS. ASBI hereby represents to SWS that, no agent, representative or broker
has represented any of the ASBI Companies or any or all of the shareholders in
connection with the transactions
51
<PAGE>
described in this Agreement and provided, however, that ASBI's previous
agreement with Keefe, Bruyette and Woods, Inc. ("KBW") has been terminated and
no fee or commission is payable to KBW as a result of the transactions
contemplated by the Agreement. SWS shall have no responsibility or liability for
any fees, expenses or commissions payable to any agent, representative or broker
of the ASBI Companies or any shareholder of ASBI, and ASBI hereby agrees to
indemnify and hold SWS harmless for any amounts owed to any agent,
representative or broker of the ASBI Companies or any shareholder of ASBI.
SECTION 11.04 Entire Agreement. This Agreement and the other agreements,
----------------
documents, schedules and instruments executed and delivered by the parties to
each other at the Closing constitute the full understanding of the parties, a
complete allocation of risks between them and a complete and exclusive statement
of the terms and conditions of their agreement relating to the subject matter
hereof and supersede any and all prior agreements, whether written or oral, that
may exist between the parties with respect thereto. Except as otherwise
specifically provided in this Agreement, no conditions, usage of trade, course
of dealing or performance, understanding or agreement purporting to modify,
vary, explain or supplement the terms or conditions of this Agreement shall be
binding unless hereafter or contemporaneously herewith made in writing and
signed by the party to be bound, and no modification shall be effected by the
acknowledgment or acceptance of documents containing terms or conditions at
variance with or in addition to those set forth in this Agreement.
SECTION 11.05 Further Cooperation. The parties agree that they will, at
-------------------
any time and from time to time after the Closing, upon request by the other and
without further consideration, do, perform, execute, acknowledge and deliver all
such further acts, deeds, assignments, assumptions, transfers, conveyances,
powers of attorney, certificates and assurances as may be reasonably required in
order to fully consummate the transactions contemplated hereby in accordance
with this Agreement or to carry out and perform any undertaking made by the
parties hereunder.
SECTION 11.06 Severability. In the event that any provision of this
------------
Agreement is held to be illegal, invalid or unenforceable under present or
future laws, then (A) such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision were not a part hereof; (B) the remaining provisions of this Agreement
shall remain in full force and effect and shall not be affected by such illegal,
invalid or unenforceable provision or by its severance from this Agreement; and
(C) there shall be added automatically as a part of this Agreement a provision
as similar in terms to such illegal, invalid or unenforceable provision as may
be possible and still be legal, valid and enforceable.
SECTION 11.07 Notices. Any and all payments (other than payments at the
-------
Closing), notices, requests, instructions and other communications required or
permitted to be given under this Agreement after the date hereof by any party
hereto to any other party may be delivered personally or by nationally
recognized overnight courier service or sent by mail or (except in the case of
payments) by telex or facsimile transmission, at the respective addresses or
transmission numbers set forth below and shall be effective (A) in the case of
personal delivery, telex or facsimile transmission, when received; (B) in the
case of mail, upon the earlier of actual receipt or five (5) business days after
deposit in the United States Postal Service, first class certified or registered
mail, postage prepaid, return receipt requested; and (C) in the case of
nationally-recognized overnight courier service, one (1) business day after
delivery to such courier service together with all
52
<PAGE>
appropriate fees or charges and instructions for such overnight delivery. The
parties may change their respective addresses and transmission numbers by
written notice to all other parties, sent as provided in this Section 11.07. All
communications must be in writing and addressed as follows:
IF TO ASBI:
Mr. Don Buchholz
Chairman of the Board
ASBI Holdings, Inc.
301 S. Center
P.O. Box 1959
Arlington, Texas 76004-1959
Telecopy: (214)859-9309
WITH A COPY TO:
Mr. Mark Haynie
Haynie, Rake & Repass, P.C.
14651 Dallas Parkway, Suite 136
Dallas, Texas 75240
Telecopy: (972) 716-1850
IF TO SWS:
Mr. David Glatstein
President and Chief Executive Officer
Southwest Securities Group, Inc.
Suite 3500
1201 Elm Street
Dallas, Texas 75270
Telecopy: (214)859-9309
WITH A COPY TO:
Mr. Kenneth R. Hanks
Southwest Securities Group, Inc.
Suite 3500
1201 Elm Street
Dallas, Texas 75270
Telecopy: (214)859-6020
53
<PAGE>
Mr. Chris Knox
Southwest Securities Group, Inc.
Suite 3500
1201 Elm Street
Dallas, Texas 75270
Telecopy: (214)859-9441
Ms. Dianne Capps Saslaw
Southwest Securities Group, Inc.
Suite 3500
1201 Elm Street
Dallas, Texas 75270
Telecopy: (214)859-6020
Mr. Charles E. Greef
Jenkens & Gilchrist,
a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2799
Telecopy: (214) 855-4300
SECTION 11.08 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
-------------
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLYING TO
CONTRACTS ENTERED INTO AND TO BE PERFORMED WITHIN THE STATE OF TEXAS, WITHOUT
REGARD FOR THE PROVISIONS THEREOF REGARDING CHOICE OF LAW.
SECTION 11.09 Multiple Counterparts. For the convenience of the parties
---------------------
hereto, this Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, and all counterparts hereof so executed by the
parties hereto, whether or not such counterpart shall bear the execution of each
of the parties hereto, shall be deemed to be, and shall be construed as, one and
the same Agreement. A telecopy or facsimile transmission of a signed
counterpart of this Agreement shall be sufficient to bind the party or parties
whose signature(s) appear thereon.
SECTION 11.10 Certain Definitions.
-------------------
A. "Affiliate" means, with respect to any person, any person that,
directly or indirectly, controls, is controlled by, or is under common
control with, such person in question. For the purposes of this
definition, "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with") as used with respect to
any person, shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities or by contract
or otherwise.
B. "ASBI Companies" shall mean, collectively, ASBI and all ASBI
Subsidiaries.
54
<PAGE>
C. "ASBI Subsidiaries" shall mean the Subsidiaries of ASBI, which
shall include the ASBI Subsidiaries described in Section 3.04 of this
Agreement and any corporation, bank, savings association, or other
organization acquired as a Subsidiary of ASBI in the future and owned by
ASBI at the Effective Time.
D. "Average Closing Price" shall mean the average of the daily last
sales prices of SWS Common Stock as reported on the New York Stock Exchange
(as reported by The Wall Street Journal or, if not reported thereby,
another authoritative source as chosen by SWS) for the ten (10) consecutive
full trading days in which such shares are traded on the New York Stock
Exchange.
