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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.__)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
SOUTHWEST SECURITIES GROUP. INC.
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(Name of Registrant as Specified In Its Charter)
___________________
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
September 24, 1999
Dear Stockholder:
The 1999 Annual Meeting of Stockholders (the "Annual Meeting") of Southwest
Securities Group, Inc. (the "Company") will be held at the Adolphus Hotel, 1321
Commerce Street, Dallas, Texas, at noon on Wednesday, November 3, 1999. Lunch
will be served at noon in the Century B Room and the Annual Meeting will take
place concurrently.
The enclosed material includes the Notice of Annual Meeting, Proxy Statement,
which describes the business to be transacted at the meeting, and proxy for you
to complete and return to the Company.
We will be reporting on your Company's activities, and you will have an
opportunity to ask questions about its operations. We hope you plan to attend
the Annual Meeting personally, and we look forward to seeing you. It is
important that your shares be represented at the meeting whether or not you are
able to attend in person. Accordingly, the return of the enclosed proxy as soon
as possible will be greatly appreciated and will ensure your shares are
represented at the Annual Meeting. If you do attend the Annual Meeting, you may
withdraw your proxy should you wish to vote in person.
On behalf of the Board of Directors and management of Southwest Securities
Group, Inc., we would like to thank you for your continued support and
confidence.
Sincerely yours,
Don A. Buchholz David Glatstein
Chairman of the Board President and Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 3, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Southwest Securities Group, Inc. (the "Company") will be held at
the Adolphus Hotel, 1321 Commerce Street, Dallas, Texas, in the Century B Room,
on Wednesday, November 3, 1999, at noon local time for the following purposes:
1. To elect eight Directors to serve until the next Annual Meeting of
Stockholders or until their successors are elected and qualified,
2. To consider and vote on a proposal to approve of the issuance of
2,600,000 shares of the Company's Common Stock, $0.10 par value (the
"Common Stock"), in connection with the proposed acquisition of ASBI
Holdings, Inc., a Texas corporation ("ASBI"), as described in the
Proxy Statement accompanying this Notice of Annual Meeting,
3. To consider and vote on a proposal to amend the Company's Certificate
of Incorporation to increase the authorized number of shares of Common
Stock from 20,000,000 to 60,000,000 shares, and
4. To transact such other business as may properly come before the Annual
Meeting and any adjournments thereof.
As of September 14, 1999, there were 11,814,793 shares of Common Stock
outstanding. If the proposed acquisition of ASBI is completed as described in
the accompanying Proxy Statement, the Company will issue 2,600,000 shares of
Common Stock to stockholders of ASBI, representing approximately 22% of the
outstanding shares of Common Stock as of such date.
Holders of the Company's Common Stock of record as of the close of business on
September 14, 1999, are entitled to receive notice of, and to vote at, the
Annual Meeting and any adjournments thereof.
It is important that your shares be represented at the Annual Meeting. For that
reason, we ask that you promptly sign, date and mail the enclosed proxy in the
return envelope provided. Stockholders who attend the Annual Meeting may revoke
their proxies and vote in person. To help us prepare properly for your
attendance at the Annual Meeting, we ask that you indicate on your proxy whether
you plan to attend the meeting and luncheon.
By Order of the Board of Directors,
Barbara A. Hart
Secretary
Dallas, Texas
September 24, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INFORMATION CONCERNING SOLICITATION AND VOTING.......................................... 1
Revocability of Proxies............................................................ 1
Expenses........................................................................... 1
Record Date and Voting Securities.................................................. 2
FORWARD-LOOKING STATEMENTS.............................................................. 2
THE COMPANY............................................................................. 2
PROPOSAL ONE - ELECTION OF DIRECTORS.................................................... 3
Nominees for Director.............................................................. 3
Compensation of Directors.......................................................... 5
Organization of the Board of Directors............................................. 5
Recommendation of the Board........................................................ 5
PROPOSAL TWO - ISSUANCE OF 2,600,000 SHARES OF COMMON STOCK IN CONNECTION WITH THE
PROPOSED ACQUISITION OF ASBI HOLDINGS, INC......................................... 6
Description of the Transaction..................................................... 6
Reasons for the Proposed Acquisition............................................... 7
Risk Factors....................................................................... 8
Business and Regulation of ASBI and the Bank....................................... 11
Background of the Transaction...................................................... 12
The Agreement and Plan of Reorganization........................................... 17
Relationship of the Parties and Interests of Certain Persons in the Transaction.... 20
Opinion of Independent Financial Advisor........................................... 22
Accounting Treatment............................................................... 27
Certain Federal Income Tax Consequences............................................ 27
Transfer Restrictions.............................................................. 27
The Registration Rights Agreement.................................................. 27
Market Prices and Dividends........................................................ 28
Management's Discussion and Analysis of the Financial Condition and
Results of Operations of ASBI and Subsidiaries................................ 28
Financial Data..................................................................... 39
Requirement for Stockholder Approval............................................... 48
Recommendation of the Board........................................................ 48
PROPOSAL THREE - APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION.................. 49
Recommendation of the Board........................................................ 49
MANAGEMENT.............................................................................. 50
Stock Ownership of Principal Owners and Management................................. 50
Section 16(a) Beneficial Ownership Reporting Compliance............................ 51
Executive Compensation............................................................. 53
Summary Compensation Table.................................................... 53
Incentive Stock Options....................................................... 54
Compensation Committee Report on Executive Compensation....................... 55
PERFORMANCE GRAPH....................................................................... 58
INDEPENDENT AUDITORS.................................................................... 59
STOCKHOLDER PROPOSALS................................................................... 59
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................................... 59
OTHER MATTERS........................................................................... 59
INDEX TO ASBI'S CONSOLIDATED FINANCIAL STATEMENTS....................................... F-1
EXHIBIT A - FAIRNESS OPINION
</TABLE>
-i-
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SOUTHWEST SECURITIES GROUP, INC.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
--------------------------------
PROXY STATEMENT
--------------------------------
ANNUAL MEETING OF STOCKHOLDERS, NOVEMBER 3, 1999
This Proxy Statement and the accompanying Notice of Annual Meeting and proxy are
being furnished to the stockholders of Southwest Securities Group, Inc. (the
"Company") in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board") for use at the 1999 Annual Meeting of
Stockholders of the Company (the "Annual Meeting") to be held at the Adolphus
Hotel, 1321 Commerce Street, Dallas, Texas, in the Century B Room, on Wednesday,
November 3, 1999, at noon local time, and any adjournments or postponement
thereof. These proxy materials are being mailed on or about September 24, 1999,
to holders of record on September 14, 1999, of the Company's Common Stock, $0.10
par value ("Common Stock").
At the Annual Meeting, the stockholders of the Company will be asked to consider
and vote upon proposals to (i) elect a Board of Directors to serve until the
next annual meeting of stockholders or until their successors are duly elected
and qualified; (ii) approve the issuance of 2,600,000 shares of the Common
Stock (the "Share Issuance") in connection with the proposed acquisition by the
Company of all of the outstanding shares of voting and non-voting common stock,
par value $0.001 per share, of ASBI Holdings, Inc. ("ASBI") by virtue of the
merger of a wholly owned subsidiary of the Company with and into ASBI; (iii)
approve an amendment to the Company's Certificate of Incorporation to increase
the authorized number of shares of Common Stock from 20,000,000 to 60,000,000
shares; and (iv) transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
INFORMATION CONCERNING SOLICITATION AND VOTING
Revocability of Proxies
A proxy may be revoked by a stockholder prior to its exercise by written notice
to the Secretary of the Company, by submission of another proxy bearing a later
date or by revoking the prior proxy and voting in person at the Annual Meeting.
Such notice or later proxy will not affect a vote on any matter taken prior to
the receipt thereof by the Secretary of the Company. The mere presence at the
Annual Meeting of the stockholder appointing the proxy will not revoke the
appointment. If not revoked, the proxy will be voted at the Annual Meeting in
accordance with the instructions indicated on the proxy by the stockholder or,
if no instructions are indicated, will be voted FOR each of the nominees for
director and each other matter of business described herein and, as to any other
matter of business that may properly be brought before the Annual Meeting, in
accordance with the judgment of the person or persons voting the same.
Expenses
All expenses of the Company in connection with this solicitation will be borne
by the Company. In addition to solicitation by mail, proxies may be solicited
by directors, officers and other employees of the Company, by telephone,
telegraph, fax, telex, in person or otherwise, without additional compensation.
The Company will also request brokerage firms, nominees, custodians and
fiduciaries to forward proxy materials to the beneficial owners of the
Company's
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Common Stock and will reimburse those brokerage firms, nominees, custodians and
fiduciaries and the Company's transfer agent for their reasonable out-of-pocket
expenses in forwarding such materials.
Record Date and Voting Securities
Holders of record at the close of business on September 14, 1999, of the
Company's Common Stock are entitled to notice of, and to vote at, the Annual
Meeting and any adjournments thereof. Each outstanding share of Common Stock
entitles the holder thereof to one vote with respect to each matter considered
at the Annual Meeting. Pursuant to the rules of the New York Stock Exchange
("NYSE"), the exchange on which the Common Stock is listed, the presence in
person or by proxy of a majority of the shares of Common Stock entitled to vote
on the Share Issuance is necessary to constitute a quorum for purposes of
approving the Share Issuance. All other matters also require the presence in
person or by proxy of a majority of the shares of Common Stock entitled to vote
to constitute a quorum. Pursuant to Delaware law, abstentions are treated as
present and entitled to vote, and therefore are counted in determining the
existence of a quorum and will have the effect of a vote against any matter
requiring the affirmative vote of a majority of the shares present and entitled
to vote at the Annual Meeting. Under Delaware law, broker "non-votes" are
considered present but not entitled to vote and thus will be counted in
determining the existence of a quorum but will not be counted in determining
whether a matter requiring approval of a majority of the shares present and
entitled to vote has been approved. Thus, in accordance with Delaware law,
abstentions from the proposal to approve the Share Issuance will have the same
effect as votes against the proposal to approve the Share Issuance, but broker
"non-votes" will have no effect on the outcome of the vote on the proposal to
approve the Share Issuance. The Company's Certificate of Incorporation does not
provide for cumulative voting. Assuming the presence of a quorum at the Annual
Meeting, the affirmative vote of a plurality of the votes cast by holders of
Common Stock is required for the election of directors. Pursuant to the rules of
the NYSE, the affirmative vote of a majority of the total shares represented in
person or by proxy and entitled to vote at the Annual Meeting is required for
the approval of the Share Issuance. Pursuant to Delaware law, the affirmative
vote of a majority of the outstanding stock entitled to vote on the Amendment to
the Certificate of Incorporation is required to amend the corporate charter.
All other matters will be determined by a majority of the votes cast.
Only holders of record of Common Stock on September 14, 1999, are entitled to
notice of, and to vote at, the Annual Meeting.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Proxy Statement or incorporated herein by
reference that are not statements of historical facts are "forward-looking"
statements and are thus prospective. Such forward-looking statements include,
without limitation, statements regarding the Company's future financial
position, results of operations, business strategy and prospects, and plans and
objectives of management for future operations. Such forward-looking statements
are subject to risks, uncertainties and other factors which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. A number of important factors could cause actual
results to differ materially from the information set forth in any forward-
looking statements, including those factors disclosed under the caption
"Proposal Two - Risk Factors" (the "Cautionary Statements"). All subsequent
written and oral forward-looking statements attributable to the Company or to
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
THE COMPANY
The Company is a full-service securities firm using technology to deliver a
broad range of investment and related financial services to its clients, which
include individual and institutional investors, broker/dealers, corporations,
governmental entities and financial intermediaries. Intermediaries include
banks, other broker/dealers or independent registered representatives. The
Company's activities in the securities business include execution and clearing
of
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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. The Company offers investment management,
advisory and trust services through three wholly owned subsidiaries.
PROPOSAL ONE
ELECTION OF DIRECTORS
A Board of eight directors is to be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the Company's eight nominees named below, all of whom are presently
directors of the Company, except Mr. Gartland. If any nominee is unable or
unwilling to accept nomination or election, the proxies will be voted for the
nominee designated by the present Board to fill the vacancy, unless the Board
reduces the number of directors to eliminate the vacancy. At present, it is not
anticipated that any nominee will be unable or unwilling to serve as a director.
The term of office of each person elected as a director will continue until the
next Annual Meeting or until a successor has been elected and qualified.
Nominees for Director
Don Buchholz (age 70)/1,3/
A founder of the Company. Director and Chairman of the Board since August 1991;
Chief Executive Officer of the Company from 1984 until July 1994; Chairman of
the Board of Southwest Securities, Inc., the Company's principal subsidiary
("Southwest"), from August 1993 to May 1996; President of the Company from 1984
until August 1991; Associated with Southwest in various executive capacities
since its inception in 1972. Past director of the Securities Industry
Association (the "SIA"); past Chairman of the Executive Committee of the South
Central District of the SIA; past member of the Boards of Governors of the NYSE
and the National Association of Securities Dealers (the "NASD"); past President
and director of the Texas Stock and Bond Dealers Association.
David Glatstein (age 50)/1/
Chief Executive Officer of the Company since May 1996; President and director of
the Company and President of Southwest since May 1995; 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; securities broker with White, Weld &
Company, Inc. from 1973 to 1978. Past Chairman of the District 6 Business
Conduct Committee of the NASD.
Brodie L. Cobb (age 38)
Director of the Company since May 6, 1999. Founder and Managing Director of San
Francisco-based Presidio Strategies, a specialty investment bank focusing on
mergers and acquisitions and asset management from 1998 to present; Vice
President at NationsBanc Montgomery Securities from 1995 to 1998; Associate at
C.S. First Boston from 1992 to 1995; owned a private sports marketing firm in
California from 1990 to 1992; held positions with Security Pacific's Leveraged
Funding Group from 1988 to 1990.
J. Jan Collmer (age 64)/2,3,4/
Director of the Company since 1994. Founder and President of Collmer
Semiconductor, Inc., an importer, marketer and manufacturer of industrial
electronic components and systems since 1979. Prior to founding Collmer
Semiconductor, Inc., served in various engineering and executive positions with
Varo, Inc., a defense electronics firm. Currently serves on the NASD
Arbitration Panel and as a trustee for the University of Dallas.
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Robert F. Gartland (age 47)
Managing Director of the Global Investor Services Division of Chase Manhattan
Bank from October 1998 to May 1999 with responsibilities including Global
Operations, Client Service and Accounting, Global Business Architecture and
Broker/Dealer Clearing Services. Over twenty years experience with Morgan
Stanley including Head of Morgan Stanley Services from 1991 to 1998, Chief
Information Officer from 1989 to 1990 and Head of Finance, Administration and
Operations in Europe from 1985 to 1989. Former member of the Board of Directors
of the National Securities Clearing Corporation (1993 to 1997) and Comprehensive
Software Systems (1994 to 1998). Currently, a member of the Advisory Board of
the Financial Engineering Program at Columbia University, a member of the Board
of Directors of the Brooklyn Bureau of Community Service and Chairman of the
Corporate Development Board of the League Treatment Center in Brooklyn.
R. Jan LeCroy (age 68)
Director of the Company since 1997. Past President of the Dallas Citizens
Council, a non-profit organization whose members are the Chief Executive
Officers of the 250 largest corporations in the Dallas metropolitan area and
whose mission is to improve the quality of life and economic viability of the
community. Over twenty years experience in various leadership assignments in
the community college field, including seven years as Chancellor of the Dallas
County Community College District, the largest undergraduate institution in the
State of Texas. In 1995, appointed by Texas Governor George Bush as one of six
commissioners on the Education Commission of the States, which advocates
education policy for kindergarten through graduate school for the nation.
Frederick R. Meyer (age 71)/2,3,4/
Director of the Company since 1991. Chairman of the Board (since 1985),
President and CEO (1987 to 1994 and 1995 to May 1999) of Aladdin Industries,
LLC, a diversified company principally engaged in the manufacture of
thermosware, foam insulated mugs and related products. President and Chief
Operating Officer of Tyler Corporation, a diversified manufacturing corporation,
from 1983 to 1986; Consultant to Tyler Corporation from 1986 to 1989. Currently
a director of Aladdin Industries, LLC, Tyler Corporation and Palm Harbor Homes,
Inc.
Jon L. Mosle, Jr. (age 70)/2,3,4/
Director of the Company since 1991. Director of Private Capital Management for
Ameritrust Texas Corporation from 1984 to 1992. From 1954 to 1984, affiliated
with Rotan Mosle, Inc., a regional NYSE member firm, which was acquired by
PaineWebber Incorporated in 1983. Experience at Rotan Mosle, Inc. included
supervisory responsibility for both over-the-counter trading and municipal
departments, as well as participating in corporate finance activities. Served
as Branch Manager, Regional Manager, Vice Chairman of the Board and member of
Rotan Mosle, Inc.'s Operating Committee. Currently a director of Wiser Oil
Company, an Associate Director of Bank of Texas and an Advisory Director of
Westwood Trust.
- ----------------------------------
/1/ Executive Committee
/2/ Audit Committee
/3/ Compensation Committee
/4/ Stock Option Committee
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Compensation of Directors
Members of the Board who are not officers or employees of the Company receive a
fee of $1,500 per quarter plus $500 for each directors' meeting they attend.
Directors are reimbursed for expenses relating to attendance at meetings. In
August 1999, outside directors of the Board received additional compensation due
to favorable financial performance of the Company. Directors Collmer, LeCroy
and Meyer were each paid an additional cash sum of $9,000, and Mr. Mosle has
elected to receive his additional compensation in equivalent units of the
Company's Common Stock under the Southwest Securities Group, Inc. Phantom Stock
Plan. Mr. Mosle received 232 equivalent units of Common Stock in August 1999 at
$38.75 per unit.
Pursuant to the terms of the Southwest Securities Group, Inc. Stock Option Plan,
Messrs. Collmer, LeCroy, Meyer and Mosle were each awarded options to acquire
2,200 shares of Common Stock. These options were granted on November 4, 1998,
with an exercise price of $16.25 and have a five-year term, expiring on November
4, 2003. These options are fully vested. On May 6, 1999, an option to acquire
2,200 shares of Common Stock with an exercise price of $50.00 was granted to Mr.
Brodie Cobb. These options vest six months from the date of grant and have a
five-year term, expiring May 6, 2004. The number of stock options granted, as
well as the options' exercise price, has been adjusted for the 10% stock
dividend paid August 2, 1999.
Organization of the Board of Directors
The Executive Committee of the Board has the authority, between meetings of the
Board, to take all actions with respect to the management of the Company's
business that require action by the Board, except with respect to certain
specified matters that by law must be approved by the entire Board.
The Audit Committee is responsible for (i) reviewing the scope of, and the fees
for, the annual audit, (ii) reviewing the Company's accounting practices and
policies with the independent auditors, (iii) reviewing with the independent
auditors their final report, (iv) reviewing overall accounting and financial
controls with internal and independent auditors and (v) being available to the
independent auditors during the year for consultation purposes.
The Compensation Committee determines the salaries of the executive officers of
the Company and its subsidiaries, assists in determining the salaries of other
personnel and performs other similar functions.
The Stock Option Plan Committee administers the grant of awards under the
Company's stock option plans.
The Company has no nominating committee; the entire Board is responsible for
selecting nominees for election as directors.
The Board held four regularly scheduled meetings and three special meetings
during fiscal year 1999. Each director attended at least three-quarters of the
meetings. No meetings of the Executive Committee were held during fiscal 1999.
The Audit Committee held one meeting during fiscal year 1999; all committee
members were present. The Compensation Committee held one meeting during fiscal
year 1999; all committee members were present. The Stock Option Committee held
one meeting during fiscal year 1999; all committee members were present.
Recommendation of the Board
The Board of Directors recommends that the stockholders vote "FOR" the nominees
listed above.
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PROPOSAL TWO
ISSUANCE OF 2,600,000 SHARES OF COMMON STOCK IN CONNECTION WITH THE PROPOSED
ACQUISITION OF ASBI HOLDINGS, INC./1/
The discussion in this Proposal Two contains a summary of the terms and
provisions of that certain Agreement and Plan of Reorganization by and between
the Company and ASBI, dated as of August 10, 1999 (the "Acquisition Agreement"),
including, without limitation, the form of Merger Agreement and Registration
Rights Agreement attached as exhibits to the Acquisition Agreement. Such
discussion is qualified in its entirety by reference to the provisions of the
Acquisition Agreement, including the exhibits thereto, which is incorporated
herein by this reference. See "Incorporation of Certain Documents by Reference."
Stockholders of the Company may obtain a copy of the Acquisition Agreement,
including its exhibits, without charge, by writing or calling James R. Bowman,
Vice President, Southwest Securities Group, Inc., 1201 Elm Street, Suite 3500,
Dallas, Texas 75270-2180, telephone: (214) 859-1800.
Information contained in this Proxy Statement with respect to the Company has
been supplied by the Company, and information with respect to ASBI and the Bank
(defined herein) has been supplied by ASBI and the Bank. The Company makes no
representations as to the accuracy or completeness of information provided by
ASBI or the Bank contained in this Proxy Statement.
Description of the Transaction
On August 10, 1999, the Company and ASBI entered into an Agreement and Plan of
Reorganization (previously defined as the "Acquisition Agreement"), which
provides for, among other matters, the acquisition of ASBI by the Company (the
"Acquisition"). ASBI is a Texas corporation and unitary savings and loan
holding company, owning all of the stock of Arlington Savings Bancshares, Inc.,
a Delaware corporation and unitary savings and loan holding company, which, in
turn, owns all of the stock of First Savings Bank, A Federal Savings Bank,
Arlington, Texas, a federal savings association (the "Bank"). See "Business and
Regulation of ASBI and the Bank."
Pursuant to the Acquisition Agreement, the Company will acquire ASBI through the
merger of a wholly owned subsidiary of the Company with and into ASBI (the
"Merger"). ASBI will be the surviving corporation in the Merger and will become
a wholly owned subsidiary of the Company. As a result of the Merger, the shares
of ASBI common stock outstanding immediately prior to the effective time of the
Merger (the "Effective Time") will be converted into and exchanged for 2,600,000
shares of Common Stock. As a result, the stockholders of ASBI will become
stockholders of the Company. The shares of Common Stock to be issued to the
stockholders of ASBI in the Merger, and which comprise the Share Issuance, are
referred to throughout this Proxy Statement as the "Shares."
The issuance of the Shares will not initially be registered with the Securities
and Exchange Commission ("SEC") under the Securities Act of 1933, as amended
(the "Securities Act"). Such Shares will be issued to stockholders of ASBI in
the Merger in reliance on an exemption from registration provided by Regulation
D of the Securities Act and, in addition to any resale limitations imposed by
the Securities Act, will be subject to certain restrictions on transfer. See
"Transfer Restrictions." The Company has, however, entered into a Registration
Rights Agreement with all stockholders of ASBI which will provide the
opportunity under certain circumstances for persons receiving the Shares to
register some or all of the Shares under the Securities Act in the future. See
"The Registration Rights Agreement."