E. "Environmental Laws" mean all federal, state and local laws,
regulations, statutes, ordinances, codes, rules, decisions, orders or
decrees relating or pertaining to the public health and safety or the
environment, or otherwise governing the generation, use, handling,
collection, treatment, storage, transportation, recovery, recycling,
removal, discharge or disposal of Hazardous Materials, including, without
limitation, (i) the Solid Waste Disposal Act, 42 U.S.C. 6901 et seq., as
-------
amended ("SWDA," also known as "RCRA" for a subsequent amending act), (ii)
the Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. (S)9601 et seq., as amended ("CERCLA"), (iii) the Clean Water
-------
Act, 33 U.S.C. (S)1251 et seq., as amended ("CWA"), (iv) the Clean Air Act,
-------
42 U.S.C. (S)7401 et seq., as amended ("CAA"), (v) the Toxic Substances
-------
Control Act, 15 U.S.C. (S)2601 et seq., as amended ("TSCA"), (vi) the
-------
Emergency Planning and Community Right to Know Act, 15 U.S.C. (S)2601 et
--
seq., as amended ("EPCRKA"), and (vii) the Occupational Safety and Health
----
Act, 29 U.S.C. (S) 651 et seq., as amended.
------
F. "Environmental Liabilities" mean any and all damages, costs,
losses (including without limitation, diminution in value), liabilities,
judgments, penalties, fines, lawsuits, obligations, deficiencies, demands
and expenses (whether or not arising out of third-party claims) including,
without limitation, interest, penalties, cost of mitigation, clean-up or
remedial action, damages to the environment, attorneys' fees and related
expenses, expert fees and all amounts paid in investigation, defense, audit
or settlement of any of the foregoing relating to relating to or associated
with the Environmental Properties or to any Hazardous Materials that exist
or have previously existed on, about or within such properties or have been
used, generated, stored, transported, disposed of on, or released from,
such properties.
G. "Hazardous Material" means, without limitation, (i) any
"hazardous wastes" as defined under RCRA, (ii) any "hazardous substances as
defined under CERCLA, (iii) any toxic pollutants as defined under CWA, (iv)
any hazardous air pollutants as defined under CAA, (v) any hazardous
chemicals as defined under TSCA, (vi) any hazardous substances or extremely
hazardous substances as defined under EPCRKA, (vii) asbestos, (viii)
polychlorinated biphenyls, (ix) underground storage tanks, whether empty,
filled or partially filled with any substance, (x) any substance the
presence of which on the property in question is prohibited under any
Environmental Law, and (xi) any other substance which under any
Environmental Law requires special handling or notification of or reporting
to any federal, state or local governmental entity in its generation, use,
handling, collection,
55
<PAGE>
treatment, storage, re-cycling, treatment, transportation, recovery,
removal, discharge or disposal.
H. "Investment Securities" means all securities held by the Bank and
reflected as an asset of the Bank in accordance with RAP.
I. "Material Adverse Change" means, with respect to a particular
party, any material adverse change in the financial condition, assets,
properties, key employees, liabilities (absolute, accrued, contingent or
otherwise), reserves, business or results of operations or prospects of the
ASBI Companies or the SWS Companies, as applicable, and specifically
includes any change that reduces the shareholders' equity of SWS (on a
consolidated basis) by an amount equaling or exceeding $10,000,000 in the
case of SWS (excluding any changes or fluctuations in the market price of
SWS Common Stock or the valuation of the Knight/Trimark Group, Inc. Class A
Common Stock held by SWS) or in the case of ASBI any change that reduces
the shareholders' equity of ASBI (on a consolidated basis) by an amount
equaling or exceeding $2,500,000 and/or the resignation of Richard J.
Driscoll as an officer of ASBI or the Bank. Further an event or change
affecting the banking industry or securities industry as a whole shall not
be considered a Material Adverse Change unless it affects the ASBI
Companies or the SWS Companies, as the case may be, to a greater degree
than other similar size companies or banks.
J. "Material Adverse Effect" on a party shall mean an event, change,
or occurrence which, individually or together with any other event, change,
or occurrence, has a material adverse impact on (i) the financial
condition, results of operations, or business of such party and its
Subsidiaries, taken as a whole, or (ii) the ability of such party to
perform its obligations under this Agreement or to consummate the Merger or
the other transactions contemplated by this Agreement.
K. The term "Property" or "Properties" shall include all real
property owned or leased by the ASBI Companies, including, but not limited
to properties that the Bank has foreclosed on as well as their respective
premises and all improvements and fixtures thereon.
L. "Subsidiary" means, when used with reference to an entity, any
corporation, partnership or limited liability company, twenty percent (20%)
of the outstanding voting securities of which are owned directly or
indirectly by such entity or any partnership, joint venture or other
enterprise in which any entity has, directly or indirectly, any equity
interest.
M. "SWS Companies" shall mean, collectively, SWS and all SWS
Subsidiaries.
N. "SWS Subsidiaries" shall mean the Subsidiaries of SWS and any
corporation, bank, savings association, or other organization acquired as a
Subsidiary of SWS in the future and owned by SWS at the Effective Time.
SECTION 11.11 Specific Performance. Each of the parties hereto
--------------------
acknowledges that the other party would be irreparably damaged and would not
have an adequate remedy at law for money damages in the event that any of the
covenants contained in this Agreement were not performed in
56
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accordance with its terms or otherwise were materially breached. Each of the
parties hereto therefore agrees that, without the necessity of proving actual
damages or posting bond or other security, the other party shall be entitled to
temporary and/or permanent injunction or injunctions to prevent breaches of such
performance and to specific enforcement of such covenants in addition to any
other remedy to which they may be entitled, at law or in equity.
SECTION 11.12 Attorneys' Fees and Costs. In the event attorneys' fees or
--------------------------
other costs are incurred to secure performance of any of the obligations herein
provided for, or to establish damages for the breach thereof, or to obtain any
other appropriate relief, whether by way of prosecution or defense, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs incurred therein.
SECTION 11.13 Rules of Construction. Each use herein of the masculine,
---------------------
neuter or feminine gender shall be deemed to include the other genders. Each
use herein of the plural shall include the singular and vice versa, in each case
as the context requires or as it is otherwise appropriate. The word "or" is
used in the inclusive sense. All articles and sections referred to herein are
articles and sections, respectively, of this Agreement and all exhibits and
schedules referred to herein are exhibits and schedules, respectively, attached
to this Agreement. Descriptive headings as to the contents of particular
sections are for convenience only and shall not control or affect the meaning,
construction or interpretation of any provision of this Agreement. Any and all
schedules, exhibits, annexes, statements, reports, certificates or other
documents or instruments referred to herein or attached hereto are and shall be
incorporated herein by reference hereto as though fully set forth herein
verbatim.
SECTION 11.14 Binding Effect; Assignment. All of the terms, covenants,
--------------------------
representations, warranties and conditions of this Agreement shall be binding
upon, and inure to the benefit of and be enforceable by, the parties hereto and
their respective successors, representatives and permitted assigns. Nothing
expressed or referred to herein is intended or shall be construed to give any
person other than the parties hereto any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provision herein contained,
it being the intention of the parties hereto that this Agreement, the assumption
of obligations and statements of responsibilities hereunder, and all other
conditions and provisions hereof are for the sole benefit of the parties to this
Agreement and for the benefit of no other person, except the Shareholders of
ASBI. Nothing in this Agreement shall act to relieve or discharge the
obligation or liability of any third party to any party to this Agreement, nor
shall any provision give any third party any right of subrogation or action over
or against any party to this Agreement. No party to this Agreement shall assign
this Agreement, by operation of law or otherwise, in whole or in part, without
the prior written consent of the other parties. Any assignment made or
attempted in violation of this Section 11.14 shall be void and of no effect.
SECTION 11.15 Public Disclosure. Neither ASBI nor SWS will make, issue or
-----------------
release any announcement, statement, press release, acknowledgment or other
public disclosure of the existence of, or reveal the terms, conditions or the
status of, this Agreement or the transactions contemplated hereby without the
prior written consent of the other party to this Agreement; provided, however,
that notwithstanding the foregoing, ASBI and SWS will be permitted to make any
public disclosures or governmental filings as legal counsel may deem necessary
to maintain compliance with or to
57
<PAGE>
prevent violations of applicable federal or state laws or regulations or that
may be necessary to obtain regulatory approval for the transactions contemplated
hereby.
SECTION 11.16 Extension; Waiver. At any time prior to the Closing Date,
-----------------
the parties may (A) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (B) waive any inaccuracies
in the representations and warranties contained herein or in any document,
certificate or writing delivered pursuant hereto, or (C) waive compliance with
any of the agreements or conditions contained herein. Such action shall be
evidenced by a signed written notice given in the manner provided in Section
11.07 hereof. No party to this Agreement shall by any act (except by a written
instrument given pursuant to Section 11.07 hereof) be deemed to have waived any
right or remedy hereunder or to have acquiesced in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in
exercising any right, power or privilege hereunder by any party hereto shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. A waiver of any party of
any right or remedy on any one occasion shall not be construed as a bar to any
right or remedy that such party would otherwise have on any future occasion or
to any right or remedy that any other party may have hereunder.
SECTION 11.17 Amendments. To the extent permitted by applicable law, this
----------
Agreement may be amended by action taken by or on behalf of the board of
directors of SWS and ASBI at any time before or after adoption of this Agreement
by the shareholders of ASBI and SWS, but, after any submission of this Agreement
to such shareholders for approval, no amendment shall be made that decreases the
consideration to be paid for the ASBI Common Stock as set forth in Section 1.05
or that materially and adversely affects the rights of the shareholders of
either ASBI or SWS hereunder without the requisite approval of such
shareholders. This Agreement may be amended, modified or supplemented only by
an instrument in writing executed by the party against which enforcement of the
amendment, modification or supplement is sought.
SECTION 11.18 Binding Arbitration Relating to Environmental Escrow. Any
----------------------------------------------------
dispute submitted to arbitration pursuant to Section 1.13 shall be determined by
the decision of a board of arbitration consisting of three members ("Board of
Arbitration") selected as hereinafter provided. ASBI shall select an arbitrator
and SWS shall select an arbitrator, each of whom shall be a member of the Board
of Arbitration, and each of whom shall be independent of the parties and shall
be experienced in arbitrating complex commercial transactions. A third Board of
Arbitration member, independent of the parties, shall be selected by mutual
agreement of the other two Board of Arbitration members. If the other two Board
of Arbitration members fail to reach agreement on such third member within 10
days after their selection, such third member shall thereafter be selected by
the American Arbitration Association upon application made to it for such
purpose by any party to the arbitration. The Board of Arbitration shall meet in
Dallas, Texas or such other place as a majority of the members of the Board of
Arbitration determines more appropriate, and shall reach and render a decision
in writing with respect to items in dispute. The decision shall state the facts
on which it is based, be approved by at least a majority of the members of the
Board of Arbitration, and shall be based on the law governing the Agreement. In
connection with rendering its decisions, the Board of Arbitration shall adopt
and follow the Commercial Rules of Arbitration of the American Arbitration
Association in effect as of the date of the arbitration. To the extent
practical, decisions of the Board of Arbitration shall be rendered and delivered
to ASBI and SWS no more than
58
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30 calendar days following commencement of proceedings with respect thereto, but
in any event no later than December 30, 1999. The arbitrators shall limit their
award to a determination of the Environmental Escrow Amount and the appropriate
Escrow Period to adequately protect the SWS Companies and ASBI Companies (after
the Closing Date) from any Environmental Liabilities relating to the
Environmental Properties. Any decision made by the Board of Arbitration shall be
final, binding and conclusive on ASBI and SWS. Each party to this Agreement
shall be responsible for its own legal, expert and consultant fees and expenses
incurred in connection with the arbitration proceedings. The fees and expenses
of the Board of Arbitration shall be shared equally between SWS and ASBI.
[Signature Page Follows]
59
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
SWS: SOUTHWEST SECURITIES GROUP, INC.
By: /s/ David Glatstein
-------------------------------------
David Glatstein
President and Chief Executive Officer
ASBI: ASBI HOLDINGS, INC.