________________________
/1/ In accordance with the terms of the Acquisition Agreement (defined
herein), in the event the Company changes the number of shares of Common
Stock issued and outstanding as a result of a stock split, stock dividend,
recapitalization, or similar transaction with respect to such stock prior
to the issuance of the shares to which this Proposal Two relates, then the
actual number of shares to be issued will be adjusted upward or downward,
as the case may be. The proportionate number of shares to be issued
pursuant to this Proposal Two, relative to the number of shares outstanding
on the effective date of such issuance, will not be affected.
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Following completion of the Merger, it is anticipated that the Company will
cause ASBI and Arlington Savings Bancshares, Inc. to merge with and into the
Company. As a result, the Bank will become a direct, wholly owned subsidiary of
the Company.
As described in greater detail herein, consummation of the Merger is subject to
a number of conditions, including receipt of prior regulatory and stockholder
approval, including approval by the stockholders of the Company of this proposal
regarding the Share Issuance. See "The Agreement and Plan of Reorganization."
Stockholders of the Company will not have preemptive rights to participate in
the Share Issuance.
Reasons for the Proposed Acquisition
The Company's interest in acquiring ASBI, including the Bank, stems from the
belief that the Company's customers can be better served by access to a broader
array of financial services products than can be offered solely by a securities
firm. Combining the Bank's product line with that of the Company's brokerage
subsidiaries will eliminate customers' need for multiple financial
relationships, thus providing enhanced customer service and convenience. The
Company believes that service and convenience are what differentiates a
financial services firm from its competitors. Additionally, the combination of
banking and brokerage services will provide cross-marketing opportunities with
existing customers, transactional economies of scale, a more diversified, stable
revenue stream and opportunities for growth, specifically in the Internet
banking arena. The timing of the proposed Acquisition is also important. The
Company has launched a new marketing initiative for its on-line brokerage
operation, and the ability to concurrently market on-line banking services in
the initiative should leverage the value of the advertising.
While the Company believes that long-term stockholder value will be created
through the synergistic opportunities described above, short-term economic
benefits are expected to be realized almost immediately. The Bank has targeted
selected, higher margin niches within its lending market and aggressively worked
to establish a solid deposit base in North Texas, resulting in a highly
profitable institution that is expected to be accretive to the Company's
earnings.
The Company envisions a number of advantages as a result of the Merger. Some of
the advantages are set forth below:
Benefits to the Company
-----------------------
. The earnings of ASBI are expected to be accretive to those of the
Company from the inception of the Acquisition.
. The earnings of thrift institutions are generally less volatile than
those of the brokerage sector because they are not as exposed to
fluctuations in the securities markets. This will add stability and
diversification to the Company's financial results.
. The acquisition of a federally chartered and insured savings institution
allows the Company to market a broader range of financial services to
current and potential customers. Additional traditional financial
services include mortgages, certificates of deposit, credit cards,
checking accounts and on-line bill payment.
. ASBI has a minimal investment in "bricks and mortar" when compared to
its peer group. This will allow the Company to offer traditional banking
services without the costs of a traditional branch banking environment.
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. ASBI gives the Company a complete financial services product line that,
when combined with the Company's existing brokerage products and
technological expertise, will result in a one-stop, on-line financial
services provider.
. ASBI's customer base in the Dallas-Fort Worth metropolitan area provides
a new market for the Company's brokerage, trust, computer system design
and web hosting services.
. The mortgage loan purchase operations of the Bank gives the Company an
avenue to expand in the mortgage securitization market. The mortgage
loan purchase operations provide a broad base of mortgage originators
from whom the Company can purchase mortgages and finance on a permanent
basis through offering securities in the capital markets.
Benefits to the Bank
--------------------
. The Bank benefits from the Company's technological sophistication as the
banking industry moves towards a branchless "cyber-banking" model. The
acquisition of additional on-line bank customers will not only afford it
operational savings and the potential for increases in lendable assets,
but also greatly diversify - both geographically and demographically -
its depositor base.
. The Bank benefits from the ability to use the Company's greater capital
resources to further strengthen its already strong operations within the
Dallas-Fort Worth metropolitan area and to use the Company's extensive
client contacts to incrementally expand its operations beyond the
metropolitan area.
. The Bank benefits from the loan demand which may be provided to it from
the Company's extensive client base of both brokers and brokerage
customers. Such loan demand will gradually enable the Bank to diversify
its lending base and its geographic risks.
. The Bank benefits from the Company's numerous commercial contacts with
firms better suited to traditional bank lending than capital market
funding. In addition, the Company's capital resources will enable the
Bank to evaluate a broader and deeper array of potential clients in the
commercial lending realm.
. The Bank benefits from its access to the Company's substantial financial
resources, useful in increasing growth in factoring of accounts
receivable, a promising but capital intensive business line. Further,
the Company's technological expertise holds out the promise of bringing
Internet-era innovations to this segment of the financial services
market.
. The Bank benefits from the inclusion of banking services in the
Company's current advertising campaign for on-line brokerage services.
Risk Factors
In addition to the other information in this Proxy Statement, the following are
certain factors that should be considered by holders of Common Stock when
evaluating the proposed Share Issuance.
Dilution of Existing Stockholders The proposed Share Issuance will result
---------------------------------
in substantial dilution to the voting power and interests of current Company
stockholders. Based upon the 11,814,793 shares of Common Stock outstanding as of
the Record Date, immediately following consummation of the Merger, and after
giving effect to the Share Issuance, the ASBI stockholders would own
approximately 18% of the then outstanding shares of Common Stock.
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Fixed Number of Shares to be Issued As a result of the Merger, each share
-----------------------------------
of common stock of ASBI will be converted into shares of Common Stock of the
Company. The Acquisition Agreement provides that a fixed number of shares of
Common Stock will be issued to stockholders of ASBI in connection with the
Merger. In other words, the Acquisition Agreement does not provide for any
adjustment of the number of shares of Common Stock to be issued based on
fluctuations in the market value of the Common Stock. Because the value of the
shares of Common Stock fluctuates day to day, the overall value of the aggregate
consideration to be issued by the Company in connection with the Acquisition
will fluctuate in a similar manner. The actual value of the consideration to be
received by the stockholders of ASBI in connection with the Merger will depend
upon the market price of the Common Stock at the Effective Date of the Merger.
This actual value may be substantially more or less than the market value of the
Common Stock on August 10, 1999, the date that the Acquisition Agreement was
ultimately approved by the Special Committee and the Board and the date of the
Fairness Opinion. Accordingly, there can be no assurance that the aggregate
value of the consideration on the Effective Date of the Merger will not be
higher, lower or the same as the value of such consideration on August 10, 1999.
Uncertainties Associated with a Change in Interest Rates Like most
--------------------------------------------------------
depository institutions, the Bank's earnings are affected by changes in market
interest rates and other economic factors beyond its control. The Bank's
operations depend substantially on its net interest income, which is the
difference between the interest income earned on its interest-earning assets,
such as loans and investments, and the interest paid on its interest-bearing
liabilities, such as deposits and other borrowings. Interest rates are highly
sensitive to many factors beyond the control of the Company, including
governmental monetary policies, domestic and international economic and
political conditions and other factors. If interest rate fluctuations cause the
Bank's cost of funds to increase faster than the yield on the Bank's interest-
bearing assets, its net interest income will be reduced. The market value of
most of the Company's financial assets also is sensitive to fluctuations in
market interest rates. Fixed-rate investments, mortgage-backed and related
securities and mortgage loans generally decline in value as interest rates rise.
Geographic Concentration The primary market area of the Bank is the
------------------------
Dallas/Fort Worth metropolitan area. As a result, economic conditions in this
area can significantly impact the deposit and loan activities of the Bank.
Although this area is economically diversified, an economic downturn in this
area could negatively impact the operations of the Bank.
Construction Lending Risks Prompted by demand for new residential housing
--------------------------
units in its market area, the Bank has been an active originator of residential
construction loans to over 120 local residential builders. Residential
construction loans constituted 27% of the loan portfolio at June 30, 1999.
Subject to market conditions, the Bank intends to continue originating
residential construction loans. Construction lending generally involves greater
credit risk than one-to-four family mortgage lending. Construction loans
generally have higher loan balances than one-to-four family mortgage loans. In
addition, the potential for cost overruns because of the inherent difficulties
in estimating construction costs and, therefore, collateral values and the
difficulties and costs associated with monitoring construction progress, among
other things, are major contributing factors to this greater credit risk. Some
construction loans have the added risk that there is not an identified buyer for
the completed home when the loan is originated. Consequently, there is risk
that the builder will have to service the construction loan debt and finance the
other carrying costs of the completed home for an extended time period until a
buyer is identified. Furthermore, the demand for construction loans and the
ability of construction loan borrowers to service their debt depends on the
state of the local economy and market interest rate levels. A downturn in
economic conditions would be expected to have an adverse effect on the credit
quality of the Bank's construction loan portfolio, and may require management to
establish additional provisions for loan losses, which would have an adverse
effect on net income.
Purchase Mortgage Loans The Bank purchases mortgage loans held for sale
-----------------------
from a variety of mortgage originators. These loans represented approximately
21% of the outstanding loans at June 30, 1999. The volume of loans available for
purchase from the mortgage originators is dependent on the state of the economy
as well as market interest
9
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rate levels. A downturn in economic conditions would be expected to have an
adverse effect on the volume of loans available for purchase. This would, in
turn, have an adverse effect on net income.
Uncertainties Associated with Entering into a Highly Competitive Line of
------------------------------------------------------------------------
Business The success of the Acquisition will in large part be dependent on the
- --------
ability of the Company, following completion of the Merger, to successfully
operate the Bank. The business of the Bank is highly competitive and is rapidly
evolving. The Bank faces significant competition for its products and services
from bank and non-financial institutions. Many of the Bank's competitors have
financial and other resources greater than those of the Bank and have other
competitive advantages over the Bank. There can be no assurance that the
Company will be able to successfully compete with the Bank's competitors.
Uncertainties Associated with Entering into a Highly Regulated Line of
----------------------------------------------------------------------
Business In addition, as a financial institution, the Bank is subject to a
- --------
complex body of federal and state banking laws and regulations which are
intended primarily for the protection of depositors. Among other matters, these
laws and regulations (1) restrict the ability of holding companies and their
financial institution affiliates from tying the provision of certain products
and services, such as extensions of credit, to the purchase of other products
and services offered by the holding company or its affiliates, and (2) require
transactions between a financial institution and any affiliate (including a
holding company) to be on terms substantially the same, or at least as favorable
to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with non-affiliated parties. Certain revisions to these
laws and regulations could subject the Bank to more demanding regulatory
compliance requirements and could, thereby, adversely affect the ability of the
Bank to conduct, or the cost of conducting, business. Legislation and
regulatory initiatives containing wide-ranging proposals for altering the
structure, regulation and competitive relationships of financial institutions
are introduced regularly. The Company cannot predict whether or what form of
proposed statute or regulation will be adopted, if any, or the extent to which
such adoption will affect the business of the Bank.
Pending Financial Services Reform Legislation On May 6, 1999, the United
---------------------------------------------
States Senate adopted the Financial Services Modernization Act of 1999 (S. 900),
and on July 1, 1999, the United States House of Representatives followed by
passing the Financial Services Act of 1999 (H.R. 10). As of the date of this
Proxy Statement, differences between the two bills remain, however, and must be
resolved by a House-Senate conference committee. One such difference between
the two bills relates to whether commercial companies may acquire unitary thrift
holding companies, such as ASBI. The Senate version of the bill would ban the
sale of existing unitary thrift holding companies to commercial firms, while the
House version of the bill would allow the sale of existing unitary thrifts to
commercial firms under certain circumstances. Both bills would ban the creation
of any new unitary thrift holding companies. Because the business activities of
the Company and its subsidiaries generally pertain to investment and related
financial services, it is believed that the proposed Acquisition of ASBI by the
Company would be permitted under both the House and Senate versions of the bill.
No assurance can be made that differences between the two bills will be resolved
by the House-Senate conference committee prior to the end of the 1999
legislative session or, if resolved, whether the final version of the bill will
be acceptable to the President of the United States. In addition, no assurance
can be given that any version of the bill reconciled by the House-Senate
conference committee will not be more restrictive and put into question the
legality of the proposed Acquisition.
Year 2000 Issue The Company is aware of the issues associated with the
---------------
programming code in existing computer systems as the Year 2000 approaches. The
"Year 2000" issue, which is pervasive and complex, generally stems from the fact
that computer programmers and other designers of equipment that use
microprocessors have historically abbreviated dates by eliminating the first two
digits of the year. Thus, as the Year 2000 approaches, many systems may be
unable to distinguish years beginning with "20" from years beginning with "19",
and so may not accurately process certain date-based information. Systems that
do not properly recognize this information could potentially result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
10
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The businesses of the Company and of ASBI and its subsidiaries, including the
Bank, are highly dependent on the operation of their respective computer
systems. To a degree, ASBI relies on outside software vendors and suppliers for
the operation of its computer systems. In addition, ASBI, through the Bank,
maintains lending relationships with customers who, themselves, may be impacted
by Year 2000 issues. Although ASBI is attempting to monitor the efforts of other
parties, it cannot control the success of these efforts. While ASBI has
represented to the Company in the Acquisition Agreement that it and its
subsidiaries are Year 2000 compliant, unanticipated problems could cause
computer systems to malfunction, which would likely result in interruption of
business and incurrence of significant costs to remediate such problems. The
failure by ASBI to complete any Year 2000 renovation in a timely manner could
have a materially adverse affect on its operations and financial performance, as
could Year 2000 problems experienced by others on whom ASBI relies or with whom
it otherwise does business.
Business and Regulation of ASBI and the Bank
The business of ASBI principally consists of the ownership and management of its
subsidiaries, the principal operating subsidiary of which is the Bank. ASBI is
currently classified as a unitary savings and loan holding company subject to
regulation by the Office of Thrift Supervision (the "OTS") of the Department of
the Treasury. ASBI currently does not engage in any significant activity other
than holding the stock of its subsidiaries and operating the business of a
savings bank through the Bank. At June 30, 1999, ASBI had consolidated assets of
approximately $268 million, deposits of approximately $234 million, loans of
approximately $246 million and stockholders' equity of approximately $26
million. The main office of the Bank is located at 301 South Center Street,
Arlington, Texas 76010, and its main telephone number is (817) 861-3633.
The Bank is a federally chartered savings association organized and existing
under the laws of the United States. Originally chartered with the Federal Home
Loan Bank Board on March 29, 1985 under the name "Arlington Savings Bank, A
Federal Savings Bank," the Bank became "First Savings Bank, A Federal Savings
Bank" effective April 13, 1995. The Bank is headquartered in Arlington, Texas,
and conducts business from its main office and from a drive-in facility. The
Bank has obtained regulatory approval for, and is in the process of
establishing, a new branch in Arlington, Texas. The Bank leases its main office
and drive-in facility and owns the property to be used in connection with its
pending branch location.
The Bank offers services, such as certificates of deposit, checking and savings
accounts and credit cards, through traditional channels as well as through the
Internet. The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), up to applicable limits for each depositor.
The Bank focuses on several sectors of the residential housing market, including
interim construction lending and short term funding for mortgage bankers. In
addition, the Bank originates commercial loans and purchases loans or pools of
loans for investment. The Bank also engages in the buying and selling of home
improvement loan receivables and originating or purchasing sub-prime loans
secured by liens on automobiles through its operating subsidiaries, described in
the following paragraphs.
First Consumer Credit, L.L.C. First Consumer Credit, L.L.C., a Texas
-----------------------------
limited liability company ("First Consumer"), received OTS approval as an
operating subsidiary of the Bank on August 10, 1995. First Consumer engages in
various aspects of buying and selling home improvement loans receivable by
purchasing installment consumer home improvement notes that have anticipated
average terms of 90 months and are generally secured by residential real estate.
First Consumer typically holds these notes only a minimal period of time before
portfolios of the notes are accumulated and sold in bulk. This entity is
licensed to conduct business in 40 states. The Bank currently owns approximately
64% of the voting and management interest of First Consumer.
11
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FSB Financial, L.L.C. FSB Financial, L.L.C., a Texas limited liability
---------------------
corporation ("FSB Financial"), received OTS approval as an operating subsidiary
of the Bank on July 21, 1997, to engage in the originating or purchasing of sub-
prime loans secured by liens on automobiles. The loans are generally originated
by car dealerships and other dealers in such commercial paper. The Bank
currently owns approximately 51% of the voting and management interest of FSB
Financial.
FSB Development, L.L.C. FSB Development, L.L.C., a Texas limited liability
-----------------------
corporation ("FSB Development"), received OTS approval as an operating
subsidiary of the Bank on November 5, 1997. FSB Development currently owns a
56% limited partnership interest in Harley Associates, Ltd., a Texas limited
partnership ("Harley Associates"). Harley Associates is engaged in developing
single family residential lots in the Dallas-Fort Worth metropolitan area. The
lots are sold to high volume builders whose operating history indicates they
will have the ability to complete such development. The Bank is currently the
sole member of FSB Development.
In addition to the operating subsidiaries described above, the Bank intends to
acquire a 51% interest in Aculoan Financial Software Corporation, a California
corporation, and licensed consumer lender and broker, as an operating subsidiary
of the Bank. Upon receipt of regulatory approval, the Bank intends to change
the name of the operating subsidiary to American First Mortgage Service. This
proposed operating subsidiary will engage in the wholesale origination, purchase
and sale of second mortgage and home improvement loans, will originate loans
produced by licensed brokers and will purchase loans from licensed lenders one
at a time or in bulk. Substantially all of the loans originated and purchased
by the operating subsidiary will be sold to institutional investors. When a
loan is sold, the operating subsidiary will lock in the difference between the
interest rate received on the loan and the interest rate paid to the purchaser
less normal servicing fees for as long as the loan remains outstanding. The
Bank has filed an application with the OTS and the FDIC for approval to acquire
an interest in this operating subsidiary.
ASBI is a savings and loan holding company registered with the OTS and is
subject to OTS regulation, examination, supervision and reporting requirements.
The Bank, as a federal savings bank, is also subject to comprehensive regulation
and supervision by the OTS. Many of the regulations applicable to ASBI relate
to activity restrictions and restrictions on acquisitions, while regulations
applicable to the Bank generally relate to lending and investment activities,
payment of dividends and maintenance of appropriate levels of capital. Failure
to comply with these regulations may be considered an unsafe and unsound
practice and may result in the imposition by the OTS of various sanctions.
Because the deposits of the Bank are insured by the SAIF, the FDIC also has the
authority to conduct special examinations. The Bank is required to file
periodic reports with the OTS describing its activities and financial condition.
This supervision and regulation is intended primarily for the protection of
depositors of the Bank.
In addition to receipt of stockholder approval of the transaction, the
Acquisition must be approved by the OTS. An application for prior approval of
the Acquisition was submitted to the OTS by the Company on August 16, 1999 (the
"Application"). The Application is pending as of the date of this Proxy
Statement. Following approval of the Application by the OTS, however, the U.S.
Department of Justice will have a period of not less than 15 and not more than
30 days during which it may oppose the transaction under federal antitrust laws.
During this waiting period, the Merger may not be consummated. No assurance can
be given that the OTS will approve the Application or that it will approve the
Application without imposition of conditions that would make it inadvisable to
proceed with the transaction contemplated by the Acquisition Agreement.
Background of the Transaction
The Company continually looks for ways to improve the product mix offered to its
customers. Beginning in 1997, the Company formally established an internal
mergers and acquisitions department (the "M&A Department") for the purpose of
exploring and evaluating potential acquisition opportunities that would expand
the product offerings of the Company, diversify revenue sources, grow existing
core businesses or position the Company as a full-service financial
12
<PAGE>
services company. By early 1998, the Company had two full-time investment
professionals in the M&A Department and had established with management and the
Board a focus for the department's activities, which included the search to
acquire a financial institution. To further support the activities of the M&A
Department, the Company engaged an investment banker to search for financial
institution acquisition candidates.
In the spring of 1998, the Company reviewed the operations of two financial
institutions that had been identified by the Company as potential acquisition
candidates. After consideration of the potential synergies of a business
combination with one of these institutions, the Board approved a non-binding
letter of intent regarding an acquisition. Due diligence and progress on
reaching a definitive agreement followed, but negotiations were terminated prior
to reaching a definitive agreement due to adverse market conditions in late
summer of 1998. Discussions with the other potential candidate never
materialized because it had since been acquired by another organization. The
Company thereafter terminated the engagement with its investment banker.
Because the Company and the Board remained convinced of the overall merits of
owning a financial institution, the Company continued to search for viable
acquisition opportunities throughout the remainder of calendar 1998 and into
1999.
As described below, ASBI and the Bank have had relationships with the Company
for many years. Don A. Buchholz, Chairman of the Board of ASBI and the Bank and
whose family members collectively own a majority of the outstanding stock of
ASBI, also serves as Chairman of the Board of the Company and is a significant
stockholder of the Company. See "Relationship of the Parties and Interests of
Certain Persons in the Transaction." The Bank also purchases securities for its
investment portfolio through the Company. On multiple occasions during the past
few years, David Glatstein, President and Chief Executive Officer of the
Company, had informally inquired whether ASBI had any interest in pursuing a
business combination with the Company. On each occasion, Mr. Glatstein was
advised that ASBI was not for sale.
The Company understands that in early 1999 ASBI had begun exploring various
strategic options with the assistance of an investment banker, including the
possibility of a business combination with another financial institution.
In May of 1999, at the request of the minority stockholders of ASBI, Mr.
Buchholz informed Mr. Glatstein that the minority stockholders might be
interested in exploring a possible business combination between the Company and
ASBI. No formal discussions of a possible business combination between the two
organizations had been entertained prior to this time.
No specific terms regarding structure or consideration were addressed during the
preliminary discussions between Mr. Buchholz and Mr. Glatstein. Mr. Glatstein,
however, did indicate that the Company might be interested in pursuing
discussions regarding a possible business combination with ASBI. Thereafter,
ASBI provided the Company with information regarding the financial condition and
operations of ASBI and the Bank.
A series of informal discussions between Mr. Glatstein and representatives of
ASBI followed, primarily to discuss structural issues and merger consideration.
Mr. Buchholz did not participate in these informal discussions. Concurrently
with these preliminary discussions, the Company's M&A Department and other
officers of the Company performed an evaluation of the business and financial
aspects of ASBI and the Bank and the potential for synergies with the current
business of the Company. This evaluation indicated that a business combination
with ASBI would be attractive to the Company. Consequently, representatives of
the Company and ASBI agreed to meet for the purpose of developing the terms of a
letter of intent.
On June 6, 1999, representatives of the Company, Mr. Buchholz, Mr. Richard J.
Driscoll, who is President and a director of the Bank, and other representatives
of ASBI and the minority stockholders of ASBI met to discuss and negotiate the
terms of a proposed business combination between the Company and ASBI. Given
that Mr. Buchholz is an officer, director and stockholder of each organization,
Mr. Buchholz observed but did not participate in the
13
<PAGE>
negotiations. During the course of these discussions, the Company presented a
proposal to the ASBI representatives attending the meeting. The Company's
representatives and Mr. Buchholz then left the meeting room to allow ASBI to
consider the Company's proposal. Upon the completion of these discussions, the
parties entered into a non-binding letter of intent at that meeting regarding
the proposed Acquisition of ASBI by the Company (the "Letter of Intent").