By: /s/ Don Buchholz
-------------------------------------
Don Buchholz
Chairman of the Board
60
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EXHIBIT 10.1
[LOGO OF SOUTHWEST SECURITIES APPEARS HERE]
SOUTHWEST SECURITIES
DEFERRED COMPENSATION PLAN
Effective July 1, 1999
<PAGE>
Table of Contents
<TABLE>
<S> <C>
I. Establishment and Purpose
1.1 Establishment 1
1.2 Purpose........................................... 1
1.3 Effective Date of Plan............................ 1
II Definitions
2.1 Account........................................... 2
2.2 Affiliate......................................... 2
2.3 Beneficiary....................................... 2
2.4 Committee......................................... 2
2.5 Commissions....................................... 3
2.6 Company........................................... 3
2.7 Credited Interest................................. 3
2.8 Deferral Amount................................... 3
2.9 Deferral Period................................... 3
2.10 Disability or Disabled............................ 3
2.11 Discretionary Contribution........................ 3
2.12 Eligible Employee................................. 3
2.13 Employee.......................................... 3
2.14 ERISA............................................. 3
2.15 Incentive Award................................... 4
2.16 Investment Alternative............................ 4
2.17 Matching Contribution............................. 4
2.18 Participant....................................... 4
2.19 Plan.............................................. 4
2.20 Plan Year......................................... 4
2.21 Retirement Date................................... 4
2.22 Service........................................... 4
2.23 Stock............................................. 4
2.24 Vested Account.................................... 4
III. Eligibility and Participation
3.1 Eligibility....................................... 5
3.2 Participation and Classification of Participants.. 5
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
IV. Determination of Contribution Amounts
4.1 Deferrals......................................... 6
4.2 Election of Deferred Amount....................... 6
4.3 Deferral Amount Election Forms.................... 7
4.4 Matching Contribution............................. 7
4.5 Discretionary Contribution........................ 7
V. Payment of Benefits
5.1 Time of Payment................................... 8
5.2 Method of Payment................................. 8
5.3 Death Benefit..................................... 9
5.4 Disability Benefit................................ 10
5.5 Beneficiary Designations.......................... 10
VI. Investment Alternatives
6.1 Participant Accounts.............................. 11
6.2 Adjustment of Accounts............................ 11
6.3 Investment Alternatives........................... 11
6.4 Credited Interest................................. 12
6.5 Vesting........................................... 12
6.6 Account Statements................................ 13
VII. Administration of Plan
7.1 Administration.................................... 14
7.2 Compensation and Expense.......................... 14
7.3 Claim Review Procedures........................... 14
7.4 Finality of Determinations........................ 16
7.5 Indemnification................................... 16
7.6 Voting of Securities.............................. 16
VIII. Provisions for Benefits
8.1 Provisions for Benefits........................... 17
IX. Amendment, Termination or Merger
9.1 Amendment and Termination......................... 18
9.2 Merger, Consolidation or Acquisition.............. 18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
X. General Provisions
10.1 Effect on Other Plans............................. 19
10.2 Nonalienation..................................... 19
10.3 Incompetency...................................... 19
10.4 Effect of Mistake................................. 20
10.5 Plan Not an Employment Contract................... 20
10.6 Tax Withholding................................... 20
10.7 Severability...................................... 20
10.8 Applicable Law.................................... 21
10.9 Binding Effect.................................... 21
</TABLE>
iii
<PAGE>
SOUTHWEST SECURITIES
DEFERRED COMPENSATION PLAN
Effective July 1, 1999
Article I
Establishment and Purpose
-------------------------
1.1 Establishment. Southwest Securities Group, Inc., a corporation
-------------
organized under the laws of the state of Delaware ("Company"), hereby
establishes a deferred compensation plan for Eligible Employees to be known as
the Southwest Securities Deferred Compensation Plan ("Plan").
1.2 Purpose. The Plan shall provide Eligible Employees the ability to
-------
defer payment of Incentive Awards and Commissions paid by the Company. In
addition, the Plan shall provide a Company Matching Contribution and allow for
Discretionary Contributions for selected Eligible Employees.
1.3 Effective Date of Plan. The plan is effective July 1, 1999.
----------------------
1
<PAGE>
Article II
Definitions
-----------
Pronouns and other similar words used herein in the masculine or neuter
gender shall be read in the appropriate gender. The singular form of words shall
be read as plural where appropriate. Where capitalized words or phrases appear
in the Plan, they shall have the meaning set forth below.
2.1 "Account" means the recordkeeping account maintained in the name of a
-------
Participant to which Deferral Amounts, Matching Contributions, Discretionary
Contributions, and Credited Interest are recorded pursuant to the provisions of
Article VI.
2.2 "Affiliate" means:
---------
(a) Any corporation other than the Company (i.e., either a subsidiary
corporation or an affiliate or associated corporation of the
Company), which together with the Company is a member of a
"controlled group of corporations" within the meaning of Section
414(b) of the Internal Revenue Code.
(b) Any organization that is under "common control" with the Company
determined under Section 414(c) of the Internal Revenue Code.
(c) Any organization which together with the Company is a member of
an "affiliated service group" within the meaning of Section
414(m) of the Internal Revenue Code.
2.3 "Beneficiary" means the person, persons, trust, or other entity
-----------
designated by a Participant to receive benefit, if any, under this Plan at such
Participant's death pursuant to Section 5.5.
2.4 "Committee" means the Executive Committee or such other Committee as
---------
may be appointed by the Board of Directors of Southwest Securities from time to
time to oversee the administration of the plan.
2
<PAGE>
2.5 "Commissions" means any commissions paid to an Eligible Employee under
-----------
the Company's Commission payment schedule, as identified on the Employer payroll
system.
2.6 "Company" means Southwest Securities Group, Inc. and its Affiliates
-------
and any successor thereto.
2.7 "Credited Interest" means the amount credited to a Participant's
-----------------
Account pursuant to Section 6.4.
2.8 "Deferral Amount" means the portion of the Eligible Employee's
---------------
Incentive Award or Commissions, which he elects to defer pursuant to Article IV.
2.9 "Deferral Period" means the period established under Section 4.1 to
---------------
which a Deferral Amount election shall apply.
2.10 "Disability or Disabled" means a mental or physical condition which
----------------------
qualifies the Participant as being disabled for purposes of the Southwest
Securities Long Term Disability Plan. If a participant is not covered by such
plan, disability means a mental or physical condition, which in the opinion of
the Committee will cause the Participant to be unable to perform usual duties of
the employer for a period of at least six months.
2.11 "Discretionary Contribution" means a supplemental amount credited to a
--------------------------
Participant's Account as allocated by the Committee from time to time.
2.12 "Eligible Employee" means an Employee who is designated by the
-----------------
Committee as belonging to a "select group of management or highly compensated
employees", as such phrase is defined under ERISA and who meets such other
criteria as determined by the Committee.
2.13 "Employee" means an individual who is an employee of the Company or
--------
Affiliate.
2.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
3
<PAGE>
2.15 "Incentive Award" means any award to an Eligible Employee under the
---------------
Company's Annual Incentive Compensation Plan as it may be amended or modified
from time to time or any successor plan.
2.16 "Investment Alternative" means the investment selected by the
----------------------
Participant pursuant to Section 6.3.
2.17 "Matching Contribution" means the amount credited to a Participant's
---------------------
Account by the Company, as defined in Section IV.
2.18 "Participant" means an Eligible Employee who has been designated a
-----------
Participant under the Plan pursuant to Section 3.2.
2.19 "Plan" means this Southwest Securities Deferred Compensation Plan, as
----
amended from time to time.
2.20 "Plan Year" means the 12-month period beginning each July 1 and ending
---------
the succeeding June.
2.21 "Retirement Date" means the first day of any month after a Participant
---------------
separates from service, attains age 55 and completes 10 years of Service.
2.22 "Service" means the most recent period of whole year of uninterrupted
-------
service with the Employer.
2.23 "Stock" means Southwest Securities Common Stock.
-----
2.24 "Vested Account" means the vested portion of a Participant's Account
--------------
as defined in Section 6.5.
4
<PAGE>
Article III
Eligibility and Participation
-----------------------------
3.1 Eligibility. Only those eligible employees selected by the Committee
-----------
shall be eligible to participate in the Plan. All determinations as to an
Employee's status as an Eligible Employee shall be made by the Committee. The
Committee may also determine that an Employee that was previously eligible under
the Plan is no longer eligible. The determinations of the Committee shall be
final and binding on all Employees. The Committee shall provide each Eligible
Employee with notice of the Employee's status as an Eligible Employee under this
Plan and permit such Eligible Employee the opportunity to make the Deferral
Amount election pursuant to Article IV. Such notice may be given at such time
and in such manner as the Committee may determine.
3.2 Participation and Classification of Participants. Each Eligible
------------------------------------------------
Employee who has a Deferral Amount credited to an Account under this Plan shall
be a Participant. An Eligible Employee shall continue as a Participant as long
as there is a balance credited to the Participant's Account.
5
<PAGE>
Article IV
Determination of Contribution Amounts
-------------------------------------
4.1 Deferral. The Company and each affiliate which has Eligible Employees
--------
shall establish a Deferral Period to which any Deferral Amount election made by
such employees shall apply. Such Deferral Period shall be at least twelve months
in length except for the Participant's initial Deferral Period. Only Commissions
and Incentive Awards which become payable within such Deferral Period may be
covered by a Deferral Amount election.
For any Deferral Period, a Participant may elect to defer (up to the
percentages shown below) any Incentive Award or Commission that may be payable
by the Company. The amount deferred shall be specified as a percentage
(deferrals made in 1% increments).
(a) Incentive Awards. A Participant may elect to defer up to 50% of
----------------
an Incentive Award for the Deferral Period.
(b) Commissions. A Participant may elect to defer up to 100% of
-----------
Commissions received for any Deferral Period.
4.2 Election of Deferral Amount. An Eligible Employee must file a Deferral
---------------------------
Amount election form for each Deferral Period for which a Deferral will be made.
Such election must be made not less than 45 days prior to the commencement of
the Deferral Period to which it is to apply, except that an Eligible Employee's
initial election may be made within 30 days of his selection as a Participant
provided no Commission or Incentive Award payable to the Participant at the date
of such election shall be considered part of such Deferral Amount. For any
Deferral Amount election to be effective July 1, 1999, such election must be
made on or before June 30, 1999.
If an Eligible Employee does not file a Deferral Amount election form
within the foregoing period prior to any Deferral Period, such Eligible Employee
will be deemed to have elected not to defer receipt of any Incentive Awards or
Commissions which otherwise become payable during such Deferral Period.
6
<PAGE>
Once made, an election will be in force for the entire Deferral
Period. If a severe and unforeseeable financial hardship (as determined under
Section 5.1) occurs during the Deferral Period, a Participant may revoke the
Deferral Amount election with the consent of the Committee. Following such a
revocation, a Participant may resume Deferrals only during the above-described
period for the following Deferral Period by executing a new Deferral Amount
election and delivering it to the Committee.
4.3 Deferral Amount Election Forms. All Deferral Amount elections shall be
------------------------------
made on a Deferral Amount election form. A Deferral Amount election form shall
specify the Deferral Amount, Investment Alternative pursuant to Subsection 6.3,
and the Eligible Employee's designated Beneficiary to receive any death benefit
applicable to such Deferral Amounts.
4.4 Matching Contribution. The Company shall match 25% of a Participant's
---------------------
annual Deferral Amount up to a maximum matching amount of $10,000 per Plan Year.
Matching Contributions shall be made in Stock unless otherwise determined by the
Company. Such contributions may be made at such times as determined by the
Committee but shall be deemed to have been made, and number of shares to be
contributed shall be determined, as of the next business day following the date
on which the Deferral Amount to which the Matching Contribution relates is
applied to purchase a mutual fund or Stock under Section 6.3.
4.5 Discretionary Contribution. From time to time, the Company may make
--------------------------
additional contributions to selected Participants' Discretionary Account, as the
Committee deems appropriate. Discretionary Contributions shall be made in
Stock, unless otherwise determined by the Company.
7
<PAGE>
Article V
Payments of Benefits
--------------------
5.1 Time of Payment. Payment of the Vested Account will commence within 90
---------------
days of the earliest to occur of 1) termination prior to Retirement Date, 2)
retirement after a Retirement Date, 3) death, or 4) disability. A Participant
may defer commencement of payment under the Plan beyond his Retirement or
termination date with the consent of the Committee, provided his request to do
so is received by the Committee not less than one year prior to the date that
payment would otherwise be made or commence and the Participant agrees to defer
payment or commencement to a definite future date not less than two years from
the date payment would otherwise be made or commence. The election must be made
at least one year prior to Retirement Date. All or a portion of the Account may
be paid during active employment of a Participant if he makes an election to
receive such distribution two years prior to the date such distribution is to be
paid or is granted approval by the Committee due to an unforeseen financial
hardship withdrawal. Only one such election shall be permitted and any such
election shall be irrevocable except in the case of the Participant's subsequent
death or Disability.
Subject to Section 5.2, all or a portion of the Participant's Account
may be paid during active employment of a Participant if he makes an election to
receive such distribution a least two years prior to the date such distribution
is to be paid. The Committee may also permit a Participant to receive payment of
all or a portion of his Vested Account to the extent he incurs a severe and
unforeseeable financial hardship. An unforeseeable financial emergency will not
be deemed to exist if the hardship may be relieved through other sources or
cessation of Deferrals under Section 4.2 of the Plan.
5.2 Method of Payment. When a Participant becomes entitled to a
-----------------
distribution, the Plan shall, except as provided below, pay the balance of the
Participant's Vested Account in 10 annual installments. The first installment
shall be due on the first day of the month following the Participant's
Retirement or termination. Each subsequent annual installment shall be paid on
the first business day in July following the initial payment and shall continue
on each subsequent July 1 until all
8
<PAGE>
installment payments have been made. The amount of the first installment shall
equal one-tenth of the Vested Account on the valuation date established under
Section 6.2 which coincides or immediately precedes the Participant's Retirement
or termination. The amount of the second installment shall be one-ninth of the
Vested Account on the valuation date coincident with or next preceding the
second installment date and so forth until all installment payments have been
made; provided that if any installment payment would be less than $50,000, the
Plan may distribute the entire remaining Vested Account Balance. After
commencement of installment payments, a Participant's Account shall continue to
be adjusted in the same manner as set forth in Section 6.4.