The Letter of Intent provided a general outline of the terms of the transaction,
including, among other things, a timetable for conducting a due diligence review
by the Company of ASBI and the Bank and a timetable for negotiating the terms of
and entering into a definitive agreement. Although the concept of a pricing
collar mechanism had been discussed during negotiations of the Letter of Intent
at the June 6 meeting, this mechanism was rejected by both parties. The terms
of the Letter of Intent also indicated that the Letter of Intent was subject to
ratification by the Board at its next regular or special meeting and that the
Company had complete discretion to terminate the Letter of Intent based on its
due diligence review of ASBI and the Bank.
On June 28, 1999, the Letter of Intent was amended by the parties for the sole
purpose of extending the period of time for the Company to conduct its due
diligence review of ASBI and the Bank until July 15, 1999.
At a special meeting held on June 30, 1999, the Board discussed, among other
matters, the Acquisition of ASBI. Following a general discussion by Mr.
Glatstein regarding the background of the proposed Acquisition, the Board
adopted various resolutions relating to, among other matters, approving and
ratifying the Letter of Intent, as amended, authorizing preparation of necessary
applications for regulatory approval of the proposed Acquisition and hiring
outside consultants to assist the Company in performing necessary due diligence
with respect to ASBI and the Bank. In addition, because of the relationship
that Mr. Buchholz shares with the Company and ASBI, and consistent with the duty
owed by the Board to its stockholders, the Board appointed a special independent
committee (the "Special Committee") comprised of three directors: namely
Frederick R. Meyer, Jon L. Mosle, Jr., and Brodie L. Cobb, each of whom the
Board concluded was capable and independent with respect to evaluating the
Acquisition. The Board then charged the Special Committee with the
responsibility of reviewing, evaluating and making a determination with respect
to the Company's proposal to a acquire ASBI (or any other transaction involving
the Company and ASBI) and to report its conclusions to the Board. The Board
also authorized the Special Committee to engage an independent financial
advisor, engage separate legal counsel and negotiate (or supervise the
negotiations on behalf of the Company) with ASBI concerning the provisions of
any merger agreement or other similar document and to reject any proposal or
transaction if not deemed to be in the best interest of the Company. Although
Mr. Buchholz attended this meeting as Chairman of the Board, he abstained from
voting on the resolutions described above.
On July 2, 1999, the Special Committee met by means of a telephonic conference
call. The Special Committee discussed the background and status of the proposed
Acquisition of ASBI and reviewed its responsibilities to review, evaluate and
make a determination with respect to the transaction and to report its
conclusions to the full Board. The Special Committee also discussed the
retention of independent counsel to provide legal advice to the Special
Committee. The Special Committee selected outside counsel from among several
law firms to be its legal advisor. The Special Committee also discussed the
selection of an independent financial advisor to determine the fairness, from a
financial point of view, of the proposed transaction to the Company and all of
its stockholders. Recommendations were discussed among members of the Special
Committee and it was determined that interviews would be conducted at its next
meeting.
On July 9, 1999, the Special Committee met by means of a telephonic conference
call. Counsel to the Special Committee was introduced at and participated in
the meeting. Mr. Meyer was appointed to serve as Chairman of the Special
Committee. The Special Committee then received reports from executive officers
of the Company regarding the due diligence efforts being conducted with regard
to ASBI and the Bank. The Special Committee discussed the retention of a
financial advisor and interviewed several investment banking firms as potential
candidates. After completing the interviews, and after discussing the
distinctions among and the qualifications, experience and independence of the
various firms, the Special Committee selected Friedman, Billings, Ramsey & Co.,
Inc. ("FBR") as financial advisor to the Special Committee. Furthermore, it was
agreed that, if the Special Committee later determined that an Acquisition of
ASBI would be in the best interests of the Company and its stockholders, FBR
would
14
<PAGE>
issue an opinion as to whether the Acquisition would be fair, from a financial
point of view, to all of the stockholders of the Company.
On July 16, 1999, the Special Committee met by means of a telephonic conference
call for the purpose of receiving due diligence reports with respect to ASBI and
the Bank from executive officers and outside consultants previously retained by
the Board, including, without limitation, The Camel Group, KPMG LLP, Cheshier
and Fuller, L.L.P. and counsel for the Company. Mr. Glatstein presented a
report to the Special Committee regarding prior efforts by the Company to
acquire a financial institution, the history of negotiations to date with ASBI
and the strategies underlying the Acquisition of ASBI. Mr. Glatstein indicated
that the proposed Acquisition appeared to meet the criteria for acquisitions
previously established by management, namely, a target that was Internet ready,
with sound management, that could be purchased at a price that was accretive to
the Company's earnings. He also discussed anticipated synergies between the
Company and ASBI. After receiving all of the reports, the Special Committee
discussed, and made inquiries regarding, the results of operations and financial
projections, asset values, financial ratios, growth prospects and markets of the
Company and ASBI. The Special Committee also discussed the proposed
Acquisition, the anticipated synergies, price and the reports by the Company and
its advisors. The Special Committee and its advisors then discussed the
possibility of adding a pricing collar mechanism to the transaction in order to
limit the Company's exposure in the event of a dramatic price increase in the
Company's stock prior to closing of the transaction. The Special Committee
authorized Chairman Meyer to discuss directly with Mr. Buchholz the Special
Committee's recommendation that a price collar be negotiated so that the
Company's stockholders could have more assurance that the transaction, as
finally consummated, would more closely reflect the valuation of the transaction
as negotiated at the time the Letter of Intent was signed.
On July 28, 1999, the Special Committee met by means of telephonic conference
call to receive an update from Chairman Meyer regarding his meeting with Mr.
Buchholz on July 22, 1999, and to receive a preliminary report from FBR.
Chairman Meyer reported to the Special Committee that Mr. Buchholz stated that
the minority stockholders of ASBI did not want a pricing collar, and he,
therefore, declined to consider such a collar arrangement. Mr. Meyer reported
that Mr. Buchholz stated that the minority stockholders of ASBI proposed that
the Acquisition Agreement provide a mechanism whereby either the Company or ASBI
would be able to terminate the agreement if the pricing became unfavorable,
provided that the terminating party paid a breakup fee of $2.5 million, as
reflected in the Letter of Intent. The Special Committee and its financial and
legal advisors discussed the possibility that the Acquisition Agreement contain
a provision permitting the Company to terminate the transaction prior to closing
if the Company's stock price became unfavorable; however, the Special Committee
preferred to negotiate a collar mechanism, if possible. The Special Committee
also recommended that the Acquisition Agreement provide that Don Buchholz and
his related interests vote their respective shares of the Common Stock of the
Company in proportion to the vote of the other stockholders of the Company. The
Special Committee invited Mr. Glatstein to join the meeting and requested that
he continue to attempt to negotiate a pricing collar. Mr. Glatstein agreed to
meet with Mr. Buchholz to negotiate a collar, and if he could not do so, to
negotiate the ability of the Company to terminate the transaction if the
Company's stock price rose dramatically prior to closing. Representatives of
FBR noted that the stock price could certainly rise dramatically and that such
price fluctuations were normally addressed by a collar provision in similar
transactions. The financial advisor indicated a range of prices of the
Company's Common Stock pursuant to which they would be able to issue a fairness
opinion and advised that the fairness opinion would reflect market conditions
only at the date the Acquisition Agreement was executed. Mr. Glatstein stated
he would report back to the Special Committee following his discussions with Mr.
Buchholz.
On August 4, 1999, the Special Committee and its advisors met by means of a
telephonic conference call to discuss the status of negotiations with ASBI and
to receive a report from its financial advisor with respect to the proposed
Acquisition. At the invitation of Chairman Meyer, Mr. Glatstein joined the
meeting and reported that several outstanding contractual matters had been
resolved but that the parties were unable to agree upon a collar mechanism with
respect to the consideration being offered by the Company. He reported that the
minority stockholders of ASBI were prepared to execute an acquisition agreement
containing the pricing terms as originally negotiated in the Letter of Intent,
notwithstanding the fact that the trading price of the Company's stock had
declined from $49.20 (as adjusted
15
<PAGE>
for the 10% stock dividend paid August 2, 1999) at the execution of the Letter
of Intent to $35.375. The Special Committee discussed in detail Mr. Glatstein's
report and management's recommendation regarding adequate protection to the
Company in the event the value of the Common Stock rose dramatically during the
pendency of the transaction. The Special Committee preferred to implement a
pricing collar, but after extensive discussion, concluded that the right of the
Company to terminate the transaction prior to closing in the event the Board or
the Special Committee, in the exercise of its fiduciary duty, had determined, in
good faith after considering the advice of outside counsel, to withdraw or
modify its approval or recommendation of the Merger, when coupled with a breakup
fee should adequately protect the Company in the event its stock price was
unacceptably high at the time of closing. The Special Committee then called upon
representatives of FBR to review the financial aspects of the proposed
Acquisition. The Special Committee's financial advisors reviewed, among other
matters, market statistics, historical exchange ratios, year-to-date comparisons
of revenues, implied exchange ratios, implied public and private market
valuations and pro forma analyses contained in the report submitted to the
meeting. FBR reported that it had not reached any definite conclusion with
respect to its ability to render a fairness opinion and would not be in a
position to do so until such time as negotiations had been concluded, the
structure of the transaction was in place and that it had the opportunity to
review the final terms of the proposed Acquisition Agreement. FBR did, however,
indicate to the Special Committee that if the final terms of the Acquisition
Agreement contained no pricing collar but did afford the ability of the Company
to terminate the transaction for a breakup fee not in excess of $2.5 million in
the event the Special Committee or the Board, in the exercise of its fiduciary
duties, elected to terminate the transaction, it would be able to deliver a
fairness opinion.
On August 5, 1999, a special meeting of the Board was held to review the
proposed Acquisition of ASBI and to receive a status report from the Special
Committee regarding its progress in reaching a definitive agreement with ASBI.
In addition to the members of the Board, including Mr. Buchholz, counsel to the
Company, counsel to the Special Committee and a representative of FBR were in
attendance. Because of Mr. Buchholz's position with the Company and ASBI, Mr.
Glatstein was appointed to serve as Chairman at this special meeting of the
Board. Following a report by Mr. Glatstein regarding the status and results of
the Company's due diligence efforts, particularly the due diligence reports
submitted by the Company's outside due diligence consultants, Mr. Glatstein
discussed with the Board internal projections regarding ASBI's business. The
Board thoroughly reviewed these due diligence findings and projections and
discussed strategies and synergies of the proposed combination of ASBI and the
Company. Counsel to the Company then reviewed with the Board the terms and
provisions of the draft Acquisition Agreement provided to each director in
advance of the meeting, noting that there remained several unresolved issues.
Counsel for the Special Committee and a representative from FBR then joined the
meeting at which time Mr. Meyer, Chairman of the Special Committee, reported to
the Board of the activities of the Special Committee in reviewing due diligence
reports and reviewing the Acquisition Agreement. Mr. Mosle reported that,
subject to resolution of the remaining unresolved issues and review of final
documentation, confirming advice of legal counsel to the Special Committee and
receipt of an oral fairness opinion from FBR, the Special Committee would
recommend to the Board that it proceed with the Acquisition of ASBI upon the
terms and subject to the conditions contained in the Acquisition Agreement.
Prior to adjournment of the special meeting, the Board considered the
compensation of the Special Committee members for their work and it was resolved
that each member of the Special Committee receive $500 per day that the Special
Committee devoted substantive attention to this transaction, plus $10,000 at
conclusion of the Special Committee's engagement, with an additional $10,000 to
be paid to the Chairman of the Special Committee.
On August 10, 1999, the Special Committee met again by means of telephonic
conference call. The purpose of the meeting was to receive an update from the
Special Committee's legal advisors regarding the status of the Acquisition
Agreement and to receive an oral opinion from its financial advisor with respect
to the fairness of the transaction to all stockholders of the Company from a
financial point of view. The Special Committee's legal advisors updated the
Special Committee and the financial advisor as to the status of the Acquisition
Agreement as negotiated in its final form by representatives of the Company and
ASBI. The Special Committee was satisfied that the Company would have the right
to terminate the Acquisition Agreement if, in the exercise of their fiduciary
duties, either the Special Committee withdraws its recommendation or the Board
decides not to close because the consideration was unacceptably high because of
an increase in the price of the Common Stock. See "The Agreement and Plan of
Reorganization - Break-Up
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Fee." The Special Committee's financial advisor then reported that it was
prepared to and did in fact give its oral opinion that, as of August 10, 1999,
the transaction as contained in the proposed documentation was fair, from a
financial point of view, to all the stockholders of the Company. After detailed
discussion of these and other matters, the Special Committee adopted resolutions
approving and recommending to the Board the Acquisition of ASBI, on the terms
set forth in the Acquisition Agreement submitted at the meeting.
Following the meeting of the Special Committee, the Board held a special meeting
by telephonic conference call on the afternoon of August 10, 1999, to receive
the report of the Special Committee. The Chairman of the Special Committee
reported that the Special Committee had reviewed the final documentation and,
with the assistance of advice from its legal counsel and investment banker,
unanimously recommended approval of the Acquisition of ASBI on the terms set
forth in the final Acquisition Agreement, copies of which had been circulated to
the members of the Board in advance of the meeting. With the recommendation of
the Special Committee, the Board authorized management of the Company to proceed
with the Acquisition of ASBI and to enter into the Acquisition Agreement with
ASBI.
The Agreement and Plan of Reorganization
The Company and ASBI have entered into the Acquisition Agreement, dated as of
August 10, 1999. Pursuant to the terms of the Acquisition Agreement and subject
to prior stockholder and regulatory approval and the expiration of all
applicable waiting periods, the Company will acquire all of the issued and
outstanding shares of common stock of ASBI through the reverse triangular merger
(defined herein as the "Merger") of SWS Acquisition Corporation ("Newco"), a
newly-created subsidiary corporation, chartered and organized under the laws of
the State of Texas by the Company for the exclusive purpose of effecting the
Merger, with and into ASBI using Common Stock as consideration for the Merger.
ASBI will continue as the surviving corporation in the Merger.
Under the terms of the Acquisition Agreement, each share of ASBI common stock
outstanding immediately prior to the Effective Time of the Merger (other than
shares held by any stockholders exercising their dissenters' rights as provided
under Texas law) will be converted into the right to receive Common Stock in an
amount equal to the quotient of (i) 2,600,000 shares of Common Stock divided by
(ii) the number of shares of ASBI common stock outstanding immediately prior to
the Effective Time (the "Exchange Ratio"); provided, however, each stockholder
of ASBI who would otherwise be entitled to receive fractional shares of Common
Stock will receive cash in lieu thereof in accordance with the terms of the
Acquisition Agreement.
Following consummation of the Merger, shares of Newco stock outstanding at the
Effective Time will be converted into a like number of shares of common stock of
ASBI, as the surviving corporation in the Merger, with the effect that the
number of shares of the common stock of ASBI 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 result shall be that the
Company will own 100% of ASBI following completion of the Merger.
The terms of the Merger, including the Exchange Ratio, were the result of
negotiations between representatives of the Company and ASBI. See "Background
of the Transaction." The Company believes the Exchange Ratio represents the fair
value of the ASBI common stock to be received in the Merger. The Special
Committee has received a fairness opinion from its independent financial
advisor, FBR, that, as of August 10, 1999, the consideration is fair to the
stockholders of the Company from a financial point of view. See "Opinion of
Independent Financial Advisor."
Representations and Warranties The Acquisition Agreement contains a number
------------------------------
of representations and warranties made by each company to the other. These
representations and warranties are essentially reciprocal and are believed by
management to be customary for transactions of this nature. Certain of the
material representations and warranties of the parties relate to (1) due
organization, power and standing, and other corporate matters, (2)
authorization, execution, delivery and enforceability of the Acquisition
Agreement, (3) capital structure and securities, (4) subsidiaries, (5) conflicts
under charter documents, violations of any instruments or law, and required
consents and
17
<PAGE>
approvals, (6) documents filed with applicable regulatory agencies and the
accuracy of information in those documents, (7) liabilities, (8) the absence of
adverse changes and material adverse effects, (9) materials contracts, (10)
compliance with applicable laws and (11) Year 2000 matters.
The representations and warranties made by the Company and ASBI in the
Acquisition Agreement will not survive the closing of the Acquisition, and
neither party, including directors, principal officers or stockholders, has
agreed to indemnify the other in the event of a misrepresentation or breach of
warranty discovered after completion of the Merger.
Covenants The Acquisition Agreement also contains certain covenants made
---------
by both parties. These covenants are believed by management to be customary for
transactions of this nature. Various of the covenants made by each party to the
Acquisition Agreement are described in the following paragraphs.
The Company has agreed to, among other things, (1) use its best efforts to
consummate the transactions contemplated by the Acquisition Agreement, (2) file
or cause to be filed the applications for all regulatory approvals required to
be obtained by the Company in connection with the Acquisition Agreement, (3)
promptly notify ASBI of any representation or warranty made by the Company that
becomes untrue or any legal or similar action that questions, or might question,
the validity of the Acquisition Agreement or the agreements contemplated thereby
or that seeks to enjoin or otherwise restrain the transactions contemplated
thereunder, (4) notify ASBI of any change that would adversely affect, prevent
or delay consummation of the transactions contemplated by the Acquisition
Agreement or the other agreements contemplated thereunder, (5) incorporate,
charter and organize Newco and (6) promptly after the execution of the
Acquisition Agreement, enter into and cause Newco to enter into that certain
Agreement and Plan of Merger by and among Newco, ASBI and joined in by the
Company (the "Merger Agreement"). A copy of the form of Merger Agreement is
attached as an exhibit to the Acquisition Agreement. The Company has agreed
that it will cause Newco to perform its obligations under the Merger Agreement
and shall vote all of the stock of Newco it holds in favor of the Merger and the
Merger Agreement.
ASBI has agreed to, among other things, (1) use its best efforts to consummate
the transactions contemplated by the Acquisition Agreement, (2) operate its
business only in the ordinary course of its business, (3) preserve its business
organization intact and to retain present customers, depositors, correspondent
bank relationships and officers and directors, (4) timely file required
governmental reports and tax returns, (5) observe proper accounting under
generally accepted accounting principles, (6) not introduce any new material
method of management or operation, (7) not take any action that could result in
a material adverse change in the condition of ASBI, (8) not take, or fail to
take, any action that would cause the representations and warranties made by
ASBI to the Company to be inaccurate at consummation of the transaction, (9) not
change its capital structure, (10) not change its corporate charter or bylaws,
(11) not grant any increase in compensation or benefits to its employees or
officers, except in accordance with past practices and (12) not make any change
in accounting methods, principles or material practices. In addition, ASBI has
agreed to allow two designees of the Company to attend all regular and special
meetings of the boards of directors of ASBI and any subsidiary, including the
Bank. ASBI has also granted the Company the right to conduct environmental
inspection on any ASBI property, with ASBI providing full indemnification to the
Company for any claims as a result of any of the environmental inspections. The
Company has agreed to indemnify ASBI for its or its agents' negligent acts in
performing any environmental inspection.
Conditions Both the Company's and ASBI's obligations to consummate the
----------
Merger and related transactions are subject to certain conditions, including (1)
accuracy of representations and warranties of the other party, (2) compliance,
in all material respects, with all agreements and covenants in the Acquisition
Agreement, (3) receipt of all necessary stockholder approvals, including
approval of this Proposal regarding the Share Issuance, (4) receipt of all
necessary regulatory or governmental approvals, (5) receipt of a tax opinion to
the effect that the Merger qualifies as a reorganization pursuant to Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), (6)
receipt of an opinion of legal counsel regarding certain legal matters and (7)
the absence of any order, decree or injunction making the Merger illegal or
otherwise prohibiting the completion of the Merger.
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In addition to the foregoing mutual conditions, ASBI's obligation to consummate
the Merger is conditioned upon, among other matters, (1) receipt of a letter
from ASBI's independent accountants 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, (2) the receipt of a duly executed
Registration Rights Agreement and (3) no material adverse change in the
condition of the Company since March 31, 1999.
The Company's obligation to consummate the Merger is also conditioned upon,
among other matters, (1) no material adverse change in the condition of ASBI
since March 31, 1999, (2) receipt of an opinion of the Company's independent
public accountants that the Merger qualifies for pooling-of-interests accounting
treatment (See "Accounting Treatment"), (3) receipt of releases from the
officers and directors of ASBI and (4) receipt of non-compete and employment
agreements from certain individuals associated with ASBI. See "Relationship of
Parties and Interests of Certain Persons in the Merger." In accordance with
Articles 5.11 through 5.13 of the Texas Business Corporation Act, stockholders
of ASBI will have dissenters' rights. A condition precedent to the Company's
obligation to close the transaction is that stockholders holding not more than
9.9% of the common stock of ASBI shall have exercised their dissenters' rights.
While the Company may waive this condition, the Merger cannot qualify for
pooling-of-interests accounting treatment if stockholders holding more than 10%
of the issued and outstanding shares of ASBI common stock assert their
dissenters's rights.
In connection with the Acquisition Agreement, certain stockholders of ASBI, who
collectively own or control at least 90.27% of the common stock of ASBI, entered
into Voting Agreements and Irrevocable Proxies to vote in favor of the Merger.
Accordingly, approval of the transaction by the stockholders of ASBI is assured.
On August 16, 1999, the Company submitted the Application with the OTS to obtain
prior regulatory approval for the Company to acquire ASBI and its subsidiaries,
including the Bank. As of the date of this Proxy Statement, the Application is
pending. The Acquisition cannot be completed until such regulatory approval has
been obtained and all applicable waiting periods have expired.
Termination and Abandonment Both the Company and ASBI may terminate the
---------------------------
Acquisition Agreement and abandon the Merger at any time before completion of
the Merger by mutual consent, duly authorized by each board of directors and
upon the occurrence of certain events set forth in the Acquisition Agreement,
including in the event the transaction is not consummated by June 6, 2000.
Break-Up Fee The Acquisition Agreement provides for a reciprocal break-up
------------
fee in the amount of $2,500,000 to be paid by either the Company or ASBI to the
other party in the event the Acquisition Agreement is terminated under certain
circumstances described in the following paragraphs.