A Participant may request the Committee to authorize payment of his
Vested Account balance in a lump sum. The Committee shall have the discretion to
agree to such payment upon such terms and conditions, as it shall establish from
time to time. Without limiting the generality of the foregoing, the Committee
may require a Participant to enter into a noncompetition agreement or to execute
one or more releases of claims against the Company and its Affiliates and their
officers, employees and agents as a condition to such lump sum payment. The
Committee may, with or without the request or consent of the Participant,
require the Participant to accept a distribution of his Vested Account in a
single lump sum payment.
The portion of the Account invested in mutual funds shall be
distributed in cash. The remaining portion, if any, invested in Stock shall be
distributed in shares of Southwest Securities Common Stock.
5.3 Death Benefit. If a Participant dies with a balance credited to the
-------------
Employee's Account, such balance shall be paid to the Employee's Beneficiary
designated on the applicable Deferral Amount election form. The then current
balance of the Vested Account payable to a designated Beneficiary shall be paid
in a single lump sum payment.
9
<PAGE>
5.4 Disability Benefit. If a Participant becomes Disabled with a balance
------------------
credited to the Employee's Account, such balance shall be paid to the Employee.
The then current balance of the Vested Account shall be paid in a single lump
sum payment.
5.5 Beneficiary Designations. A Participant shall designate a Beneficiary
------------------------
who, upon the Employee's death, shall receive payments that otherwise would have
been paid to him under the Plan. All Beneficiary designations shall be in
writing. Any such designation shall be effective only if and when delivered to
the Committee during the lifetime of the Participant.
If a designated Beneficiary of a Participant predeceases the
Participant, the designation of such Beneficiary shall be void. If a Participant
fails to designate a Beneficiary with respect to any death benefit payments or
if such designation is ineffective, in whole or in part, any payment that
otherwise would have been paid to such Participant shall be paid to the
Employee's surviving spouse or, if none, to the Employee's estate.
10
<PAGE>
Article VI
Accounts and Credited Interest
------------------------------
6.1 Participant Accounts. The Committee shall maintain, or cause to be
--------------------
maintained, a bookkeeping Account for each Participant for the purpose of
accounting for the Participant's interest under the Plan. The Committee shall
maintain within each Participant's Account such Deferral Amount, Matching
Contributions, and Discretionary Contribution subaccounts as may be necessary as
well as Credited Interest allowable. In addition to the foregoing bookkeeping
subaccounts maintained for each Participant, the Committee shall maintain, or
cause to be maintained, such other accounts, subaccounts, records or books as it
deems necessary to properly provide for the maintenance of Accounts and to carry
out the intent and purpose of the Plan.
6.2 Adjustment of Accounts. Each Participant's Account shall be adjusted
----------------------
to reflect all Deferral Amounts, Matching Contributions, and Discretionary
Contributions credited to the Employee's Account, all Credited Interest and
other positive or negative earnings credited or debited to the Employee's
Account as provided by Section 6.4, and all benefit payments charged to the
Employee's Account. A Participant's Deferral Amount shall be credited to such
Participant's Account as soon as possible on or after the date on which the
amount being deferred would have become payable to the Participant absent the
deferral election. Credited Interest and other earnings shall be credited to
the Participant Accounts pursuant to Section 6.4. Changes to a Participant's
Account to reflect benefit payments shall be made as of the date of any such
payment. As of any relevant date, the balance standing to the credit of a
Participant's Account, and each separate subaccount comprising such Account,
shall be the respective balance in such Account and the component subaccounts as
of the close of business on such date after all applicable credits, debits and
charges have been posted.
6.3 Investment Alternatives. Participants may elect or modify an
-----------------------
Investment Alternative for Deferral Amounts from the following in accordance
with such procedures and limitations as approved by the Committee:
(a) Mutual Funds. A Participant may request that all or a portion of
------------
his Deferral Amount be invested in selected mutual fund(s)
11
<PAGE>
approved by the Committee from time to time. The purchase price
used for any shares or units of mutual funds held in Participant
Accounts shall be based on the price of such shares or units on
the date such shares or units are actually purchased with such
Deferral Amount.
(b) Company Stock. A Participant may request that all or a portion of
-------------
his Deferral Amount be invested in Stock. The purchase price used
for Stock units held in Participant Accounts shall be based on
the Stock price on the date such Stock is actually purchased with
such Deferral Amount.
6.4 Credited Interest. Credited Interest shall be based on the returns on
-----------------
mutual fund(s) and Company Stock weighted in accordance with the Participant's
investment allocation.
Each Participant's Account shall be credited, or debited as the case
may be, with Credited Interest on the balance in such Account. Credited Interest
shall be allocated to the appropriate subaccount balances within such Account.
Credited Interest shall be credited to Accounts on a quarterly basis at the end
of each calendar quarter.
Not withstanding anything to the contrary above, Credited Interest on
Matching Contributions and Discretionary Contributions shall be based solely on
Stock returns.
6.5 Vesting. Subject to the conditions and limitations on payment of
-------
benefits under the Plan, a Participant's Deferral Amount subaccount shall be
100% vested as of any relevant date. Company Matching Contributions and
Discretionary Contributions shall be vested 25% per year on a class year basis.
The entire balance of the Account shall be 100% vested upon death, Disability,
or retirement after Retirement Date.
Notwithstanding the foregoing, if a Participant is terminated due to theft
or other dishonesty or if the Participant violates any obligation to which he is
subject to refrain from competition or disclosure of confidential information,
the Committee may require the Participant to forfeit any portion of his Vested
Account derived from
12
<PAGE>
Matching or Discretionary Contributions and any earnings or appreciation of his
Deferral Amounts.
6.6 Account Statements. The Committee shall provide each Participant with
------------------
a statement of the status of the Employee's Account under the Plan. The
Committee shall provide such statement annually or at such other times as the
Committee may determine. Such statement shall be in the format prescribed by the
Committee.
13
<PAGE>
Article VII
Administration of the Plan
--------------------------
7.1 Administration. The Plan shall be administered by the Committee. A
--------------
majority of the members of the Committee shall constitute a quorum. The acts of
a majority of a quorum of the Committee at a meeting or acts approved in writing
by a majority of the Committee without a meeting shall be the acts of the
Committee. The Committee shall have the discretionary authority to make such
rules as it deems necessary to administer the Plan, to interpret the Plan, to
decide questions arising under the Plan, and to take such other action as may be
appropriate to carry out the purpose of the Plan. The Committee is authorized to
employ attorneys, accountants or any other agents or delegate specified duties
to employees of the Company as it shall deem proper in the discharge of its
duties. The Committee shall be the "plan administrator" and the Company shall be
the "named fiduciary" as such terms are defined by ERISA.
7.2 Compensation and Expenses. Any member of the Committee may receive
-------------------------
reimbursement by the Company for expenses properly and actually incurred. All
expenses of the Committee shall be paid by the Company. Such expenses shall
include any expenses incident to the functioning of the Committee or the Plan,
including, but not limited to, fees of actuaries, accountants, legal counsel and
other specialists, and other costs of administering the Plan.
7.3 Claims Review Procedures.
------------------------
(a) Denial of Claim. If a claim for benefits is wholly or partially
denied, the claimant shall be given notice in writing of the
denial within a reasonable time after the receipt of the claim,
but not later than 90 days after the receipt of the claim.
However, if special circumstances require an extension, written
notice of the extension shall be furnished to the claimant before
the termination of the 90-day period. In no event shall the
extension exceed a period of 90 days after the expiration of the
initial 90-day period. The notice of the denial shall contain the
following information written in a manner that may be understood
by the claimant:
14
<PAGE>
(1) The specific reasons for the denial.
(2) Specific reference to pertinent Plan provisions on which the
denial is based.
(3) A description of any additional material or information
necessary for the claimant to make a claim and an
explanation of why such material or information is
necessary.
(4) An explanation that a full and fair review by the Committee
of the denial may be requested by the claimant or authorized
representative by filing a written request for a review with
the Committee within 60 days after the notice of the denial
is received; and
(5) If a request for a review is filed, the claimant or an
authorized representative may review pertinent documents and
submit issues and comments in writing within the 60-day
period described in Section 7.3(a)(4).
(b) Decision After Review. The decision of the Committee with respect
---------------------
to the review of the denial shall be made promptly, but not later
than 60-days after the Committee receives the request for the
review. However, if special circumstances require an extension of
time, a decision shall be rendered not later than 120 days after
the receipt of the request for review. A written notice of the
extension shall be furnished to the claimant prior to the
expiration of the initial 60-day period. The claimant shall be
given a copy of the decision, which shall state, in a manner
calculated to be understood by the claimant, the specific reasons
for the decision and specific references to the pertinent Plan
provisions on which the decision is based.
15
<PAGE>
7.4 Finality of Determinations. All determinations of the Committee as to
--------------------------
any matter arising under the Plan, including questions of construction and
interpretation shall be final, binding and conclusive upon all interested
parties.
7.5 Indemnification. To the extent permitted by law and the Company's
---------------
bylaws, the members of the Committee, its agents, and the officers, directors
and employees of the Company shall be indemnified and held harmless by the
Company from and against any and all loss, cost, liability or expense that may
be imposed upon or may be reasonably incurred by them in connection with or
resulting with any claim, action, suit or proceeding to which they be a party or
which they may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by them in settlement
with the Company's written approval or paid by them in satisfaction of a
judgement in any such action, suit or proceeding. The foregoing provision shall
not be applicable to any person if the loss, cost, liability or expense is due
to such person's gross negligence or willful misconduct.
7.6 Voting of Securities. The Committee shall direct the Trustee as to the
--------------------
manner in which voting, dissenter's rights or other stockholder's rights of any
securities held by the trust created by Article VIII shall be exercised.
16
<PAGE>
Article VIII
Provisions For Benefits
-----------------------
8.1 Provisions For Benefits. Amounts payable under the Plan to or on
-----------------------
account of an Eligible Employee shall be paid, directly or indirectly, from
assets of the trust established by the Company for such payment, the assets of
which shall be subject to the claims of creditors of the Company in the event of
the Company's insolvency. The Company shall make contributions to the trust in
amounts that are reasonably estimated to be sufficient to satisfy the Company's
obligations to make benefit payments under the Plan. To the extent that the
assets of the trust are not sufficient to make benefit payments hereunder,
amounts payable under the Plan shall be paid directly by the Company from its
general assets. No assets of the Company shall be used solely for the purpose of
providing benefits hereunder (except as to the amounts paid or payable to the
trust established for this Plan), and the Company's obligation to pay such
benefits is not limited to any particular assets of the Company. The Company's
obligation to make credits to the Accounts of each Eligible Employee is merely a
contractual obligation, and an Eligible Employee shall be treated as a general
creditor of the Company with respect to any amounts credited to his Account.
17
<PAGE>
Article IX
Amendment, Termination, or Merger
---------------------------------
9.1 Amendment and Termination. The Board of Directors of the Company may
-------------------------
amend, modify or terminate the Plan at any time and in any manner. In the event
of a termination of the Plan, no further Deferral Amount elections shall be made
under the Plan. Amounts which are then payable or which become payable under the
terms of the Plan shall be paid as scheduled under the provisions of the Plan,
unless the Committee directs the payments be accelerated.
9.2 Merger, Consolidation or Acquisition. In the event of a merger,
------------------------------------
consolidation, or acquisition or other reorganization in which the Company is
not the surviving or resulting corporation, the Plan shall terminate on the
effective date of such reorganization unless the Committee determines the Plan
should continue and the surviving or resulting corporation elects to continue
and carry on the Plan. In such an event, the surviving or resulting corporation
shall have the same rights with respect to the Plan as the Company. If the Plan
is terminated as part of a reorganization, all Accounts shall be considered
fully vested at such date and participants shall receive payment of their
Accounts pursuant to Section 5.2.
18
<PAGE>
Article X
General Provisions
------------------
10.1 Effect on Other Plans. Deferred Amounts shall not be considered as
---------------------
part of a Participant's compensation for the purpose of any qualified employee
pension plans maintained by the Company. However, such amounts may be taken into
account under all other employee benefit plans maintained by the Company in the
year in which such amounts would have been payable absent the deferral election;
provided, such amounts shall not be taken into account if their inclusion would
jeopardize the tax-qualified status of the plan to which they relate.
10.2 Nonalienation. Except as otherwise required by law, no benefit
-------------
payable at any time under the Plan shall be subject in any manner to alienation,
sale, transfer, assignment, pledge, attachment, garnishment, or encumbrance of
any kind. Any attempt to alienate, sell, transfer, assign, pledge, or otherwise
encumber any such benefit, whether presently or hereafter payable, shall be
void. No benefit payable under the Plan shall in any manner be liable for or
subject to the debts or liabilities of any Participant or Beneficiary entitled
to any benefit. Without limiting the generality of the foregoing, no benefit
payable or in pay status under the Plan shall be subject to division in
connection with any divorce or separation proceeding involving a Participant.