The Company will be obligated to pay ASBI $2,500,000 in the following events:
(1) the Acquisition Agreement is terminated by ASBI for any of the following
reasons: (a) the failure by the Company to comply in any material respect with
any of its covenants or agreements contained in the Acquisition Agreement or
related agreements which remain uncured for a period of 30 days following
notice, (b) if any of the representations or warranties of the Company contained
in the Acquisition Agreement are inaccurate in any material respect or (c) the
failure of certain conditions precedent to the obligations of ASBI to complete
the transaction, including conditions relating to (i) the Company's compliance
with representations, warranties and covenants contained in the Acquisition
Agreement, (ii) due authorization and valid issuance of the Shares by the
Company and the listing of such Shares on the NYSE, (iii) the receipt by ASBI of
an opinion of counsel to the Company regarding certain legal matters and (iv)
execution of the Registration Rights Agreement or (2) the Acquisition Agreement
is terminated by the Company if the Board or the Special Committee determine, in
good faith and following consultation with outside legal counsel, that in order
to comply with its fiduciary duties to stockholders under applicable law, it is
advisable for the Board or Special Committee to withdraw or modify, in any
manner materially adverse to ASBI, its approval or recommendation of the
Acquisition.
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ASBI will be obligated to pay the Company $2,500,000 in the event the
Acquisition Agreement is terminated by the Company for any of the following
reasons: (1) failure by ASBI to comply in any material respect with any of its
covenants or agreements contained in the Acquisition Agreement or related
agreements which remain uncured for a period of 30 days following notice, (2) if
any of the representations or warranties of ASBI contained in the Acquisition
Agreement are inaccurate in any material respect, (3) if the holders of more
than a certain percentage (not to exceed 9.9%) of the ASBI common stock shall
have elected to assert dissenters' rights as provided under Texas law which,
when combined with other cash transactions considered under applicable
accounting rules, would result in the Merger not qualifying for pooling-of-
interests accounting treatment, or (4) failure of certain conditions precedent
to the obligations of the Company to complete the transaction, including
conditions relating to (a) ASBI's compliance with representations, warranties
and covenants contained in the Acquisition Agreement, (b) stockholders of ASBI
asserting dissenters' rights, (c) receipt by the Company of certain releases
from certain directors and officers of ASBI and its subsidiaries, (d) receipt by
the Company of non-compete agreements from certain individuals associated with
ASBI and its subsidiaries, including an employment agreement from Mr. Richard J.
Driscoll (see "Relationship of the Parties and Interests of Certain Persons in
the Merger"), (e) receipt by the Company of letter agreements from affiliates of
ASBI, (f) receipt by the Company of an opinion of counsel to ASBI regarding
certain legal matters, (g) receipt by the Company of evidence regarding
qualification of an exemption from registration regarding the issuance of the
Shares, (h) receipt by the Company of evidence that certain stockholder and
voting agreements relative to the stockholders of ASBI have been terminated, and
(i) environmental matters (See "Environmental Escrow").
Environmental Escrow Prior to execution of the Acquisition Agreement, the
--------------------
Company had identified certain potential environmental liabilities relating to
two parcels of real estate held by the Bank. As a consequence, the parties
agreed that ASBI will use its best efforts to resolve the environmental issues
prior to November 1, 1999. In addition, the Company will conduct additional due
diligence relating to those certain environmental liabilities. Thereafter, and
prior to November 1, 1999, if the Company continues to have concerns regarding
the environmental liabilities, the Company and ASBI will negotiate in good faith
to establish a value of the potential environmental-related liabilities
associated with these two properties. If the Company and ASBI are unable to
reach a mutual agreement, the amount of the liability will be submitted to
binding arbitration. At the Effective Time of the Merger, a number of the Shares
will be escrowed having a value sufficient to offset the potential
environmental-related liabilities identified by the parties.
Relationship of the Parties and Interests of Certain Persons in the Transaction
Mr. Don A. Buchholz, President and Chairman of the Board of ASBI, exercises
voting control over approximately 58.6% of the voting power of ASBI, both
individually and pursuant to the terms of a voting agreement among the
stockholders of ASBI. The stockholders of ASBI have agreed that this voting
agreement will not be used in connection with approval of the Merger by the
stockholders of ASBI. Mr. Buchholz is also a stockholder, director and Chairman
of the Board of the Company. See "Proposal One - Election of Directors" and
"Stock Ownership of Principal Owners and Management."
Mr. Buchholz beneficially owns 7.0% of the outstanding shares of Common Stock.
See "Stock Ownership of Principal Owners and Management." Mr. Buchholz also
beneficially owns 19.3% of the outstanding stock of ASBI (without consideration
of the voting agreement among the stockholders of ASBI, which will not be used
in connection with the Merger). Upon completion of the Merger, the ASBI shares
beneficially owned by Mr. Buchholz will be, along with all other shares of ASBI,
converted into shares of Common Stock. Thus, upon completion of the Merger and
the Share Issuance to stockholders of ASBI, it is anticipated that Mr.
Buchholz's beneficial ownership interest in the Company will increase to
approximately 9.2% of the outstanding Common Stock of the Company. Other
members of Mr. Buchholz's family and their related interests also own shares of
the Company and/or ASBI, which, in accordance with the rules of the SEC, are not
deemed to be beneficially owned by Mr. Buchholz, and, therefore, are not
included in the percentages indicated above. Mr. Buchholz may, however, have an
economic interest in such shares. Upon completion of the Merger, these family
members and related interests, which do not act in concert with each other, will
own 9.6%
20
<PAGE>
of the outstanding Common Stock of the Company. As a result of Mr. Buchholz's
increased beneficial ownership interest in the Company resulting from the
Merger, Mr. Buchholz may have the ability to exercise greater influence over the
management and affairs of the Company, including the election of directors, a
change in control of the Company and the determination of all other matters
requiring stockholder approval.
Because of the relationship between the Company and ASBI, and consistent with
the duty owed by the Board to its stockholders, the Board appointed the Special
Committee to review and consider the Merger proposal, and to negotiate the terms
and conditions of any agreement relating to the Merger, including the
Acquisition Agreement. See "Background of the Transaction."
Pursuant to the terms of the Acquisition Agreement, the shares of Common Stock
held by Mr. Buchholz, Buchholz Arlington Banshares, Ltd. and Buchholz
Investments will be voted in proportion to the vote of the other stockholders of
the Company.
Stockholders of the Company should be aware that certain members of the Board
and management of the Company have interests in the Acquisition that are in
addition to and separate from the interests of stockholders of the Company
generally. Such interests may create potential conflicts. The board of
directors of ASBI and the Board were aware of these interests, and considered
them, among other matters, in approving the Acquisition Agreement, the Merger
Agreement and the transactions contemplated thereby, including the Merger.
Approval of the Share Issuance by the stockholders of the Company will also
constitute approval of the following benefits to be received by certain
directors, executive officers and employees of ASBI and its subsidiaries.
Certain of these interests are described in the following paragraphs.
Agreements Not to Compete As an inducement for the Company to enter into
-------------------------
the Acquisition Agreement with ASBI, ASBI and the Bank have agreed to use their
best efforts to cause certain persons associated with ASBI and its subsidiaries
(including the Bank) to enter into agreements not to compete with the Bank
(generally, for a period of three years beginning on the Effective Date of the
Merger) and to deliver any and all such agreements to the Company at the closing
of the Acquisition. The individuals identified by the Company to enter into such
agreements are Don A. Buchholz, Rosalyn Autry, Robert Byrnes, John D. Harvison,
Michael Harvison, Randall Harvison, Kay Parker and Don St. Clair. The proposed
form of non-compete agreement, which is included as an exhibit to the
Acquisition Agreement, generally provides that such person will not, for a
three-year period, (i) solicit business from any current Bank customers, (ii)
(A) acquire, charter, operate or enter into any franchise or other management
agreement with any financial institution, (B) serve as an officer, director,
employee, agent or consultant to any financial institution or (C) establish or
operate a branch or other office of a financial institution, and such financial
institution is within or has its main office within fifty (50) miles of
Arlington, Texas or (iii) recruit, hire, assist others in recruiting or hiring,
or discuss employment with, or refer others concerning employment, any person
who is, or within the preceding twelve months was, an employee of the Bank. As
of the date of this Proxy Statement, such agreements have not been finalized and
may be subject to further modification prior to closing of the Acquisition.
Employment Agreement In connection with the Acquisition, the Bank and Mr.
--------------------
Richard J. Driscoll, the current President and a director of the Bank, reached
terms on an employment and non-compete agreement (the "Employment Agreement").
The Employment Agreement generally provides that the Bank will employ Mr.
Driscoll, as President of the Bank, for a three-year period beginning on the
Effective Date of the Merger. The terms of the Employment Agreement are
substantially similar to the terms of an employment agreement currently in
effect between Mr. Driscoll and the Bank, except with respect to the grant of
certain stock options described herein.
Under the terms of the Employment Agreement, Mr. Driscoll will receive an annual
base salary of $130,000, subject to annual review by the Bank. Mr. Driscoll
also will be entitled to participate in an officer's bonus pool funded with a
portion of the Bank's annual pre-tax income. The Employment Agreement also
provides for participation in the Bank's welfare and benefit plans, vacation and
other customary perquisites. In connection with his Employment
21
<PAGE>
Agreement, Mr. Driscoll will also be granted stock options to acquire 2,500
shares of Common Stock. The exercise price of these options will be priced as of
the Effective Date.
The Employment Agreement is terminable by the Bank in the event of Mr.
Driscoll's death or permanent disability or for "cause," as defined in the
Employment Agreement. The Employment Agreement can also be terminated by the
Bank without "cause," in which event Mr. Driscoll will be entitled to certain
continued benefits, including payment of his base salary for a period of twelve
months or through the balance of the term of the Employment Agreement, whichever
is less.
The Employment Agreement also provides that Mr. Driscoll will not, for a period
of one year following termination of his employment (other than a termination
without "cause"), directly or indirectly own, manage, operate, control, be
employed by, consult with or participate in or be connected with any entity
engaged in the same line of business as, and competes with the business of, the
Bank within the United States. In addition, Mr. Driscoll will not solicit for
employment, or advise or recommend any person to employ or solicit for
employment, any person Mr. Driscoll knows to be an employee of the Bank or any
of its subsidiaries.
Board Composition A representative of the Company will be appointed to the
-----------------
board of directors of the Bank to be effective as of the first meeting of the
Bank's board of directors following the Effective Date of the Merger. It is
currently anticipated that the Company will add Kenneth R. Hanks, Chief
Operating Officer of the Company, as an additional director of the Bank.
Employment and Employee Benefits Pursuant to the Acquisition Agreement,
--------------------------------
the Company has agreed to provide to officers and employees of ASBI and its
subsidiaries who remain employees of the Company and its subsidiaries following
the Merger employee benefits under employee benefit plans (other than stock
option or other plans involving the potential issuance of the Common Stock) on
terms and conditions which are substantially similar to those currently provided
by the Company's subsidiaries to their similarly situated officers and
employees. Generally, for purposes of participation and vesting (but not
accrual of benefits), service by an ASBI employee under an ASBI qualified
defined contribution plan and under any other employee benefit plan is
considered service under a similar plan of the Company. ASBI and its
subsidiaries have agreed to honor all employment, severance, consulting and
other compensation related agreements or contracts between ASBI and its
subsidiaries 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 employee plans of ASBI. Presently,
employees of First Consumer Credit and FSB Financial (each of which are
subsidiaries of the Bank) receive discretionary cash bonuses.
Opinion of Independent Financial Advisor
Pursuant to a letter agreement dated as of August 5, 1999 (the "FBR Agreement"),
Friedman, Billings, Ramsey & Co., Inc. (previously defined herein as "FBR") was
retained by the Special Committee to act as its financial advisor in connection
with an analysis of the Company's Acquisition of ASBI and the Bank and to
provide a fairness opinion to the Special Committee at the time of execution of
a definitive agreement with ASBI (the "Fairness Opinion") with respect to the
fairness from a financial point of view to all of the Company's stockholders of
the consideration offered to be paid to the stockholders of ASBI as a result of
the Merger. At the meeting of the Special Committee held on August 10, 1999,
FBR delivered its oral opinion to the Special Committee to the effect that, as
of such date, the exchange of each share of ASBI into the right to receive
shares of Common Stock in the amount equal to the quotient of (i) 2,600,000
shares of Common Stock divided by (ii) the number of shares of ASBI common stock
outstanding immediately prior to the Effective Time (defined herein as the
"Exchange Ratio") was fair from a financial point of view to the stockholders of
the Common Stock. See "Background of the Transaction." FBR confirmed its
opinion in writing following the August 10, 1999, meeting (the "FBR Opinion"),
stating that, as of August 10, 1999, and based on the matters set forth in such
FBR Opinion and pursuant to the terms and conditions of the Merger set forth in
the Acquisition Agreement, the Exchange Ratio is fair to all of the stockholders
of the Company from a financial point of view.
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THE FULL TEXT OF THE FBR OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS
ATTACHED AS EXHIBIT A TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. THE COMPANY'S STOCKHOLDERS ARE URGED TO READ THE FBR OPINION IN ITS
ENTIRETY. FBR'S OPINION IS ADDRESSED ONLY TO THE SPECIAL COMMITTEE AND DIRECTED
ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW TO ALL
OF THE STOCKHOLDERS OF THE COMPANY AS OF AUGUST 10, 1999, AND DOES NOT ADDRESS
ANY OTHER ASPECT OF THE PROPOSED MERGER OR ANY RELATED TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE ANNUAL STOCKHOLDERS' MEETING. THE SUMMARY OF THE FBR OPINION SET
FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF SUCH OPINION.
FBR is a nationally recognized investment banking firm and was selected by the
Special Committee based on the firm's reputation and experience in the valuation
of depository institutions. FBR, as part of its investment banking business, is
frequently engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with rendering the FBR Opinion, FBR, among other things, (i)
reviewed the Bank's Call Report data filed with the FDIC for the fiscal quarter
ended March 31, 1999, and the fiscal years ended December 31, 1998, 1997, 1996,
1995 and 1994; reviewed the audited financial statements for ASBI for the fiscal
years ended September 30, 1998, 1997, 1996 and 1995; (ii) reviewed the internal
financial statements for the Bank for the five months ended May 31, 1999; (iii)
participated in due diligence reviews of ASBI along with other specialists and
experts on the Special Committee's due diligence team; (iv) discussed the
financial condition, results of operations, earnings projections, business and
prospects of ASBI with the management of ASBI; (v) reviewed the Company's Annual
Report to Stockholders for the fiscal years ended June 27, 1997 and June 26,
1998, and the Company's Annual Report on Form 10-K filed with the SEC for the
fiscal years ended June 27, 1997 and June 26, 1998; reviewed the Company's
Annual Proxy Statement dated September 24, 1998; reviewed the Company's
Quarterly Report on Form 10-Q filed with the SEC for the quarter ended March 31,
1999; (vi) reviewed and discussed the Company's strategy and business plan
relating to the Company and the Merger; (vii) reviewed the reported market
prices and trading activity for the Common Stock for the period January 1, 1998,
through August 10, 1999; (vii) discussed the financial condition, results of
operations, earnings projections, business and prospects of the Company with the
management of the Company; (ix) compared the results of operations and financial
condition of the Bank with those of certain federal savings and loans (or their
holding companies) that FBR deemed to be reasonably comparable to the Bank, as
the case may be; (x) reviewed the financial terms, to the extent publicly
available, of certain acquisition transactions that FBR deemed to be reasonably
comparable to the Merger; (xi) reviewed the potential pro forma impact of the
Merger to the stockholders of the Company; (xii) reviewed a copy of the
Acquisition Agreement; and (xiii) performed such other financial analyses and
reviewed and analyzed such other information as FBR deemed appropriate,
including an assessment of general economic, market and monetary conditions.
In rendering the FBR Opinion, FBR did not assume responsibility for
independently verifying, and did not independently verify, any financial or
other information concerning the Company and ASBI furnished to it by the Company
or ASBI, or the publicly-available financial and other information regarding the
Company, ASBI and other financial services organizations (or their holding
companies). FBR has assumed that all such information is accurate and complete
and has no reason to believe otherwise.
FBR has further relied on the assurances of management of the Company and ASBI
that they are not aware of any facts that would make such financial or other
information relating to such entities inaccurate or misleading. With respect to
financial forecasts for the Company provided to FBR by its management, FBR has
assumed, for purposes of the FBR
23
<PAGE>
Opinion, that the forecasts have been reasonably prepared on bases reflecting
the best available estimates and judgments of such management at the time of
preparation as to the future financial performance of the Company and ASBI. As a
matter of policy, the Company does not publicly disclose internal management
forecasts, projections or estimates of the type furnished to FBR in connection
with its analysis of the Merger and such forecasts, projections and estimates
were not prepared with a view towards public disclosure. These forecasts,
projections and estimates were based on numerous variables and assumptions which
are inherently uncertain and which may not be within the control of management
including, without limitation, general economic, regulatory and competitive
conditions. Accordingly, actual results could vary materially from those set
forth in such forecasts, projection and estimates.
FBR has assumed that there has been no undisclosed material change in ASBI's
assets, financial condition, result of operations, business or prospects since
May 31, 1999. FBR did not undertake an independent appraisal of the assets or
liabilities of ASBI nor was FBR furnished with any such appraisals. FBR is not
an expert in the evaluation of allowances for loan losses, was not requested to
and did not independently review such allowances, and was not requested to and
did not independently review any individual credit files of ASBI. FBR is not an
expert in the evaluation of environmental liabilities and did not independently
examine potential liabilities of two properties associated with ASBI where
environmental problems are known to exist. As set forth in the Acquisition
Agreement, ASBI will use best efforts to eliminate any potential environmental-
related liability to the Company. If such potential liability is not
eliminated, the Acquisition Agreement provides that a portion of the
consideration will be allocated to an escrow (the "Environmental Escrow")
established to diminish the impact, in whole or in part, of any future liability
to the Company. See "The Agreement and Plan of Reorganization -- Environmental
Escrow." FBR expresses no opinion as to the adequacy of such potential
Environmental Escrow. FBR's conclusions and opinion are necessarily based upon
economic, market and other conditions and the information made available to FBR
as of the date of the FBR Opinion. FBR expresses no opinion on matters of a
legal, regulatory, tax or accounting nature related to the Merger.
The Special Committee imposed no limitations on FBR with respect to the
investigation made or procedures followed by FBR in rendering the FBR Opinion.
In connection with rendering such Fairness Opinion to the Special Committee, FBR
performed a variety of financial analyses. The following is a summary of the
material financial analyses performed by FBR, but does not purport to be a
complete description of FBR's analyses or presentation at the August 4, 1999,
and August 10, 1999, meeting of the Special Committee and the meeting of the
Company's Board on August 5, 1999. See "Background of the Transaction." FBR
believes that its analyses must be considered as a whole and that selecting
portions of such analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses of the processes underlying the FBR Opinion. The preparation of a
fairness opinion is a complex process involving subjective judgments and is not
necessarily susceptible to partial analyses or summary description. In its
analyses, FBR made numerous assumptions with respect to industry performance,
business and economic conditions and various other matters, many of which are
beyond the control of the Company and ASBI. Any estimates contained in FBR's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. Estimates of values
of companies do not purport to be appraisals or necessarily reflect the prices
at which the companies or their securities may actually be sold.
Summary of Proposed Transaction FBR reviewed the terms of the proposed
-------------------------------
Merger, including the Exchange Ratio. Based on the Acquisition Agreement, the
consideration to be received by ASBI stockholders will be the right to receive
shares of the Company's Common Stock in the amount equal to the quotient of (i)
2,600,000 shares of the Common Stock divided by (ii) the number of shares of
ASBI common stock outstanding immediately prior to the Effective Time in
exchange for each share of ASBI. See "The Agreement and Plan of Reorganization."
Based on the closing share price of the Common Stock as of August 10, 1999, the
Exchange Ratio represented a multiple of (i) 12.63x ASBI's earnings per share
for the twelve months ended March 31, 1999, (ii) 356.29% of ASBI's book value at
March 31, 1999, (iii) 357.38% of ASBI's tangible book value at March 31, 1999,
and (iv) a 26.47% tangible book premium on deposits.
24
<PAGE>
Comparable Public Company Analysis In preparing its presentation, FBR
----------------------------------
used publicly available information to compare selected financial and market
trading information, including book value, tangible book value and earnings for
nationwide publicly traded banks ("Nationwide Banks"); nationwide publicly
traded thrifts ("Nationwide Thrifts"); publicly traded thrifts in the regional
market area including Texas, Louisiana, Arkansas, Oklahoma and New Mexico
("Regional Thrifts"); publicly traded thrifts with total assets between $200
million and $400 million at June 30, 1999 ("Comparable Asset Thrifts"); publicly
traded thrifts whose return on average equity for the latest twelve months
exceeded 15% ("High Performing Thrifts" and collectively the "Comparable Trading
Groups"). In conjunction with its analysis, FBR reviewed valuation multiples
based on price to book value, price to tangible book value, and price to latest
twelve months earnings. FBR computed the foregoing ratios for the Merger based
on the Exchange Ratio and a price of $32.75 per share of the Common Stock (the
closing price of the Common Stock on August 10, 1999) at the time of the
execution of the Acquisition Agreement, indicating an aggregate acquisition
value for ASBI of $85.1 million. The following aggregate valuations for ASBI
were arrived at by applying the actual financial results of ASBI at or for the
period ending March 31, 1999, to (a) the median multiples for the Comparable
Trading Groups and (b) a control premium of 30%. FBR's computations yielded the
following aggregate valuation range for ASBI at August 10, 1999, for the
Nationwide Banks, the Nationwide Thrifts, the Regional Thrifts, the Comparable
Asset Thrifts and the High Performing Thrifts of $31 million to $138 million, as
compared with the actual aggregate valuation indicated by the Exchange Ratio on
August 10, 1999.
Comparable Transaction Analysis In preparing its presentation, FBR used
-------------------------------
publicly available information to compare selected transactional information
including multiples of book value, tangible book value, earnings and the premium
on deposits over tangible book value for all acquisitions of banks from January
1, 1998, to August 10, 1999 ("Nationwide Bank Transactions"); all acquisitions
of thrifts from January 1, 1998, to August 10, 1999 ("Nationwide Thrift
Transactions"); all acquisitions of thrifts in the regional market area
including Texas, Louisiana, Arkansas, Oklahoma, and New Mexico ("Regional Thrift
Transactions"); all acquisitions of thrifts with total assets between $200
million and $400 million at announcement ("Comparable Asset Thrift
Transactions"); all acquisitions of thrifts whose return on average equity for
the latest twelve months prior to announcement exceeded 15% ("High Performing
Thrift Transactions" and collectively the "Comparable Transaction Groups"). In
conjunction with its analysis, FBR compared the median multiples of price to
book value, price to tangible book value, price to latest twelve months earnings
and the premium on deposits over tangible book value for the Comparable
Transaction Groups to the multiples based on the Exchange Ratio and a price of
$32.75 per share of the Common Stock (the closing price of the Common Stock on
August 10, 1999) at the time of the execution of the Acquisition Agreement.