10.3 Incompetency. Any person receiving or claiming benefits under the
------------
Plan shall be conclusively presumed to be mentally competent until the date on
which the Committee receives written notice, in an acceptable form and manner,
that such person is incompetent and a guardian or other person legally vested
with the care of the Employee's estate has been appointed. If the Committee
finds that any person to whom a benefit is payable under the Plan is unable to
care for the Employee's affairs because of any disability or infirmity and no
legal guardian of such person's estate has been appointed, any payment due may
be paid to the spouse, a child, a parent, a sibling, or to any person deemed by
the Committee to have incurred expense for such person otherwise entitled to
payment. Any such payment so made shall be a complete discharge of any liability
therefor under the Plan. If a guardian of the estate of any person receiving or
claiming benefits under the Plan shall be appointed by a court of competent
jurisdiction, benefit payments shall be made to such guardian, provided
19
<PAGE>
proper proof of appointment and continuing qualification is furnished in the
form and manner acceptable to the Committee. Any such payment so made shall be a
complete discharge of any liability therefor under the Plan.
10.4 Effect of Mistake. If, in the sole opinion of the Committee, a
-----------------
material mistake or misstatement occurs with respect to the eligibility of a
Participant, the amount of benefit payments made or to be made to or with
respect to a Participant, the Investment Alternative selected by a Participant
or other matters related to the administration of the Plan, the Committee may
make such adjustments as it deems appropriate to correct such mistake or
misstatement. To the extent that the Committee determines that such mistake or
misstatement results from an act or failure to act of a Participant, the
Committee may require the Participant to hold the Plan harmless from any loss or
expense incurred by it.
10.5 Plan Not an Employment Contract. This Plan is not an employment
-------------------------------
contract and does not confer on any person the right to be continued in
employment. All Employees remain subject to change of salary, transfer, change
of job, discipline, layoff, discharge or any other change of employment status.
10.6 Tax Withholding. The Company or other payor may withhold from a
---------------
benefit payment or Deferral Amount any federal, state or local taxes required by
law to be withheld with respect to such payment or Deferral Amount. All
contributions will be subject to FICA tax as required by federal law. In the
event the Deferred Amount is invested in Stock the Participant's Account does
not contain sufficient cash for the required withholding, the Company or other
payor may sell shares of Stock to supply sufficient cash to fund the required
withholding.
10.7 Severability. If any provision of the plan is held invalid or illegal
------------
for any reason, any illegality or invalidity shall not affect the remaining
provisions of the Plan, and the Plan shall be construed and enforced as if the
illegal or invalid provision had never been contained therein. The Company shall
have the privilege and opportunity to correct and remedy such questions of
illegality or invalidity by amendment.
20
<PAGE>
10.8 Applicable Law. The Plan shall be governed and construed in
--------------
accordance with the laws of the State of Texas, except to the extent such laws
are preempted by any applicable federal law. No reference to ERISA in the Plan
shall be construed to mean that the Plan is subject to any particular provisions
of ERISA.
10.9 Binding Effect. This Plan shall be binding upon the Company, its
--------------
Affiliates and their respective successors and assigns and upon the Participant
and each Participant's Beneficiary, heirs, executors, administrators,
representatives, successors and assigns.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
by its duly authorized officers, effective as of July 1, 1999.
ATTEST: SOUTHWEST SECURITIES
By: /s/ Jim Zimcosky By: /s/ Stacy Hodges
--------------------------------- ---------------------------------
Jim Zimcosky Stacy Hodges
Southwest Securities, Inc. Southwest Securities Group, Inc.
Director of Human Resources Executive Vice President, Chief
Financial Officer and Treasurer
21
<PAGE>
Exhibit 12
Southwest Securities Group, Inc. and Subsidiaries
Statement Re Computation of Ratio of Earnings to Fixed Charges
(In thousands, except ratio)
<TABLE>
<CAPTION>
Fiscal Years Ended
June 25, June 26, June 27, June 28, June 30,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes $ 40,520 $ 31,898 $ 25,743 $ 21,757 $ 8,755
Add fixed charges:
Interest expense 99,951 100,704 83,238 69,092 42,308
Interest factor in rents /(1)/ 1,776 1,611 1,057 848 697
-----------------------------------------------------------------------------
Total fixed charges 101,727 102,315 84,295 69,940 43,005
-----------------------------------------------------------------------------
Earnings before fixed charges
and income taxes $ 142,247 $ 134,213 $ 110,038 $ 91,697 $ 51,760
=============================================================================
Ratio of earnings to fixed charges 1.4 1.3 1.3 1.3 1.2
=============================================================================
</TABLE>
/(1)/ The Company estimates that one-third of rental expense is
representative of the interest factor.
<PAGE>
Exhibit 23 - Consent of Independent Auditors
The Board of Directors
Southwest Securities Group, Inc.:
We consent to incorporation by reference in the registration statement (No. 33-
86234) on Form S-8 of Southwest Securities Group, Inc. of our report dated July
27, 1999, except as to the second paragraph of Note 19 which is as of August 6,
1999 and Note 18 which is as of August 10, 1999, relating to the consolidated
statements of financial condition of Southwest Securities Group, Inc. and
subsidiaries as of June 25, 1999 and June 26, 1998, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 25, 1999, and
related schedule, which report appears in the June 25, 1999, annual report on
Form 10-K of Southwest Securities Group, Inc.
KPMG LLP
Dallas, Texas
September 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> JUN-25-1999
<CASH> 11,334
<RECEIVABLES> 3,767,657
<SECURITIES-RESALE> 197,271
<SECURITIES-BORROWED> 2,987,910
<INSTRUMENTS-OWNED> 74,486
<PP&E> 11,189
<TOTAL-ASSETS> 4,293,274
<SHORT-TERM> 0
<PAYABLES> 3,812,655
<REPOS-SOLD> 0
<SECURITIES-LOANED> 2,954,007
<INSTRUMENTS-SOLD> 24,350
<LONG-TERM> 50,000
0
0
<COMMON> 1,180
<OTHER-SE> 261,104
<TOTAL-LIABILITY-AND-EQUITY> 4,293,274
<TRADING-REVENUE> 41,689
<INTEREST-DIVIDENDS> 147,006
<COMMISSIONS> 65,048
<INVESTMENT-BANKING-REVENUES> 29,100
<FEE-REVENUE> 40,118
<INTEREST-EXPENSE> 99,951
<COMPENSATION> 124,691
<INCOME-PRETAX> 40,520
<INCOME-PRE-EXTRAORDINARY> 40,520
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,219
<EPS-BASIC> 2.23<F1>
<EPS-DILUTED> 2.21<F1>
<FN>
<F1>A 10% stock dividend was declared by the Board of Directors on May 6, 1999,
payable August 2, 1999 to shareholders of record on July 15, 1999. Prior
Financial Data Schedules have not been restated for this stock dividend.
</FN>
</TABLE>