<TABLE>
<CAPTION>
Comparable High
Nationwide Nationwide Regional Asset Performing
Bank Thrift Thrift Thrift Thrift
The Merger Transactions Transactions Transactions Transactions Transactions
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Price/Book Value 356% 251% 173% 122% 145% 350%
Price/Tangible
Book Value 357% 263% 173% 122% 156% 365%
Price/Earnings
(latest 12 months) 12.63x 21.1x 23.7x 19.4x 23.4x 24.1x
Tangible Book
Premium/Core Deposits 26% 19% 11% 6% 11% 35%
</TABLE>
25
<PAGE>
Discounted Earnings Stream Analysis Using a discounted earnings stream
-----------------------------------
analysis, FBR estimated the present value of ASBI's net income from which
dividends could be paid through the year 2003 on a stand-alone basis. FBR's
assumptions in the discounted earnings stream analysis were as follows:
Annual earnings growth rate 10-15%
Annual dividend payout ratio 75%
Terminal multiples 15-20x earnings
Discount rates 15% and 18%
The discounted earnings stream analysis indicated an aggregate valuation range
between $99.2 million and $140.6 million. As indicated above, this analysis is
not necessarily indicative of actual values or actual future results and does
not purport to reflect the prices at which any securities may trade at the
present or at any time in the future. Discounted earnings stream analysis is a
widely used valuation methodology, but the results of such methodology are
highly dependent upon the numerous assumptions that must be made, including
earnings growth rates, dividend payout rates, terminal values and discount
rates.
Contribution Analysis FBR reviewed the relative contributions of the
---------------------
Company and ASBI to the combined company based on financial data as of March 31,
1999:
Company ASBI
-------- ------
Pro-forma Ownership Interests 81.91% 18.09%
Latest Twelve-Month Earnings 77.84% 22.16%
Quarterly Annualized Earnings 79.59% 20.41%
Book Value 89.50% 10.50%
Tangible Book Value 89.18% 10.82%
Pro Forma Merger Analysis FBR analyzed the pro forma financial impact of
-------------------------
the Merger on the earnings per share ("EPS") of the Company during the calendar
years 1999 and 2000, the book value of the Company, and the tangible book value
of the Company. Based upon estimates of ASBI's earnings, publicly available
analysts' earnings estimates for the Company and with no assumed cost savings or
revenue enhancements, the analysis indicated that the proposed Merger would, at
the Exchange Ratio, be accretive to the Company's EPS by approximately 1.23% in
1999 and 0.73% in 2000. The analysis indicated that the Merger would result in
book value and tangible book value dilution of 8.48% and 8.15%, respectively. In
this analysis, FBR assumed that the Company would perform substantially in
accordance with earnings forecasts available in the public domain and ASBI would
perform at substantially similar results as those achieved in 1998. The actual
results achieved by the pro forma company may vary from projected results and
the variations may be material. FBR does believe that the pro forma company
could achieve cost savings and revenue enhancements, however, FBR did not factor
this into its analysis.
Pursuant to the FBR Agreement, the Special Committee retained FBR to act as its
independent financial advisor in connection with the Merger. FBR is entitled to
a fee of $500,000 for the Engagement. The Company has also agreed to reimburse
FBR for its reasonable out-of-pocket expenses in connection with its engagement
up to $25,000 and to indemnify FBR and its affiliates and their respective
partners, directors, officers, employees, agents, and controlling persons
against certain expenses and liabilities including liabilities under applicable
securities laws.
26
<PAGE>
FBR has advised the Special Committee and the Company that, in the ordinary
course of its business as a full-service securities firm, FBR may, subject to
certain restrictions, actively trade the securities of the Company for its own
account or for the accounts of its customers, and accordingly, may at any time
hold a long or short position in such securities.
Accounting Treatment
The proposed Acquisition is intended to qualify under the pooling-of-interests
method of accounting for business combinations. Under this method of
accounting, the assets and liabilities of the Company and ASBI will be carried
forward after the effective date of the Merger into the consolidated financial
statements of the Company at their recorded amounts; the consolidated income of
the Company will include income of the Company and ASBI for the entire fiscal
year in which the Merger occurs; the separately reported income of the Company
and ASBI for prior periods will be combined and restated as consolidated income
of the Company; and no goodwill will be created.
It is a condition to the obligation of the parties to the Acquisition Agreement
to complete the Merger that the Company's independent public accountants deliver
an opinion that the Merger qualifies for pooling-of-interests accounting
treatment.
Certain Federal Income Tax Consequences
The Share Issuance will have no federal income tax consequences to either the
Company or stockholders of the Company.
It is a condition to the obligation of the parties to the Acquisition Agreement
to complete the Merger that the Company's independent public accountants deliver
an opinion that the Merger qualifies as a tax-free reorganization.
Transfer Restrictions
The Share Issuance will not be registered under Federal or state securities
laws, and the certificates representing the shares will bear a legend to such
effect. Under such laws, the Shares may not be offered, sold or transferred
except (i) pursuant to an exemption from registration under the Securities Act
and such other applicable laws or (ii) pursuant to an effective registration
statement under the Securities Act. The stockholders of ASBI who receive the
Shares in connection with the Acquisition will have certain rights to require
the Company to register the Shares in the future in accordance with the
Registration Rights Agreement. See "The Registration Rights Agreement."
The Registration Rights Agreement
In connection with the Acquisition of ASBI, the Company and all stockholders of
ASBI will enter into a Registration Rights Agreement. Pursuant to the
Registration Rights Agreement, ASBI stockholders are entitled to certain
piggyback registration rights (the "Piggyback Rights") with respect to the
Shares. These Piggyback Rights are discussed in the following paragraphs. The
Registration Rights Agreement will terminate five years after the Effective Time
of the Merger.
Prior to termination of the Registration Rights Agreement, each time the Company
proposes to register any shares of its Common Stock under the Securities Act on
its own behalf or on behalf of any other security holder, the Company will give
prompt written notice to all holders of the Shares of the Company's intention to
effect such a registration and will offer each holder of Shares the right to
request inclusion of his or her Shares in the proposed registration. Holders of
the Shares will have 20 days from their receipt of written notice to send their
written request for inclusion in the registration to the Company.
27
<PAGE>
However, the Piggyback Rights will not apply to any proposed registration
relating to stock options, employee benefit plans, or a transaction to which
Rule 145 of the Securities Act or similar rule is applicable. In addition, in
the event of an underwritten offering, the Company may limit the number of
Shares to be registered upon the recommendation of the managing underwriter that
including all or a part of the Shares would have a material adverse effect on
the offering price of the securities. If the number of Shares included in a
proposed offering is limited based on the recommendation of the managing
underwriter, the number of shares of Common Stock to be included in the
registration and underwriting will be allocated first to the Company for shares
it intends to sell for its own account and then to holders of the Shares and
other security holders of the Company with equivalent rights.
In the event the Shares are included in an underwritten offering, each holder of
Shares who participates in the registration and underwriting will be a party and
subject to the underwriting agreement between the Company and its underwriters.
Such provisions may include a prohibition on sales for a period of ninety days
following the effective date of a registration statement.
Market Prices and Dividends
Information regarding market prices and dividends on the Common Stock is
provided in the Annual Report to Stockholders accompanying this Proxy Statement.
There is no established trading market for shares of ASBI common stock. ASBI
has advised the Company that there have been no reported transactions involving
shares of the common stock of ASBI during the past two years. Effective January
1, 1997, ASBI elected to be taxed pursuant to Subchapter S of the Code. As a
consequence, ASBI has historically paid out approximately 50% to 60% of its
earnings to its stockholders in cash dividends to cover estimated personal tax
liabilities of its stockholders resulting from the Subchapter S election.
Declaration of any dividends by ASBI following consummation of the Merger will
be based upon factors such as capital requirements, financial conditions,
operating results and tax considerations.
Management's Discussion and Analysis of the Financial Condition and
Results of Operations of ASBI and Subsidiaries
The following discussion provides certain information regarding the financial
condition and results of operations of ASBI and its subsidiaries (collectively
referred to as "ASBI"). This discussion should be read in conjunction with
ASBI's Consolidated Financial Statements and Notes to Financial Statements
presented elsewhere in this Proxy Statement. See "Index to ASBI's Consolidated
Financial Statements."
ASBI is a unitary savings and loan holding company that derives substantially
all of its revenues and income from the operation of the Bank. ASBI was formed
January 31, 1995 when the owners of the common stock of Arlington Savings
Bancshares, Inc. contributed their shares of stock to ASBI in return for an
equivalent ownership interest in ASBI. Arlington Savings Bancshares, Inc. was
subsequently merged with and into Arlington Savings Bancshares of Delaware,
Inc., a wholly-owned subsidiary of ASBI also formed on January 31, 1995. ASBI,
through its Delaware subsidiary, owns 100% of the Bank. The Bank began
operations in 1986.
ASBI converted from a Subchapter C corporation to a Subchapter S corporation
effective as of January 1, 1997. The remaining deferred tax liability at June
30, 1999 and 1998, of approximately $551,000 is related to ASBI's future taxable
income due primarily to the recapture (for tax purposes) of the reserve for loan
loss and certain built in gains primarily associated with purchased loan pools,
which may be taxable at the corporate level in future years.
28
<PAGE>
Results of Operations
---------------------
General The earnings of ASBI depend primarily on ASBI's net interest
income (i.e. the difference between the income earned of ASBI's loans and
investments and the interest paid on its deposits and other borrowed funds).
Among the factors affecting net interest income are the type, volume and quality
of its loans, deposits and other borrowed funds and the relative sensitivity of
its interest-earning assets and interest-bearing liabilities to changes in
market interest rates.
ASBI's income is also affected by fees it receives from other banking services,
by gains and losses on its loans held for sale and its investments, by its
provisions for loan losses and by the level of its operating expenses. All
aspects of ASBI's operations are affected by general market, economic and
competitive conditions.
ASBI reported net income (unaudited) of approximately $8,563,000 for the nine
months ended June 30, 1999, a 12.3% increase from net income (unaudited) of
approximately $7,623,000 for the nine months ended June 30, 1998. ASBI had net
income of approximately $10,393,000 for the year ended September 30, 1998,
$6,308,000 for the year ended September 30, 1997, and $4,772,000 for the year
ended September 30, 1996. Changes occurring in the major components of ASBI's
consolidated income statement for such periods are discussed below.
Net Interest Income Net interest income is the primary source of
income for ASBI and represents the amount by which interest and fees generated
by earning assets exceed the cost of funds, primarily interest paid to ASBI's
depositors on interest-bearing accounts. Net interest income was approximately
$12,767,000 for the nine months ended June 30, 1999, a 2.1% increase over net
interest income of $12,499,000 for the nine months ended June 30, 1998. Average
rates paid on interest-bearing funds decreased from 5.9% as of June 30, 1998, to
5.6% as of June 30, 1999. Average net loans held for investment of $183 million
for the nine months ended June 30, 1999, increased 1.7% over average loans of
$180 million for the similar 1998 period. Average interest-bearing deposits
(including borrowings from the Federal Home Loan Bank) for the nine months ended
June 30, 1999, were $236 million, an increase of 7.8% over average deposits of
$219 million for the similar 1998 period.
For the year ended September 30, 1998, net interest income increased
approximately $4,184,000 or 32% over the year ended September 30, 1997. Net
interest income increased approximately $1,522,000 or 13% in 1997 over 1996 net
interest income of approximately $11,546,000. Such increases are generally
attributable to the timing of loan payoffs and volume. Additionally, ASBI
incurred a charge-off of one loan in the approximate amount of $1,139,000 during
1998.
The following table sets forth for the periods indicated an analysis of net
interest income by each major category of interest-earning assets and interest-
bearing liabilities. The rates earned and paid on each major type of asset and
liability account are set forth beside the average level in the account for the
period, and the average yields on all interest-earning assets and the average
rate paid on interest-bearing liabilities are also summarized.
29
<PAGE>
ASBI HOLDINGS, INC.
Average Balances, Interest and Average Yields
(Dollars in Thousands)
Nine Months Ended June 30,
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- -------------------------------------
Interest Interest
Income/ Income/
Average Expense Yield/ Average Expense Yield/
Balance (Annualized) Rate Balance (Annualized) Rate
------- ------------ ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans held for sale $ 61,217 $ 7,711 12.60% $ 48,344 $ 6,168 12.76%
Loans held for investment, net 183,472 21,591 11.77 179,783 22,781 12.67
Federal Home Loan Bank stock 1,126 61 5.42 1,729 104 6.02
------------ ----------- ---------- -------------
Total interest-earning assets/interest
income/average yield 245,815 29,363 11.95 229,856 29,053 12.64
Noninterest-earning assets:
Cash and due from banks 19,413 15,145
Other assets 7,379 3,587
------------ ----------
Total $ 272,607 $ 248,588
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW, money market and savings $ 11,882 458 3.85% $ 7,308 291 3.98%
Certificates of deposit 214,633 12,095 5.64 193,341 11,500 5.95
Advances from Federal Home Loan Bank 9,308 533 5.73 17,867 1,075 6.02
------------ ----------- ---------- -------------
Total interest-bearing
liabilities/interest
expense/rate 235,823 13,086 5.55 218,516 12,866 5.89
Noninterest-bearing demand deposits 10,684 8,495
Other liabilities 2,695 2,677
------------ ----------
Total liabilities 249,202 229,688
Stockholders' equity 23,405 18,900
------------ ----------- ---------- -------------
Total $ 272,607 $ 248,588
============ ==========
Net interest income $ 16,277 $ 16,187
=========== =============
Net yield on interest-earning assets
(annualized) 6.62% 7.04%
====== =====
</TABLE>
30
<PAGE>
ASBI HOLDINGS, INC.
Average Balances, Interest and Average Yields
(Dollars in Thousands)
Fiscal Year Ended September 30,
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ---------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans held for sale $ 51,775 $ 7,102 13.72% $ 14,147 $ 1,857 13.13% $ 15,790 $ 1,674 10.60%
Loans held for investment, net 180,682 22,517 12.46 153,304 19,856 12.95 123,867 17,134 13.83
Federal Home Loan Bank 1,565 94 6.01 1,970 117 5.94 1,705 103 6.04
-------- -------- -------- -------- -------- --------
Total interest-earning
assets/interest
income/average yield 234,022 29,713 12.70 169,421 21,830 12.89 141,362 18,911 13.38
Noninterest-earning assets:
Cash and due from banks 15,315 12,182 8,556
Other assets 4,108 1,478 3,180
-------- -------- --------
Total $253,445 $183,081 $153,098
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW, money market and savings $ 8,015 323 4.03% $ 4,871 174 3.57% $ 4,431 156 3.52%
Certificates of deposit 198,275 11,794 5.95 126,684 7,445 5.88 99,122 5,922 5.97
Advances from Federal Home
Loan Bank 16,141 973 6.03 26,325 1,551 5.89 28,875 1,718 5.95
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities/interest
expense/rate 222,431 13,090 5.88 157,880 9,170 5.81 132,428 7,796 5.89
Noninterest-bearing demand deposits 8,951 6,990 5,614
Other liabilities 2,592 2,363 1,824
-------- -------- --------
Total liabilities 233,974 167,233 139,866
Stockholders' equity 19,471 15,848 13,232
-------- -------- --------
Total $253,445 $183,081 $153,098
======== -------- ======== -------- ======== --------
Net interest income $ 16,623 $ 12,660 $ 11,115
======== ======== ========
Net yield on interest-earning assets 7.10% 7.47% 7.86%
===== ===== =====
</TABLE>
Changes in interest income and expense can result from variances in both volume
and rate. ASBI has an asset and liability management strategy designed to
provide a proper balance between rate-sensitive assets and liabilities, to
attempt to maximize interest margins and to provide adequate liquidity for
anticipated needs.
31
<PAGE>
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rate (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Year Ended
June 30, 1999 (annualized) September 30, 1998 September 30, 1997
-------------------------- ------------------------ ---------------------
Change Change Change
1999 1998 1997
to Attributed to to Attributed to to Attributed to
-------------------------- ------------------------ ---------------------
1998 Volume Rate Mix 1997 Volume Rate Mix 1996 Volume Rate Mix
---- ------ ---- --- ---- ------ ---- --- ---- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans held for sale $ 1,543 $1,622 $ (98) $19 $5,245 $5,163 $ 305 $(223) $ 183 $ (216) $ 358 $ 41
Loans held for
investment, net (1,190) 434 (1,651) 27 2,661 3,411 (885) 135 2,722 3,812 (1,349) 259
Federal Home Loan
Bank stock (43) (33) (7) (3) (23) (24) 1 -- 14 16 (2) --
------- ------ ------- --- ------ ------ ----- ----- ------ ------ ------- ----
Increase (decrease)
in interest income $ 310 $2,023 $(1,756) $43 $7,883 $8,550 $(579) $ (88) $2,919 3,612 $ (993) $300
======= ====== ======= === ====== ====== ===== ===== ====== ====== ======= ====
Interest expense:
Savings and transaction
accounts $ 167 $ 176 $ (15) $ 6 $ 149 $ 127 $ 37 $ (15) $ 18 $ 16 $ 2 $ --
Time deposits 595 1,201 (665) 59 4,349 4,260 139 (50) 1,523 1,621 (114) 16
Advances from Federal
Home Loan Bank stock (542) (490) (27) (25) (578) (614) 23 13 (167) (150) (15) (2)
------- ------ ------- --- ------ ------ ----- ----- ------ ------ ------- ----
Increase (decrease)
in interest expense $ 220 $ 887 $ (707) $40 $3,920 $3,773 $ 199 $ (52) $1,374 $1,487 $ (127) $ 14
======= ====== ======= === ====== ====== ===== ===== ====== ====== ====== ====
</TABLE>
Provision for Loan Losses ASBI's allowance for loan losses is
established through charges to operating income in the form of the
provision for loan losses. Actual loan losses or recoveries of loan losses
are charged or credited directly to the allowance for loan losses.
ASBI's (credit) provision for loan losses was ($184,000) for the
nine months ended June 30, 1999, as compared with $1,460,000 for the same
period in 1998. This decrease of $1,644,000 was primarily due to improved
loan quality and a 1998 charge-off of approximately $1,139,000 related to
one loan. Management determines the amount of the provision for loan losses
after considering various factors, including current and historic levels of
net loan losses, changes in the size and character of the loan portfolio,
the existing level of the allowance, and economic conditions. The allowance
for loan losses expressed as a percentage of outstanding loans held for
investment net of unearned interest was 1.72% and 2.18% as of June 30, 1999
and 1998, respectively.
ASBI's provision for loan losses was $2,140,000 for the year ended
September 30, 1998, which was $1,116,000 more than the provision of
$1,024,000 for the same period in 1997. ASBI's provision for loan losses
was $513,000 for the year ended September 30, 1996. The increase in
provision for loan losses from 1996 to 1998 was primarily the result of
increased loan volume and the large charge-off in 1998 noted above. The
allowance for possible loan losses expressed as a percentage of outstanding
loans net of unearned interest was 1.95%, 1.52% and 1.52% as of September
30, 1998, 1997 and 1996, respectively.
Noninterest Income Noninterest income, which includes, among
other items, service charges and fees, factoring fees and gains on sales of
loans increased 50.5% from $1,765,000 for the nine months ended June 30,
1998, to $2,656,000 for the nine months ended June 30, 1999. During this
period, gains on sales of loans and other assets increased $1,044,000 from
the nine months end June 30, 1998, total of $1,028,000 to the nine months
end June 30, 1999, total of $2,072,000.
32
<PAGE>
Noninterest income amounted to $3,017,000, $1,941,000 and $1,338,000 for the
years ended September 30, 1998, 1997 and 1996, respectively. These increases
are primarily attributable to increases in factoring fees and gains on sale of
loans and other assets.
Noninterest Expense Noninterest expense includes expenses which ASBI
incurs in the course of day-to-day operations such as employee compensation and
benefits, occupancy expense, data processing charges, communication expense,
professional fees, advertising, supplies and depreciation and amortization of
furniture and equipment. These expenses increased 12.8% from $5,905,000 for the
nine months ended June 30, 1998, to $6,662,000 for the nine months ended June
30, 1999. Net noninterest expense as a percentage of average assets for the
nine months ended June 30, 1999, was 3.36% annualized. For the same period of
1998, this ratio was 3.48%. The increase of $757,000 in net expenses was
primarily due to increases in personnel and occupancy costs.
Noninterest expense for the year 1998 increased $1,728,000 or 29.7% to
$7,555,000 from $5,827,000 for the year 1997. This increase was primarily a
result of increased personnel and occupancy costs.
Capital Resources, Liquidity and Financial Condition
----------------------------------------------------
Capital Resources The FDIC, the OTS and other federal agencies have
adopted risk-based and leverage capital measures to assist in the assessment of
the capital adequacy of the banks they regulate. The principal objectives of the
risk-based measures are to: (i) make regulatory capital requirements more
sensitive to differences in risk profiles among financial institutions; (ii)
factor off-balance sheet exposures into the assessment of capital adequacy;
(iii) minimize disincentives to holding liquid, low-risk assets; and (iv)
achieve greater consistency in the evaluation of the capital adequacy of
financial institutions.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and off-
balance sheet items to broad risk categories. The financial institution's risk-
based capital ratio is calculated by dividing its qualifying capital (the
numerator of the ratio) by its risk-weighted assets (the denominator).
The risk-based capital ratio focuses principally on broad categories of credit
risk. The risk-based ratio does not, however, incorporate other factors that
can affect a bank's financial condition. These factors include overall interest
rate exposure, liquidity, funding and market risks, the quality and level of
earnings, investment or loan portfolio concentrations, the quality of loans and
investments, the effectiveness of loan and investment policies, and management's
ability to monitor and control financial and operating risks.
The Bank is a federally-chartered savings bank and as such its qualifying total
capital consists of two types of capital components: "core capital elements"
(comprising Tier 1 capital) and "supplementary capital elements" (comprising
Tier 2 capital). Certain assets are deducted from a financial institution's
capital for the purpose of calculating the risk-based capital ratio.
Assets and credit equivalent amounts of off-balance sheet items are assigned to
one of four risk categories, according to certain criteria. The aggregate
dollar value of the amount in each category is then multiplied by the risk
weight associated with that category. The resulting weighted values from each
of the risk categories are added together, and this sum is the financial
institution's total risk-weighted assets that comprise the denominator of the
risk-based capital ratio. Assets deducted from a bank's capital in determining
the numerator of the risk-based capital ratio are not included as part of the
financial institution's risk-weighted assets.
Risk weights for off-balance sheet items are determined by a two-step process.
First, the "credit equivalent amount" of off-balance sheet items is determined,
in most cases, by multiplying the off-balance sheet items by a credit
conversion
33
<PAGE>
factor. Second, in most cases, the credit equivalent amount is assigned to the
appropriate risk category according to designated criteria.
The FDIC and OTS regulated financial institutions are required to maintain a
minimum risk-based capital ratio of total capital (after deductions) to risk-
weighted assets of 8%. In general 50% of this ratio must consist of Tier 1
capital. Certain restrictions and limitations also apply regarding all
calculation of Tier 1 capital. Tier 2 capital elements that are not used as part
of Tier 1 capital generally will qualify for inclusion in a financial
institution's capital base up to a maximum of 100% of the financial
institution's Tier 1 capital. As of September 30, 1998, the Bank's Tier 1 risk-
based capital ratio was 10.2% and the total risk-based capital ratio was 10.6%.
In addition, the FDIC, the OTS and other federal agencies have promulgated
capital leverage guidelines designed to supplement the risk-based capital
guidelines. The principal objective of the leverage ratio is to address the
extent to which a financial institution could leverage its equity capital base.
The FDIC requires its regulated federal savings banks to meet a minimum leverage
capital requirement of Tier 1 capital to total assets of not less than 3% for a
bank that is not anticipating or experiencing significant growth and is highly
rated (i.e., a composite rating of 1 on a scale of 1 to 5). Banks that the FDIC
determines are anticipating or experiencing significant growth or that are not
highly rated must meet a minimum leverage ratio of 3% plus an additional cushion
of at least 100 to 200 basis points. The OTS's capital guidelines call for a
minimum equity capital to total asset ratio of 6%.
ASBI's leverage ratio was 8.4% and 8.3% as of September 30, 1998 and 1997,
respectively.
Liquidity ASBI's assets and liability management policy is intended
to maintain adequate liquidity and thereby enhance its ability to raise funds to
support asset growth, meet deposit withdrawals and lending needs, maintain
reserve requirements, and otherwise sustain operations. ASBI accomplishes this
through management of the repricing of its interest-earning assets and
maturities of its interest-bearing liabilities. Liquidity is monitored daily and
overall interest rate risk is assisted through reports showing both sensitivity
ratios a simulation model and existing dollar "gap" data. ASBI believes its
present position to be adequate to meet its current and future liquidity needs.
The liquidity of ASBI is maintained in the form of readily marketable loans,
balances with the Federal Home Loan Bank, vault cash and federal funds sold and
advances from the Federal Home Loan Bank. While the minimum liquidity
requirement for banks is determined by federal bank regulatory agencies as a
percentage of deposit liabilities, ASBI's management monitors liquidity
requirements as warranted by interest rate trends, changes in the economy and
the scheduled maturing and interest rate sensitivity of the investment and loan
portfolios and deposits. In addition to the liquidity provided by the
foregoing, ASBI has available a significant borrowing capacity with the Federal
Home Loan Bank for the purpose of purchasing overnight funds should additional
liquidity be needed.
Average noninterest-bearing demand deposits were $10,684,000 for the nine months
ended June 30, 1999, an increase of $2,189,000 over the average balance for the
nine months ended June 30, 1998. Average interest-bearing deposits for the nine
months ended June 30 were $226,515,000 in 1999 and $200,649,000 in 1998.
Average noninterest-bearing demand deposits were $8,951,000, $6,990,000 and
$5,614,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
Average interest-bearing deposits for such years ended were $206,290,000,
$131,555,000 and $103,553,000, respectively.
Net cash (used) generated by operating activities was ($49,635,000), $9,867,000
and ($159,000) for the years ended September 30, 1998, 1997 and 1996,
respectively. Proceeds from sales of loans held for sale were $17,687,000,
$11,792,000 and $16,624,000 in the same periods. ASBI utilized these funds to
originate loans and purchase loans held for sale and loans held for investment.
Loans originated, net of principal collected, were $10,442,000, $42,013,000 and
$31,242,000 in 1998, 1997 and 1996, respectively. ASBI purchased loans held for
sale of $76,789,000, $9,082,000 and $20,796,000 in 1998, 1997 and 1996,
respectively.
34
<PAGE>
ASBI's deposit customer base consists primarily of individuals and businesses
within its market areas. On June 30, 1999, noninterest-bearing deposits were
$11,232,000, deposits in savings and transaction-related accounts were
$14,025,000 and time deposits were $208,871,000.
Interest Rate Sensitivity Interest rate sensitivity refers to the
relationship between market interest rates and net interest income resulting
from the repricing of certain assets and liabilities. Interest rate risk arises
when an earning asset matures or when its rate of interest changes in a time
frame different from that of the supporting interest-bearing liability. One way
to reduce the risk of significant adverse effects on net interest income of
market rate fluctuations is to minimize the difference between rate-sensitive
assets and liabilities, referred to as "gap," by maintaining an interest rate
sensitivity position within a particular time frame.
Maintaining an equilibrium between rate-sensitive assets and liabilities will
reduce some of the risk associated with adverse changes in market rates, but it
will not guarantee a stable net interest spread because yields and rates may
change simultaneously and by different amounts. These changes in market spreads
could materially affect the overall net interest spread even if assets and
liabilities were perfectly matched. If more assets than liabilities reprice
within a given period, an asset sensitive position or "positive gap" is created.
During a positive gap, a decline in market rates will have a negative impact on
net interest income. Alternatively, where more liabilities than assets reprice
in a given period, a liability sensitive position or "negative gap" is created
(rate sensitivity ratio is less than 100%) and a decline in interest rates will
have a positive impact on net interest income.
The following table shows interest sensitivity gaps for these different
intervals as of June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
One Day Over Over Six
To Three Three To Months To Over
Floating Months Six Months One Year One Year Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets ("ISA")
Loans - Gross:
Commercial and real estate $ 163,665 $ 9,506 $ 7,349 $ 12,842 $ 47,633 $ 240,995
Installment -- 850 778 1,372 6,078 9,078
Federal Home Loan Bank stock -- -- -- -- 1,195 1,195
---------- --------- --------- -------- ---------- ----------
Total ISA 163,665 10,356 8,127 14,214 54,906 251,268
Interest Sensitive Liabilities ("ISL")
Interest bearing deposits:
Savings accounts -- 17 17 34 336 404
Money market checking -- 2,457 2,457 4,914 2,613 12,441
Certificates of deposit -- 28,211 39,967 88,656 52,036 208,870
---------- --------- --------- -------- ---------- ----------
Total deposits -- 30,685 42,441 93,604 54,985 221,715
Other borrowed funds 4,243 -- -- -- -- 4,243
---------- --------- --------- -------- ---------- ----------
Total ISL 4,243 30,685 42,441 93,604 54,985 225,958
---------- --------- --------- -------- ---------- ----------
Periodic Gap $ 159,422 $( 20,329 ) $( 34,314 ) $(79,390 ) $( 79 ) $ 25,310
========== ========= ========= ======== ========== ==========
Cumulative Gap $ 159,422 $ 139,093 $ 104,779 $ 25,389 $ 25,310
========== ========= ========= ======== ==========
Periodic Gap to Total Earning Assets 63.45% ( 8.09%) ( 13.66%) ( 31.60%) ( .03%)
========== ========= ========= ======== ==========
</TABLE>
35
<PAGE>
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity analysis. These prepayments may have significant effects on ASBI's
net interest margin. Because of these factors, an interest sensitivity gap
report may not provide a complete assessment of ASBI's exposure to changes in
interest rates.
Loans Held for Sale Loans held for sale are valued at the lower of cost or
market as determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate note basis. Discounts
are amortized using a method approximating the interest method over the
remaining period to contractual maturity. Loans held for sale consisted of
first mortgage loans and home improvement loans which had been purchased but had
not yet been sold in the secondary market. Gains and losses on the sale of
loans held for sale are determined using the specific identification method. At
June 30, 1999 and 1998, and September 30, 1998, 1997 and 1996, the cost of loans
held for sale approximated market.
Investment Securities ASBI does not actively purchase or sell investment
securities. The only investment at June 30, 1999, is concentrated in Federal
Home Loan Bank stock with a recorded cost of $1,195,000.
Deposits The daily average balances and average rates paid by category of
deposit at the dates shown below are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year ended
Nine months ended September 30,
June 30, 1999 1998 1997
Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 10,684 --% $ 8,951 --% $ 6,990 --%
NOW accounts 1,368 1.78 1,071 2.10 943 2.25
Money market 10,058 4.19 6,591 4.39 3,609 3.97
Savings 456 2.76 353 2.99 319 2.98
Time 214,633 5.64 198,275 5.95 126,684 5.88
---------- ---------- ----------
Total $ 237,199 5.29% $ 215,241 5.63% $ 138,545 5.50%
========== ========== ==========
</TABLE>
The scheduled maturities of certificates of deposit in denominations of $100,000
or more at June 30, 1999, and September 30, 1998, are shown below (in
thousands):
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
------------- ------------------
<S> <C> <C>
Due in three months or less $ 3,062 $ 10,136
Due in over three to six months 6,485 6,978
Due in over six to twelve months 10,365 6,525
Due in over twelve months 5,215 6,073
------------- ------------------
Totals $ 25,127 $ 29,712
============= ==================
</TABLE>
36
<PAGE>
Loans The following table classifies ASBI's loans held for investment
according to type as of the dates shown (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Commercial $ 18,105 $ 21,706 $ 20,674
Real estate - construction 67,539 59,302 46,033
Real estate - mortgage 98,931 97,731 107,019
Installment 8,785 8,685 4,574
Other 3 3 9
------- -------- --------
193,363 187,427 178,309
Allowance for possible loan losses (3,309) (3,659) (2,707)
-------- -------- --------
Total $190,054 $183,768 $175,602
======== ======== ========
</TABLE>
Total loans net of unearned income and allowance for possible loan losses
increased 4.7% in 1998 from 1997 levels. At June 30, 1999, total loans exceeded
year end 1998 levels by 3.4%.
Of fixed rate loans aggregating $62,177,000 as of June 30, 1999, the weighted
average remaining maturity was 102 months. Of variable rate loans aggregating
$183,983,000 as of June 30, 1999, the weighted average remaining maturity was 28
months.
Of fixed rate loans aggregating $73,901,000 as of September 30, 1998, the
weighted average remaining maturity was 94 months. Of variable rate loans
aggregating $184,938,000 as of September 30, 1998, the weighted average
remaining maturity was 30 months.
Allowance for Loan Losses and Risk Elements The provision for loan
losses represents a determination by ASBI's management of the amount necessary
to be charged to operating income and transferred to the allowance for loan
losses to maintain a level which it considers adequate in relation to the risk
of future losses inherent in the loan portfolio. It is ASBI's policy to provide
for exposure to losses of specifically identified credits, and, while it is also
ASBI's policy to charge off in the current period those loans in which a loss is
deemed to exist, risks of future losses also exist which cannot be quantified
precisely or attributed to particular loans or classes of loans.
In assessing the adequacy of its allowance for loan losses, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are probable losses which must be charged off
and to assess the risk characteristics of individually significant loans and of
the portfolio in the aggregate. This review takes into consideration the
judgements of the responsible lending officers, the results of external
independent loan reviews and the board of directors, and also those of bank
regulatory agencies that review the loan portfolio as part of their regular
examination of ASBI.
In evaluating the allowance for loan losses, management also considers ASBI's
loan loss experience, the amount of past due and nonperforming loans, current
and anticipated economic conditions and other appropriate information. The
allowance for loan losses also reflects an analysis of the risks associated with
each class of loans.
The allowance for loan losses at June 30, 1999, was $3,309,000 compared to
$3,659,000 at September 30, 1998, and $2,707,000 at September 30, 1997. The
large increase in commercial loan charge-offs in 1998 was primarily due to one
loan in the amount of $1,139,000 for which recovery is unlikely. For more
information in connection with the allowance for loan losses and the provision
for loan losses, see Note 5 of ASBI's Notes to Financial Statements. Although
additional losses may occur, management believes the allowance for loan losses
to be adequate as of the dates presented and at present.
37
<PAGE>
The following table reflects activity in the allowance for possible loan losses
(dollars in thousands):
<TABLE>
<CAPTION>
As of and for
the Nine As of and for the
Months Ended Year Ended
June 30, September 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 3,659 $ 2,707 $ 2,051
Charge-offs:
Commercial -- ( 1,153) ( 2)
Real estate - construction ( 27) -- --
Real estate - mortgage ( 18) -- --
Installment loans ( 39) ( 44) ( 366)
--------- --------- ---------
Total charge-offs ( 84) ( 1,197) ( 368)
Recoveries: real estate - mortgage 1 9 --
--------- --------- ---------
Net charge-offs ( 83) ( 1,188) ( 368)
Transfers to allowances for ORE losses ( 60) -- --
(Credit) provision charged to expense ( 207) 2,140 1,024
--------- --------- ---------
Balance at end of period $ 3,309 $ 3,659 $ 2,707
========= ========= ==========
Net charge-offs (recoveries) as a percentage of
average loans held for investment (annualized for 1999) .10% .66% .24%
</TABLE>
Nonaccrual, Past Due and Restructured Loans The following is an
analysis of nonperforming assets as of the dates shown (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ 3,517 $ 6,979 $ 4,455
Accruing loans which are contractually past
due 90 days or more as to principal or
interest payments 2,310 2,195 2,510
Troubled debt restructuring 3,763 1,738 1,648
-------- -------- --------
Total $ 9,590 $ 10,912 $ 8,613
======== ======== ========
Foregone interest on nonaccrual loans $ 187 $ 272 $ 226
======== ======== ========
</TABLE>
The accrual of interest on a loan is discounted when, in the opinion of
management (based upon such criteria as default in payment, asset deterioration,
decline in cash flow, recurring operating loss, declining sales, bankruptcy and
other financial conditions which could result in default), the borrower's
financial condition is such that the collection of interest is doubtful. As of
June 30, 1999, loans totaling $3,517,000, or 1.86% of total net loans held for
investment outstanding, were on a nonaccrual basis and, therefore, no income was
being recognized. Management believes the risks in these loans to be significant
as there may be some portion of the principal which will become uncollectible.
Placing a loan on nonaccrual status has a two-fold impact on net interest
income. First, it causes an immediate charge against earnings for the interest
which had been accrued but not yet collected on the loan. Second, it eliminates
future interest earnings with respect to that particular loan from ASBI's
revenues. Interest on such loans is not recognized until all of the principal is
collected or until the loan is returned to a performing status.
Nonaccrual loans decreased by $3,462,000 from $6,979,000 at September 30, 1998,
to $3,517,000 at June 30, 1999.
38
<PAGE>
Of the $3,517,000 at June 30, 1999, $459,000 related to one loan which was not
classified as nonaccrual at September 30, 1998. The decrease from September 30,
1998, to June 30, 1999, is primarily comprised of four loans totaling
$4,143,000, of which two loans totaling $3,086,000 were either paid off or put
back on accrual status and of which two loans totaling $1,057,000 were
foreclosed upon. The Bank anticipates no additional loss with respect to these
loans.
The anticipated amounts of charge-offs by category during the next full year of
operations are as follows (in thousands):
<TABLE>
<S> <C>
Commercial $ 25
Real estate - mortgage 150
Installment 80
Overdrafts 5
--------------
$ 260
==============
</TABLE>
Return on Equity and Assets
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended
June 30, September 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on Average Assets * 3.23% 4.37% 3.42%
Return on Average Equity * 36.69% 53.42% 40.04%
Average Equity to Average Assets Ratio 8.82% 8.18% 8.53%
Dividend Payout Ratio -- 46.94% 46.27%
</TABLE>
* Annualized for 1999
Financial Data
Selected Historical and Pro Forma Financial Data
------------------------------------------------
Preparation of the Financial Statements The following financial
information was derived from the audited financial statements of the Company for
the fiscal years ended June 25, 1999, June 26, 1998, and June 27, 1997, and from
the audited financial statements of ASBI for the fiscal years ended September
30, 1998 and 1997, and the unaudited financial statements as of and for the
twelve months ended June 30, 1999. The information is only a summary and should
be read in conjunction with the historical financial statements and related
notes contained herein and incorporated by reference.
Pooling-of-Interests Accounting Treatment The proposed Acquisition is
expected to be accounted for as a "pooling-of-interests." This means that, for
accounting and financial reporting purposes, the companies will be treated as if
they had always been combined. For a more detailed description of pooling-of-
interests accounting, see "Accounting Treatment."
The unaudited pro forma condensed combined financial information reflects the
pooling-of-interests method of accounting as if the Company and ASBI had been
combined since June 27, 1997. The pro forma condensed combined statements of
income and pro forma condensed combined balance sheet were prepared by adding or
combining the historical amounts of each company. The accounting policies of the
Company and ASBI are substantially comparable.
39
<PAGE>
Consequently, no adjustments were made to the unaudited pro forma condensed
combined financial statements to conform the accounting policies of the
combining companies. The companies may have performed differently had they
always been combined. The unaudited pro forma condensed combined financial
information may not be indicative of the historical results that would have
occurred or the future results that will occur after the Merger. See "Unaudited
Pro Forma Condensed Combined Financial Statements" on pages 43-6.
Merger-Related Expenses Merger-related fees and expenses, consisting
primarily of fees and expenses of investment bankers, attorneys and accountants
and financial printing and other related charges, will be approximately $1
million. See note 4 on page 47.
Periods Covered The unaudited pro forma condensed combined statements
of income combine the Company's results for the fiscal years ended June 25,
1999, June 26, 1998, and June 27, 1996, with ASBI's unaudited results for the
twelve months ended June 30, 1999, and the fiscal years ended September 30, 1998
and 1997, giving effect to the Merger as if it had occurred on June 29, 1996.
The unaudited pro forma condensed combined balance sheet combines the balance
sheet of the Company, as of June 25, 1999, and the unaudited balance sheet of
ASBI, as of June 30, 1999, giving effect to the Merger as if it had occurred on
June 25, 1999.
Selected Historical Financial Data
----------------------------------
Selected Historical Financial Data of the Company The following
selected historical financial data for the years ended June 25, 1999, June 26,
1998, June 27, 1997, June 28, 1996, and June 30, 1995, has been derived from the
Company's audited consolidated financial statements. This information is only a
summary and should be read together with the Company's historical financial
statements and related notes contained in the annual reports and other
information filed with the SEC and incorporated by reference (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
40
<PAGE>
which was declared on May 6, 1999, payable August 2, 1999, to
stockholders 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."
(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.
Selected Historical Financial Data of ASBI The following selected
historical financial data for fiscal years ended September 30, 1998, 1997, 1996
and 1995 has been derived from ASBI's audited consolidated financial
statements. The selected historical financial data for the nine month periods
ended June 30, 1999 and 1998, were derived from the unaudited financial
statements of ASBI. This information is only a summary and should be read
together with ASBI's historical financial statements and related notes contained
in the ASBI financial statements identified in the Index to ASBI's Consolidated
Financial Statements on page F-1 (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, September 30,
(unaudited)
1999 1998 1998 1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 5,237 $ 23,914 $ 33,360 $ 24,185 $ 20,808 $ 13,434
Net income $ 8,563 $ 7,623 $ 10,393 $ 6,308 $ 4,772 $ 2,780
Earnings per share - basic $ 0.32 $ 0.28 $ 0.38 $ .23 $ .17 $ 0.10
Earnings per share - diluted $ 0.32 $ 0.28 $ 0.38 $ .23 $ .17 $ 0.10
Cash dividend declared per
common share $ 0.19 $ 0.12 $ 0.18 $ 10.73 $ -- $ --
Total assets $ 268,336 $ 261,138 $ 270,51 $ 204,980 $ 164,405 $ 122,623
Stockholders' equity $ 25,606 $ 21,075 $ 22,21 $ 16,698 $ 14,814 $ 11,081
Shares outstanding (1) 27,206,400 27,206,400 27,206,400 27,206,400 27,206,400 27,206,400
Tangible book value per
common share $ 0.94 $ 0.77 $ 0.82 $ .61 $ .54 $ .41
</TABLE>
(1) Restated to conform with the issuance of 26,934,336 shares of non-voting
common stock issued December 31, 1997.
Selected Unaudited Pro Forma Combined Financial Data The following
selected unaudited pro forma combined financial data has been derived from and
should be read with the Unaudited Pro Forma Condensed Combined Financial
Statements and related notes on pages 43-7. This information is based on the
historical consolidated balance sheets and related historical consolidated
statements of income of the Company and ASBI giving effect to the Merger using
the pooling-of-interests method of accounting for business combinations. This
information is for illustrative purposes only. The companies may have performed
differently had they always been combined. The selected unaudited pro forma
combined financial data may not be indicative of the historical results that
would have been achieved had the companies always been combined or the future
results that the combined company will experience after the Merger (in
thousands, except share and per share amounts):
41
<PAGE>
<TABLE>
<CAPTION>
June 25, June 26, June 27,
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 371,815 $ 319,118 $ 242,590
Net income $ 33,797 $ 27,322 $ 20,436
Earnings per share - basic $ 2.35 $ 1.90 $ 1.47
Earnings per share - diluted $ 2.34 $ 1.90 $ 1.47
Cash dividend declared per common share $ 0.67 $ 0.51 $ 0.32
Total assets $ 4,562,578
Stockholders' equity $ 287,858
Shares outstanding 14,405,925
Tangible book value per common share $ 19.98
</TABLE>
Unaudited Pro Forma Condensed Combined Financial Information The
following unaudited pro forma condensed combined financial statements combine
the historical consolidated balance sheets and statements of income of the
Company and ASBI giving effect to the Merger using the pooling-of-interests
method of accounting for a business combination.
The following information was derived from the audited financial statements of
the Company for the fiscal years ended June 25, 1999, June 26, 1998, and June
27, 1997, and from the audited financial statements of ASBI for the fiscal years
ended September 30, 1998 and 1997, and the unaudited financial statements as of
and for the twelve months ended June 30, 1999. The information is only a summary
and should be read in conjunction with historical financial statements and
related notes contained in the annual reports and other information filed with
the SEC and incorporated herein by reference and ASBI historical financial
statements identified in the Index to ASBI's Consolidated Financial Statements
on page F-1.
The unaudited pro forma condensed combined statements of income for the years
ended June 25, 1999, June 26, 1998 and June 27, 1997, assume the Merger was
effected on June 29, 1996. The unaudited pro forma condensed combined balance
sheet gives effect to the Merger as if it had occurred on June 25, 1999. The
accounting policies of the Company and ASBI are substantially comparable.
Consequently, no adjustments were made to the unaudited pro forma condensed
combined financial statements to conform the accounting policies of the
combining companies.
The unaudited pro forma combined financial information is for illustrative
purposes only. The companies may have performed differently had they always been
combined. The pro forma combined financial information may not be indicative of
the historical results that would have been achieved had the companies always
been combined or the future results that the combined company will experience
after the Merger.
42
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined
Statement of Financial Condition
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Condensed
Combined
Southwest Southwest
Securities ASBI Securities
Group, Inc. Holdings, Inc. Group, Inc.
and and and
Subsidiaries Subsidiaries Subsidiaries
June 25, 1999 June 30, 1999 Adjustments June 25, 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 11,334 $ 10,416 $ -- $ 21,750
Assets segregated for regulatory purposes 225,736 -- -- 225,736
Marketable equity securities 172,928 -- -- 172,928
Receivable from brokers, dealers and clearing
organizations 3,088,005 -- -- 3,088,005
Receivable from clients, net 679,652 -- -- 679,652
Loans -- 246,160 -- 246,160
Other real estate owned, net -- 6,671 -- 6,671
Other assets 115,619 5,089 968 (5A) 121,676
--------------- -------------- ----------- -------------
$ 4,293,274 $ 268,336 $ 968 $ 4,562,578
=============== ============== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 2,700 -- $ -- $ 2,700
Payable to brokers, dealers and clearing
organizations 3,000,096 -- -- 3,000,096
Payable to clients 812,559 -- -- 812,559
Deposits -- 234,128 -- 234,128
Other liabilities 165,585 7,853 1,000 (4) 174,438
Exchangeable subordinated notes 50,000 -- -- 50,000
--------------- -------------- ----------- -------------
4,030,940 241,981 1,000 4,273,921
Minority interest in consolidated subsidiaries 50 749 -- 799
Stockholders' equity:
Preferred stock $1.00 par value. Authorized
100,000 shares; none issued -- -- -- --
Common stock 1,180 27 233 (5B) 1,440
Redeemable preferred stock $1.00 par value.
Authorized 5,000,000 shares; none issued
and outstanding -- -- -- --
Additional paid-in capital 127,092 238 (233) (5B) 127,097
Accumulated other comprehensive income - net
unrealized holding gain, net of tax of
$60,374 112,123 -- -- 112,123
Retained earnings 21,896 25,341 968 (5A) 47,205
(1,000) (4)
Receivable from employees under the
Employee Stock Purchase Plan (7) -- -- (7)
--------------- -------------- ----------- -------------
262,284 25,606 (32) 287,858
--------------- -------------- ----------- -------------
Commitments and contingencies
$ 4,293,274 $ 268,336 $ 968 $ 4,562,578
=============== ============== =========== =============
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
43
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Condensed
Combined
Southwest Southwest
Securities ASBI Securities
Group, Inc. Holdings, Inc. Group, Inc.
and and and
Subsidiaries Subsidiaries Subsidiaries
June 25, 1999 June 30, 1999 Adjustments June 25, 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Net revenues from clearing operations $ 40,118 $ -- $ -- $ 40,118
Commissions 65,048 -- -- 65,048
Interest 147,006 30,887 -- 177,893
Investment banking, advisory and administrative fees 29,100 -- -- 29,100
Net gains on principal transactions 41,689 -- -- 41,689
Other 14,309 3,658 -- 17,967
------------- -------------- ----------- -------------
337,270 34,545 -- 371,815
------------- -------------- ----------- -------------
EXPENSES
Commissions and other employee compensation 124,691 5,599 -- 130,290
Interest 99,951 13,255 -- 113,206
Occupancy, equipment and computer service costs 21,343 832 -- 22,175
Communications 13,738 -- -- 13,738
Floor brokerage and clearing organization charges 6,129 -- -- 6,129
Other 30,898 2,973 -- 33,871
------------- -------------- ----------- -------------
296,750 22,659 -- 319,409
------------- -------------- ----------- -------------
Income before income taxes and minority interest
in consolidated subsidiaries 40,520 11,886 -- 52,406
Income taxes 14,301 96 3,756 (5A) 18,153
------------- -------------- ----------- -------------
Income before minority interest in consolidated
subsidiaries 26,219 11,790 (3,756) 34,253
Minority interest in consolidated subsidiaries -- (456) -- (456)
------------- -------------- ----------- -------------
Net income $ 26,219 $ 11,334 $ (3,756) $ 33,797
============= ============== =========== =============
Earnings per share - basic $ 2.23 $ 0.42 $ -- $ 2.35
============= ============== =========== =============
Earnings per share - diluted $ 2.21 $ 0.42 $ -- $ 2.34
============= ============== =========== =============
Weighted average shares outstanding - basic 11,776,377 27,206,400 -- 14,366,377
============= ============== =========== =============
Weighted average shares outstanding - diluted 11,838,723 27,206,400 -- 14,438,723
============= ============== =========== =============
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
44
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Condensed
Combined
Southwest Southwest
Securities ASBI Securities
Group, Inc. Holdings, Inc. Group, Inc.
and and and
Subsidiaries Subsidiaries Subsidiaries
June 26, 1998 Sept. 30, 1998 Adjustments June 26, 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Net revenues from clearing operations $ 26,607 $ -- $ -- $ 26,607
Commissions 59,401 -- -- 59,401
Interest 143,121 30,343 -- 173,464
Investment banking, advisory and administrative fees 27,850 -- -- 27,850
Net gains on principal transactions 12,576 -- -- 12,576
Other 16,203 3,017 -- 19,220
------------- -------------- ----------- -------------
285,758 33,360 -- 319,118
------------- -------------- ----------- -------------
EXPENSES
Commissions and other employee compensation 91,817 4,892 -- 96,709
Interest 100,704 13,091 -- 113,795
Occupancy, equipment and computer service costs 17,663 608 -- 18,271
Communications 12,509 -- -- 12,509
Floor brokerage and clearing organization charges 5,124 -- -- 5,124
Other 26,043 4,195 -- 30,238
------------- -------------- ----------- -------------
253,860 22,786 -- 276,646
------------- -------------- ----------- -------------
Income before income taxes and minority interest
consolidated subsidiaries 31,898 10,574 -- 42,472
Income taxes 11,268 55 3,701 (5A) 15,024
------------- -------------- ----------- -------------
Income before minority interest in consolidated
subsidiaries 20,630 10,519 (3,701) 27,448
Minority interest in consolidated subsidiaries $ -- (126) -- (126)
------------- -------------- ----------- -------------
Net income $ 20,630 $ 10,393 $ (3,701) $ 27,322
============= ============== =========== =============
Earnings per share - basic $ 1.76 $ 0.38 $ -- $ 1.90
============= ============== =========== =============
Earnings per share - diluted $ 1.75 $ 0.38 $ -- $ 1.90
============= ============== =========== =============
Weighted average shares outstanding - basic 11,743,228 27,206,400 -- 14,343,228
============= ============== =========== =============
Weighted average shares outstanding - diluted 11,763,605 27,206,400 -- 14,363,605
============= ============== =========== =============
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
45
<PAGE>
Southwest Securities Group, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Income
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Condensed
Combined
Southwest Southwest
Securities ASBI Securities
Group, Inc. Holdings, Inc. Group, Inc.
and and and
Subsidiaries Subsidiaries Subsidiaries
June 27, 1997 Sept. 30, 1997 Adjustments June 27, 1997
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Net revenues from clearing operations $ 22,693 $ -- $ -- $ 22,693
Commissions 38,882 -- -- 38,882
Interest 119,176 22,244 -- 141,420
Investment banking, advisory and administrative fees 16,031 -- -- 16,031
Net gains on principal transactions 11,856 -- -- 11,856
Other 9,766 1,941 -- 11,707
------------- -------------- ----------- -------------
218,404 24,185 -- 242,589
------------- -------------- ----------- -------------
EXPENSES
Commissions and other employee compensation 65,062 3,365 -- 68,427
Interest 83,238 9,176 -- 92,414
Occupancy, equipment and computer service costs 12,216 483 -- 12,699
Communications 11,026 -- -- 11,026
Floor brokerage and clearing organization charges 4,181 -- -- 4,181
Other 16,938 3,003 -- 19,941
------------- -------------- ----------- -------------
192,661 16,027 -- 208,688
------------- -------------- ----------- -------------
Income before income taxes and minority interest in
consolidated subsidiaries 25,743 8,158 -- 33,901
Income taxes 8,760 1,766 2,855 (5A) 13,381
------------- -------------- ----------- -------------
Income before minority interest in consolidated
subsidiaries 16,983 6,392 (2,855) 20,520
Minority interest in consolidated subsidiaries -- (84) -- (84)
------------- -------------- ----------- -------------
Net income $ 16,983 $ 6,308 $ (2,855) $ 20,436
============= ============== =========== =============
Earnings per share - basic $ 1.51 $ .23 $ -- $ 1.47
============= ============== =========== =============
Earnings per share - diluted $ 1.51 $ .23 $ -- $ 1.47
============= ============== =========== =============
Weighted average shares outstanding - basic 11,269,666 27,206,400 -- 13,869,666
============= ============== =========== =============
Weighted average shares outstanding - diluted 11,282,885 27,206,400 -- 13,882,885
============= ============== =========== =============
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
46
<PAGE>
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
--------------------------------------------------------------------
Note 1
- ------
The unaudited pro forma condensed combined statements of income are based on the
audited consolidated financial statements of the Company for the fiscal years
ended June 25, 1999, June 26, 1998, and June 27, 1997, and the consolidated
financial statements of ASBI for the twelve months ended June 30, 1999, and the
audited consolidated financial statements of ASBI for the fiscal years ended
September 30, 1998 and 1997. The unaudited pro forma condensed combined
statement of financial condition is based on the consolidated statement of
financial condition of the Company as of June 25, 1999, and the unaudited
consolidated statement of financial condition of ASBI as of and for the twelve
months ended June 30, 1999.
The Company and ASBI consolidated financial statements are prepared in
conformity with generally accepted accounting principles and require the Company
and ASBI management to make estimates that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. In the opinion of the Company and ASBI, the unaudited
pro forma condensed combined financial statements include all the adjustments
necessary to present fairly the results of the periods presented. Actual results
could differ materially from these estimates.
Note 2
- ------
The accounting policies of the Company and ASBI are substantially comparable.
Consequently, no adjustments were made to the unaudited pro forma condensed
combined financial statements to conform the accounting policies of the
combining companies.
Note 3
- -------
The pro forma combined net income per common share is based on net income less
preferred stock dividends and the weighted average number of outstanding common
shares. Net income per common share, assuming dilution, includes the dilutive
effect of stock options. The weighted average number of outstanding common
shares has been adjusted to reflect the exchange ratio of 0.0956 shares of
Common Stock for each share of ASBI common stock.
The pro forma combined dividends per share reflect the sum of the dividends paid
by the Company and ASBI divided by the number of shares that would have been
outstanding for the periods, after adjusting the ASBI shares for the exchange
ratio of 0.0956 shares of the Company's Common Stock.
Note 4
- ------
Merger-related fees and expenses, consisting primarily of fees and expenses of
investment bankers, attorneys and accountants and financial printing and other
related charges, are estimated to be approximately $1 million. These fees and
expenses have been reflected in the unaudited pro forma condensed combined
statement of financial condition as of June 25, 1999. These charges are not
reflected in the unaudited pro forma condensed combined statements of income or
the pro forma combined per share data.
Note 5
- ------
(A) A pro forma adjustment has been made to reflect the tax implications of the
conversion of ASBI from an S corporation to a C corporation.
(B) A pro forma adjustment has been made to reflect the cancellation of ASBI
common stock and the assumed issuance of 2.6 million shares of Common Stock
in exchange for all of the outstanding ASBI common stock (based on the
exchange ratio of 0.0956).
47
<PAGE>
Requirement for Stockholder Approval
The rules of the NYSE require the Company to obtain the approval of its
stockholders prior to the issuance by the Company of shares of Common Stock if,
among other things, the number of shares of Common Stock to be issued will equal
or exceed 20% of the shares outstanding before the issuance of such securities.
As of September 14, 1999, there were 11,814,793 shares of Common Stock
outstanding. If the proposed Acquisition of ASBI is completed as described in
this Proxy Statement, the Company will issue 2,600,000 shares of Common Stock to
stockholders of ASBI, representing approximately 22% of the outstanding shares
of Common Stock as of such date.
The rules of the NYSE also require the Company to obtain the approval of its
stockholders prior to the issuance by the Company of Common Stock to: (1) a
director, officer or substantial stockholder of the Company (a "Related Party");
(2) a subsidiary, affiliate or other closely-related person of a Related Party;
or (3) any company or entity in which a Related Party has a substantial direct
or indirect interest; if the number of shares of Common Stock to be issued
exceeds either one percent (1%) of the number of shares of Common Stock or one
percent (1%) of the voting power outstanding before the Share Issuance.
As a result of the Merger, and based on his ownership interest in ASBI, it is
anticipated that Mr. Don A. Buchholz, the Chairman of the Board and a
substantial stockholder of the Company, will receive more than one percent (1%)
of the number of shares of Common Stock, and therefore more than one percent
(1%) of the voting power of the Company, outstanding before the Share Issuance.
As a result of the foregoing, the Company is seeking stockholder approval of the
Share Issuance. The Company is not, however, seeking stockholder approval of any
other aspect of the proposed Acquisition. If the Proposal regarding the Share
Issuance is not approved, the Company will be unable to proceed with the
Acquisition of ASBI as presently structured.
Recommendation of the Board
The Board and the Special Committee have unanimously approved the Share
Issuance, for the purpose of completing the Acquisition of ASBI, and have
determined that such Share Issuance is fair to, and in the best interests of,
the Company and its stockholders. Accordingly, the Board unanimously recommends
that stockholders of the Company approve the Share Issuance. Stockholders of the
Company do not have dissenters' rights of appraisal in connection with approval
of the Share Issuance.
THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OF THE COMPANY. NONE OF THE SECURITIES REFERRED TO IN THIS
PROXY STATEMENT AS PROPOSED TO BE ISSUED IN CONNECTION WITH THE ACQUISITION OF
ASBI HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND THEY MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO
U.S. PERSONS ABSENT REGISTRATION UNDER SUCH ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS THEREOF.
48
<PAGE>
PROPOSAL THREE
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation (the "Certificate") currently
provides that the Company is authorized to issue 20,000,000 shares of Common
Stock and 100,000 shares of Preferred Stock, $1.00 pare value per share. In
August 1999, the Board authorized an amendment to the Certificate, subject to
stockholder approval, to increase the authorized number of shares of Common
Stock to 60,000,000 shares. The stockholders are being asked to approve such
amendment to the Certificate. The proposed amendment would give the Board the
authority to issue additional shares of Common Stock without requiring future
stockholder approval of such issuances except as may be required by applicable
law or rules of the NYSE.
As of September 14, 1999, 11,814,793 shares of Common Stock were issued and
outstanding and 2,107,884 shares of Common Stock were reserved for future
issuance. If Proposal Two is passed by the stockholders of the Company, an
additional 2,600,000 shares will be reserved for future issuance. Thus, only
3,477,323 shares will be available for other corporate purposes. However, the
Company has enough authorized shares of Common Stock to complete the
Acquisition, which is the subject of Proposal Two, without the approval of this
Proposal Three.
The principal purpose of the proposed amendment to the Certificate is to
authorize additional shares of Common Stock which will be available in the event
the Board determines that it is necessary or appropriate to raise additional
capital through the sale of securities, to grant options or other stock
incentives to the Company's employees, to acquire another company or its
business or assets, to seek to establish a strategic relationship with a
corporate partner or to permit a future stock dividend or stock split. Other
than in connection with the Share Issuance, exercise of stock options pursuant
to the Southwest Securities, Inc. Stock Option Plan, Southwest Securities Group,
Inc. 1997 Stock Option Plan and purchase of shares under the Southwest
Securities Group, Inc. Stock Purchase Plan, the Board has no present agreement
or arrangement to issue any such shares. If the amendment is approved by the
stockholders, the Board does not intend to solicit further stockholder approval
prior to the issuance of any additional shares of Common Stock, except as may be
required by applicable law or the rules of the NYSE.
The increase in the authorized number of shares of Common Stock and the
subsequent issuance of such shares could have the effect of delaying or
preventing a change in control of the Company without further action by the
stockholders. Shares of authorized and unissued Common Stock could (within the
limits imposed by applicable law) be issued in one or more transactions which
would make a change in control of the Company more difficult, and therefore less
likely. Any such issuance of additional stock could have the effect of diluting
the earnings per share and book value per share of outstanding shares of Common
Stock, and such additional shares could be used to dilute the stock ownership or
voting rights of persons seeking to obtain control of the Company.
Recommendation of the Board
The Board has unanimously approved the amendment to the Certificate and
recommends that the stockholders vote "FOR" this proposal.
49
<PAGE>
MANAGEMENT
Stock Ownership of Principal Owners and Management
The following table sets forth information concerning the beneficial ownership
of the Company's Common Stock as of August 9, 1999, by (i) each person who is
known by the Company to own beneficially more than 5% of the Common Stock, (ii)
each director of the Company, (iii) each of the executive officers of the
Company named in the Summary Compensation Table included elsewhere herein, and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned /1,2/ Number Percent
------------------------------- --------- -------
<S> <C> <C>
Don A. Buchholz /3/ 827,585 7.0%
1201 Elm Street, Suite 3500, Dallas, TX 75270
Buchholz Arlington Banshares, a Limited Partnership /4/ 825,825 7.0%
1201 Elm Street, Suite 3500, Dallas, TX 75270
Cobb Partners /5/ 585,446 5.0%
1201 Elm Street, Suite 3500, Dallas, TX 75270
Brodie L. Cobb /5/ 585,446 5.0%
832 Sansome Street, First Floor, San Francisco, CA 94111
David Glatstein /6/ 583,172 4.9%
1201 Elm Street, Suite 3500, Dallas, TX 75270
William D. Felder /7/ 117,196 1.0%
Kenneth R. Hanks /8/ 13,407 *
Daniel R. Leland /9/ 160,983 1.4%
Richard H. Litton /7/ 41,348 *
W. Norman Thompson /7/ 7,072 *
Paul D. Vinton /10/ 3,746 *
J. Jan Collmer /11/ 18,485 *
Robert F. Gartland -- --
R. Jan LeCroy /12/ 5,610 *
Frederick R. Meyer /12/ 61,471 *
Jon L. Mosle, Jr. /12/ 19,355 *
All directors and executive officers as a group (16 persons) /13/ 2,460,431 20.8%
</TABLE>
____________________________
* Denotes less than 1% ownership
/1/ The rules of the SEC provide that, for the purposes hereof, a person is
considered the "beneficial owner" of shares with respect to which the person,
directly or indirectly, has or shares the voting or investment power,
irrespective of his economic interest in the shares. Unless otherwise noted,
each person identified possesses sole voting and investment power over the
shares listed, subject to community property laws.
/2/ Based on 11,813,780 shares outstanding on August 9, 1999. Shares of Common
Stock subject to options that are exercisable within 60 days of August 9, 1999,
are deemed beneficially owned by the person holding such options for the
purposes of calculating the percentage of ownership of such person but are not
treated as outstanding for the purpose of computing the percentage of any other
person.
50
<PAGE>
/3/ Includes 825,825 shares held by Buchholz Arlington Banshares. Excludes
203,231 shares held by Buchholz Investments, which is a general partnership, the
partners of which are Don A. Buchholz, his wife, adult son and adult daughter.
Pursuant to the terms of the partnership agreement governing Buchholz
Investments, Don A. Buchholz's adult son has voting power and investment power
with regard to the shares owned by the partnership. The partnership agreement
also provides that any partner may withdraw from the partnership upon 30 days'
notice and, unless the partnership is liquidated, that partner shall receive the
value of his or her capital account. Don A. Buchholz and his wife own one-third
of Buchholz Investments.
/4/ Buchholz Arlington Banshares, Ltd., is a limited partnership, the partners
of which are Don A. Buchholz, his wife, adult son and adult daughter. Pursuant
to the terms of the partnership agreement governing Buchholz Arlington
Banshares, a Limited Partnership, Don A. Buchholz is general partner and has
sole investment power. The partnership agreement further provides that any
partner may withdraw from the partnership only upon unanimous agreement of all
of the partners. Excludes shares directly held by individual partners. Don A.
Buchholz and his wife own 41% of Buchholz Arlington Banshares.
/5/ Cobb Partners is a general partnership, the partners of which are The
Estate of Allen B. Cobb, Bonnie Cobb and her children, including Brodie L. Cobb.
Mr. Brodie L. Cobb is the managing partner of the partnership and has sole
voting and investment power with regard to the shares owned by the partnership.
/6/ Includes 7,672 shares of Common Stock issuable upon exercise of stock
options. Includes 41,200 shares held in a custodial account for Mr. Glatstein's
minor child and 41,200 shares held by his adult daughter for whom he holds power
of attorney.
/7/ Includes 3,410 shares of Common Stock issuable upon exercise of stock
options.
/8/ Includes 3,121 shares of Common Stock issuable upon exercise of stock
options.
/9/ Includes 3,835 shares of Common Stock issuable upon exercise of stock
options.
/10/ Includes 2,130 shares of Common Stock issuable upon exercise of stock
options.
/11/ Includes 8,894 shares owned by Collmer Semiconductor which is 90% owned by
Mr. Collmer. Also includes 4,510 shares of Common Stock issuable upon exercise
of stock options.
/12/ Includes 4,510 shares of Common Stock issuable upon exercise of stock
options.
/13/ Includes the information in the notes above. In addition, includes 15,555
shares of Common Stock owned by other executive officers of the Company not
listed in the table above, including 2,850 shares issuable upon exercise of
stock options to those executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, and regulations of the SEC
thereunder, require the Company's executive officers and directors and persons
who own more than 10% of the Company's Common Stock, as well as certain
affiliates of such persons, to file initial reports of ownership, monthly
transactions reports and annual reports covering any changes in ownership with
the SEC and the NYSE. Executive officers, directors and persons owning more than
10% of the Company's Common Stock are required by SEC regulations to furnish the
Company with all such
51
<PAGE>
reports they file.
Based solely on its review of the copies of such reports received by it and
written representations that no other reports were required for such persons,
the Company believes that all filing requirements applicable to its executive
officers, directors and owners of more than 10% of the Company's Common Stock
were complied with, except as described below.
The Initial Statement of Beneficial Ownership on Form 3 was filed late for Stacy
Hodges and Laura Leventhal, officers of the Company; and the Statement of
Changes in Beneficial Ownership on Form 4 was filed late for David Glatstein
(two reports reflecting the purchase of shares), Norman Thompson (one report
reflecting the purchase of shares), officers of the Company, and Raymond
Wooldridge (one report reflecting the sale of shares), former officer and
director of the Company; and the Annual Statement of Changes in Beneficial
Ownership on Form 5 was filed late for David Glatstein, William D. Felder,
Kenneth R. Hanks, Daniel R. Leland, Richard H. Litton, W. Norman Thompson, Laura
Leventhal, Edward Anderson, Stacy Hodges, Paul D. Vinton, Brodie L. Cobb, J. Jan
Collmer, R. Jan LeCroy, Frederick R. Meyer and Jon L. Mosle, Jr. (reports
reflecting grant of options).
52
<PAGE>
Executive Compensation
Summary Compensation Table The following table sets forth information
--------------------------
concerning the compensation during each of the Company's last three fiscal years
of each person serving as the Chief Executive Officer during the last fiscal
year and the other six most highly compensated executive officers:
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
- ----------------------------------------------------------------------------------------------------------------------------
Fiscal Year Other All Other
ended the Annual Securities Compen-
last Friday Compensa Underlying sation
Name and Principal Position of June Salary ($) Bonus ($) -tion ($)/3/ Options (#)/2/ ($)/1/
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Glatstein 1999 464,015 800,000 -- 9,900 14,400
President & Chief Executive 1998 421,005 425,000 -- 10,395 19,200
Officer 1997 190,570 505,000 -- -- 16,500
William D. Felder 1999 250,000 250,000 -- 4,400 14,400
Executive Vice President 1998 250,000 135,000 -- 4,620 19,200
1997 250,000 125,000 -- -- 16,500
Kenneth R. Hanks 1999 150,000 250,000 -- 4,400 14,400
Executive Vice President & 1998 150,000 160,000 -- 4,042 19,200
Chief Operating Officer 1997 150,000 140,000 -- -- 8,757
Daniel R. Leland /4/ 1999 365,054 968,387 -- 4,950 14,400
Executive Vice President 1998 351,778 297,751 177,800 5,197 19,200
1997 325,203 34,000 -- 10,000 16,500
Richard H. Litton 1999 150,000 312,049 -- 4,400 14,400
Executive Vice President 1998 150,000 194,132 -- 4,620 19,200
1997 150,000 166,000 -- -- 15,946
W. Norman Thompson 1999 150,000 250,000 -- 4,400 14,400
Executive Vice President & 1998 150,000 150,000 -- 4,620 19,200
Chief Information Officer 1997 150,000 150,000 -- -- 16,500
Paul D. Vinton 1999 150,000 250,000 -- 2,750 14,400
Executive Vice President 1998 150,000 85,000 -- 2,887 19,200
1997 150,000 85,000 -- -- 16,500
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
____________________________
/1/ Consists of the Company's annual contributions to its Profit Sharing Plan
and Trust.
/2/ Adjusted for the five percent stock dividend paid August 3, 1998, and the
ten percent stock dividend paid August 2, 1999.
/3/ Consists of income realized on the exercise of stock options.
53
<PAGE>
/4/ Mr. Leland's salary and bonus was derived as a percentage of fees and
commissions he directed to the Company.
Incentive Stock Options. The following tables provide information with
-----------------------
respect to the executive officers included in the Summary Compensation Table who
received option grants in fiscal 1999:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants /2/
- -----------------------------------------------------------------------------------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Exercise Appreciation for the
Underlying Employees or Option Term (10
Options in Base Price Expiration Years)/3/
Name Granted (#) /1/ Fiscal Year ($/Share) /1/ Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David Glatstein 9,900 3.4% $ 18.47 8/24/2008 $114,970 $291,356
William D. Felder 4,400 1.5% $ 18.47 8/24/2008 $ 51,098 $129,492
Kenneth R. Hanks 4,400 1.5% $ 18.47 8/24/2008 $ 51,098 $129,492
Daniel R. Leland 4,950 1.7% $ 18.47 8/24/2008 $ 57,485 $145,678
Richard H. Litton 4,400 1.5% $ 18.47 8/24/2008 $ 51,098 $129,492
W. Norman Thompson 4,400 1.5% $ 18.47 8/24/2008 $ 51,098 $129,492
Paul D. Vinton 2,750 1.0% $ 18.47 8/24/2008 $ 31,936 $ 80,932
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
____________________________
/1/ Adjusted for the ten percent stock dividend paid August 2, 1999.
/2/ All of these options are non-qualified and were granted on August 24, 1998.
The options vest in 25% increments over four years.
/3/ Potential realized values represent the future value, net of exercise
price, of the options granted if the Company's stock were to appreciate 5%
and 10% during each of the awards ten year life. The appreciation of 5% and
10% have been set by the SEC in the proxy statement disclosure rules and,
therefore, are not intended to forecast possible future appreciation, if
any, of the Company's stock price.
The following table provides information with respect to the executive officers
listed in the Summary Compensation Table concerning the exercise of options
during fiscal 1999 and options held as of June 25, 1999.
54
<PAGE>
Aggregate Option Exercises in the Last Fiscal Year and Fiscal Year End
Option Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Value of Unexercised In-the-Money
Number of Securities Options/SARs at FY-End ($) (Based on
Shares Underlying Unexercised $21.90 Per Share)
Acquired on Value Options/SARs at FY-End Exercisable/
Name Exercise Realized (#)Exercisable/Unexercisable/1/ Unexercisable/2/
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Glatstein -- $ -- 2,598/17,697 $74,397/$ 526,465
- -----------------------------------------------------------------------------------------------------------------------------
William D. Felder -- $ -- 1,155/7,865 $33,075/$ 233,975
- -----------------------------------------------------------------------------------------------------------------------------
Kenneth R. Hanks -- $ -- 1,010/7,432 $28,923/$ 221,575
- -----------------------------------------------------------------------------------------------------------------------------
Daniel R. Leland -- $ -- 1,299/8,848 $37,199/$ 263,218
- -----------------------------------------------------------------------------------------------------------------------------
Richard Litton -- $ -- 1,155/7,865 $33,075/$ 233,975
- -----------------------------------------------------------------------------------------------------------------------------
W. Norman Thompson -- $ -- 1,155/7,675 $33,075/$ 233,975
- -----------------------------------------------------------------------------------------------------------------------------
Paul D. Vinton -- $ -- 721/4,916 $20,647/$ 146,245
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
____________________________
/1/ Adjusted for the ten percent stock dividend paid August 2, 1999.
/2/ Based on market price of $49.09, which was the closing price of the
Company's Common Stock on the New York Stock Exchange on the last day of
the 1999 fiscal year adjusted for the ten percent stock dividend paid
August 2, 1999, less the exercise price of such shares.
Compensation Committee Report on Executive Compensation. In fiscal 1999,
-------------------------------------------------------
executive compensation was determined by the Compensation Committee of the
Board. The Compensation Committee is comprised of the Chairman of the Board and
three non-employee directors. The Chairman of the Board serves as Chairman of
the Compensation Committee. Decisions by the Compensation Committee are reviewed
by the Board. The Compensation Committee establishes the compensation philosophy
and program of the Company on behalf of the Board, determines the compensation
of the Company's Chief Executive Officer and approves the compensation of the
Company's executive officers.
Pursuant to rules of the Securities and Exchange Commission, which are designed
to enhance disclosure of companies' policies regarding executive compensation,
the following report is submitted by Messrs. Buchholz (Chairman), Collmer, Meyer
and Mosle in their capacity as members of the Compensation Committee addressing
the Company's compensation policies for fiscal 1999 in general and as they
affected executive officers, including Messrs. Glatstein, Felder, Hanks, Leland,
Litton, Thompson, and Vinton, who were the Company's seven most highly
compensated executive officers in fiscal 1999. These officers are collectively
referred to in this section as the "Executive Officers."
Compensation Philosophy The Company's compensation philosophy and
program is intended to support and reinforce growth in stockholder value. The
Company's Executive Officer compensation program is designed to reward the
individual's based on consideration of a combination of Company, business unit,
and individual results. Specifically, the Compensation Committee seeks to
achieve the following objectives:
. To attract, motivate and retain highly qualified Executive Officers
through a competitive total compensation program
55
<PAGE>
. To encourage Executive Officers to purchase and hold significant
amounts of Company stock
. To require that a substantial portion of Executive Officer
compensation be tied to the achievement of financial and strategic
objectives for the Company and individual business units
Salaries The first component of the Company's Executive Officer
compensation program is cash compensation in the form of base salaries. Base
salaries generally represent a small portion of the Executive Officers' cash
compensation and are set to be competitive within the securities industry and
the Company's geographic location. The base salary amounts are reviewed annually
and are adjusted in light of the individual executive's performance and economic
conditions.
Bonuses The second component of the Company's Executive Officer
compensation program consists of annual cash bonuses based on the Company's
fiscal year operating results and the individual executive officer's
contribution to the Company for the year. The Company's incentive compensation
program provides for a bonus pool, determined annually, based on the Company's
return on equity. Allocation of the bonus pool to individual executive officers
is determined using objective measures of business unit performance as well as
subjective measures of the Executive Officer's contribution to the financial and
strategic objectives of the Company. Annual bonuses make up a significant
portion of the Executive Officers' cash compensation. Bonuses are awarded early
in the following year. The Compensation Committee believes that basing a
substantial portion of an Executive Officer's compensation on performance
motivates the executive to perform at the highest possible level.
Working in tandem with the Company's annual bonus program is the Southwest
Securities Deferred Compensation Plan, which was adopted by the Board in July of
1999. This newly adopted plan was created in order to increase retention of
Executive Officers and senior management of the Company as well as to increase
stock ownership among participants in the plan. Under the terms, the plan allows
the employee to defer a certain portion of each bonus and to invest such amounts
in various investment alternatives including Company stock. The Company matches
a portion of the deferrals in shares of Company stock that vests ratably over
four years. The Compensation Committee believes that programs such as the
Deferred Compensation Plan will further align the Executive Officers' long-term
financial and strategic interests with those of the Company's stockholders.
Long-Term Incentive Compensation The third component of the
Company's Executive Officer compensation program is the long-term incentive
compensation component. This is comprised of the annual grant by the Stock
Option Committee of options to acquire shares of Common Stock as well as the
Company's profit sharing plan contribution. The option grants have a ten-year
term and have an exercise price equal to the fair market value per share of
Common Stock on the date of the grant. These options vest ratably over four
years. The number of option shares granted is based on each Executive Officer's
total cash compensation for the preceding year as well as the individual's
contribution to the Company's financial performance and strategic initiatives.
In determining option grants to the Executive Officers, the Compensation
Committee does not take into account the amount and value of options currently
held. The Compensation Committee believes that stock options provide an
incentive to achieve the Company's long-term strategic goals by aligning the
financial interests of the Executive Officers with those of the Company's
stockholders.
The Company also makes contributions to the Company's Profit Sharing Plan and
Trust ("Profit Sharing Plan") to provide certain retirement benefits. Amounts
are allocated to employees based on gross compensation subject to IRS
limitations. The defined contribution Profit Sharing Plan covers substantially
all employees of the Company and the contributions are dependent on the profits
of the Company.
Chief Executive Officer's Compensation In keeping with the general
compensation philosophy outlined above, Mr. Glatstein's base salary was
established to place greater emphasis on incentive compensation while remaining
competitive with others in the Company's industry. The Compensation Committee
reviewed various
56
<PAGE>
indicators of the Company's financial performance, including return on equity,
profit margins, revenue growth and asset growth, as compared to the Company
budgets. The Compensation Committee also reviewed compensation of the chief
executives of other publicly traded regional brokerage firms (this group of
companies is not the same as the group of companies that comprise the published
industry index used in the stock performance graph that follows this report) as
well as subjective measures of Mr. Glatstein's individual performance to
determine the bonus portion of the annual compensation. No one factor was
assigned a particular weight. In fiscal 1999, $364,000 of Mr. Glatstein's salary
was derived from transactions that he directed to the Company with the remainder
based on the factors outlined above. Mr. Glatstein was subject to the same
profit sharing plan as the other executive officers and employees. The
Compensation Committee believes that the total compensation paid to Mr.
Glatstein is commensurate with the compensation paid to the chief executive
officers of corporations in similar lines of business after adjustment to
compensate for differences in the size, business mix and geographic area of the
companies reviewed.
Section 162(m) of the Code, enacted in 1993, limits the ability of the Company
to deduct the cost of certain annual compensation in excess of $1,000,000 paid
to individuals required to be named in the summary compensation table in proxy
statements of public companies. The Compensation Committee believes that this
limitation did not result in the loss of any significant portion of the
potential tax deduction to the Company for its fiscal year ended June 25, 1999.
However, the Compensation Committee believes it is important to balance the
effectiveness of executive compensation plans with the materiality of
potentially reduced tax deductions. Accordingly, the Compensation Committee may
authorize payments that may not be fully deductible if the Compensation
Committee believes it is in the interests of the Company to do so.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS
Don A. Buchholz, Chairman
J. Jan Collmer
Frederick R. Meyer
Jon L. Mosle, Jr.
57
<PAGE>
PERFORMANCE GRAPH
The following graph compares the Company's cumulative total stockholder return
on its Common Stock for 60 months from June 1994 through its latest fiscal year
end in June 1999, with the cumulative total return of the Wilshire 5000 Index
and the Nasdaq Financial Index over the same period. The graph depicts the
results of investing $100 in the Company's Common Stock, the Wilshire 5000 Index
and the Nasdaq Financial Index on June 1993, including reinvestment of
dividends.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------
6/94 6/95 6/96 6/97 6/98 6/99
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Southwest Securities Group, Inc. 100 130 185 315 404 1,365
Wilshire 5000 100 125 157 204 262 314
Nasdaq Financial Index 100 114 149 218 283 285
</TABLE>
58
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP served as independent auditors of the Company and its subsidiaries for
fiscal year 1999. Representatives of KPMG LLP are expected to be present at the
Annual Meeting. They will have the opportunity to make a statement if they
desire to do so and will be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
Any stockholder who wishes to submit a proposal for inclusion in the proxy
materials to be distributed by the Company in connection with its Annual Meeting
of Stockholders to be held in 2000 must do so not later than May 26, 2000. To be
eligible for inclusion in the 2000 proxy materials of the Company, proposals
must conform to the requirements set forth in Regulation 14A under the Exchange
Act. In order for a stockholder proposal to be raised from the floor during next
year's annual meeting, written notice must be received by the Company no later
than August 11, 2000. If such stockholder fails to comply with the foregoing
notice provision, the proxy holders will be allowed to use their discretionary
voting authority if the proposal is raised at the 2000 Annual Meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates documents by reference which are not presented
herein or delivered herewith. These documents (not including exhibits to such
documents which are not specifically incorporated by reference to such
documents) are available without charge upon request to: James Bowman, Vice
President, Southwest Securities Group, Inc., 1201 Elm Street, Suite 3500,
Dallas, Texas 75270-2180, (214) 859-1800. In order to ensure timely delivery of
such documents, any request for documents should be submitted no later than five
business days prior to the Annual Meeting.
The following document filed with the SEC by the Company (File No. 0-19483) is
incorporated herein by reference: the Company's Annual Report on Form 10-K for
the year ended June 25, 1999.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act, subsequent to or contemporaneously with the date hereof and
prior to the date of the Annual Meeting shall be deemed to be incorporated
herein by reference and to be a part hereof from the date of such filing. Any
statement contained herein or in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein or in any
other subsequently filed document which also is, or is deemed to be,
incorporated herein by reference modifies or supersedes such statement. Any such
statement so modified shall not be deemed to constitute a part hereof, except as
so modified, and any statement so superseded shall not be deemed to constitute a
part hereof.
OTHER MATTERS
As of the date of this Proxy Statement, the Company has no knowledge of any
business other than that described above that will be presented at the Annual
Meeting. If any other business should come before the Annual Meeting, it is
intended that the persons named in the enclosed proxy will have discretionary
authority to vote the shares that they represent.
You are urged to sign and return your proxy promptly in the enclosed envelope to
make certain your shares will be voted at the Annual Meeting.
By Order of the Board of Directors,
Barbara A. Hart
Secretary
September 24, 1999
59
<PAGE>
INDEX TO ASBI'S CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Consolidated Financial Statements of ASBI Holdings, Inc. and
Subsidiaries as of and for the nine month periods ended June 30, 1999 and 1998
Consolidated Balance Sheets............................................... F-2
Consolidated Statements of Income......................................... F-3
Consolidated Statements of Cash Flows..................................... F-4
Notes to Consolidated Financial Statements................................ F-5
Audited Consolidated Financial Statements of ASBI Holdings, Inc. and
Subsidiaries as of and for the years ended September 30, 1998, 1997 and 1996
Independent Auditors' Report.............................................. F-7
Consolidated Balance Sheets............................................... F-8
Consolidated Statements of Income......................................... F-9
Consolidated Statements of Cash Flows..................................... F-10
Consolidated Statements of Changes in Stockholders' Equity................ F-11
Notes to Consolidated Financial Statements................................ F-12
</TABLE>
F-1
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 1998
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,416 $ 4,071
Loans held for sale (at market value) 56,106 67,945
Loans held for investment, net 190,054 182,617
Real estate purchased for development 3,108 2,064
Premises and equipment, net 1,580 901
Other real estate owned, net 3,563 214
Federal Home Loan Bank stock (at cost) 1,195 1,073
Accrued interest receivable 1,629 1,817
Other assets 685 436
------------ ------------
Total assets $ 268,336 $ 261,138
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 11,232 $ 9,585
Interest-bearing 222,896 217,778
------------ ------------
Total deposits 234,128 227,363
Advances from the Federal Home Loan Bank 4,243 8,977
Other liabilities 4,359 3,724
------------ ------------
Total liabilities 242,730 240,064
Commitments and contingencies
Stockholders' equity:
Common stock, Class A voting, $.001 par value, 101,000,000
Class A and B shares authorized, 272,064 shares issued and
authorized in both 1999 and 1998 -- --
Common stock, Class B nonvoting, $.001 par value, 101,000,000
Class A and B shares authorized, 26,934,336 shares issued and
authorized in both 1999 and 1998 27 27
Additional paid-in capital 238 238
Retained earnings 25,341 20,809
------------ ------------
Total stockholders' equity 25,606 21,074
------------ ------------
Total liabilities and stockholders' equity $ 268,336 $ 261,138
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-2
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the nine months ended June 30, 1999 and 1998
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 21,976 $ 21,712
Interest and dividends on investments 605 437
------------ ------------
Total interest income 22,581 22,149
------------ ------------
Interest expense:
Interest on deposits (including interest expense on
certificates of deposit of $100,000 and over of approximately
$1,086 and $2,177 in 1999 and 1998, respectively) 9,414 8,843
Interest on FHLB advances 400 807
------------ ------------
Total interest expense 9,814 9,650
------------ ------------
Net interest income 12,767 12,499
(Credit) provision for possible loan losses ( 184) 1,460
------------ ------------
Net interest income after provision for possible loan losses 12,951 11,039
------------ ------------
Noninterest income:
Gain on sale of assets 2,072 1,028
Other 584 737
------------ ------------
Total noninterest income 2,656 1,765
------------ ------------
Noninterest expense:
Compensation and benefits 4,282 3,840
Occupancy and equipment 637 560
Other 1,743 1,505
------------ ------------
Total noninterest expense 6,662 5,905
------------ ------------
Income before income taxes and minority interest 8,945 6,899
Income tax expense (benefit) 75 ( 701)
------------ ------------
Income before minority interest 8,870 7,600
Minority interest ( 307) 23
------------ ------------
Net income $ 8,563 $ 7,623
============ ============
Earnings per common share $ .32 $ .28
============ ============
Weighted average shares outstanding 27,206,400 27,206,400
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-3
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended June 30, 1999 and 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,563 $ 7,623
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of loans held for sale, net ( 1,742) ( 1,040)
(Credit) provision for loan losses ( 184) 1,460
Depreciation and amortization of premises and equipment 137 133
Gain on sale of real estate owned ( 65) ( 41)
Provision for real estate owned losses 83 43
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable 254 ( 336)
Decrease (increase) in other assets 57 ( 190)
Increase (decrease) in other liabilities 368 ( 568)
Purchases of loans held for sale ( 4,877) ( 57,644)
Proceeds from sale and principal repayments on loans
held for sale 25,604 4,787
------------ ------------
Net cash provided by (used in) operating activities 28,198 ( 45,773)
------------ ------------
Cash flows from investing activities:
Loan originations and purchases, net of repayments ( 9,695) ( 10,000)
Increase in factored receivables, net of repayments ( 310) ( 54)
Purchases of premises and equipment ( 851) ( 435)
Proceeds from sale of real estate owned 817 1,743
Purchases of Federal Home Loan Bank stock, net ( 106) --
Proceeds from sale of FHLB stock -- 973
Purchase of real estate for development ( 193) ( 2,064)
------------ ------------
Net cash used in investing activities ( 10,338) ( 9,837)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW, savings and money
market accounts 3,704 6,757
Net (decrease) increase in certificates of deposit ( 9,264) 60,252
Net decrease in advances from the Federal Home Loan Bank ( 380) ( 14,659)
Dividends paid ( 5,170) ( 3,247)
------------ ------------
Net cash (used) provided by financing activities ( 11,110) 49,103
------------ ------------
Net increase (decrease) in cash and cash equivalents 6,750 ( 6,507)
Cash and cash equivalents at beginning of period 3,666 10,578
------------ ------------
Cash and cash equivalents at end of period $ 10,416 $ 4,071
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-4
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Select Notes to Consolidated Financial Statements
June 30, 1999 and 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim financial statements as of and for the nine
month periods ended June 30, 1999 and 1998, respectively, reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for such periods presented. Management has determined
that all such adjustments are of a normal recurring nature.
2. Statements of Cash Flows
ASBI has chosen to report its cash flows by the indirect method and has chosen
to report on a net basis its cash receipts and cash payments for time deposits
accepted and repayments of those deposits, and loans made to customers and
principal collections on those loans.
Supplemental information on cash flows and non-cash transactions for the nine
months ended June 30, 1999 and 1998, (unaudited) is as follows (in thousands):
1999 1998
---- ----
Cash transactions:
Interest expense paid $ 9,872 $ 9,563
======== ========
Federal income tax paid $ -- $ --
======== ========
Noncash transactions:
Net acquisition of other real estate owned $ 3,883 $ 1,605
======== ========
3. Income Taxes
ASBI changed its tax status from taxable to nontaxable effective as of January
1, 1997. The remaining deferred tax liability at June 30, 1999 and 1998, of
approximately $551,000 is related to ASBI's future taxable income due primarily
to the recapture (for tax purposes) of the reserve for loan loss and certain
built in gains primarily associated with purchased loan pools, which may be
taxable at the corporate level in future years.
4. Year 2000 Readiness
The Year 2000 issue relates to the ability of computer systems and certain other
systems (involving imbedded microchips) to properly handle year 2000 date
sensitive data and the potential risk to the Company because of relationships
with third parties (e.g. software and hardware vendors, loan customers,
correspondent banks, utility companies and others) who do not adequately address
the year 2000 issue. Failure in any of these areas could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. The Company has established a Year 2000 Project Committee
to evaluate and assess the Company's exposure to this issue. The Committee
reports the progress of the Year 2000 project to the Company's Board of
Directors on a regular basis. This Committee has implemented an approach to the
Year 2000 issue consisting of five phases. These phases include Awareness,
Assessment, Renovation, Validation and Implementation.
The Awareness phase consisted of defining the Year 2000 problem, developing the
resources necessary to perform
F-5
<PAGE>
compliance work, establishing a Year 2000 program committee and program
coordinator and developing an overall strategy that encompasses in-house
systems, service bureaus, vendors, auditors, customers, and other suppliers
(including correspondents). This phase has generally been completed.
The Assessment phase consists of evaluating the size and complexity of the
potential problems and detailing the magnitude of the effort necessary to
address the Year 2000 issue. The objective of this phase is to identify
hardware, software, networks, automated teller machines, other various
processing platforms, and customer and vendor interdependencies affected by Year
2000 date change. The assessment project goes beyond the Company's information
systems and includes environmental systems that are dependent on embedded
microchips, such as security systems, elevators, sprinkler systems, alarm and
vaults. The assessment phase is substantially completed, but management
considers it an ongoing process for the Company because of the need to evaluate
any new vendor and customer relationships and information system hardware and
software obtained through the Year 2000.
The Renovation phase includes the remediation of systems identified in the
awareness phase as not Year 2000 compliant. Management believes the Renovation
phase to be substantially complete with identified problem areas being
addressed.
Testing of mission critical systems was substantially complete by December 31,
1998. Further testing with mission critical vendors and other significant third
party vendors was substantially completed by June 30, 1999. The Company has not
identified problems thus far with any of its systems that management believes
would have a material impact upon its operations.
The Company is developing contingency plans for implementation in the event that
mission critical third party vendors or other significant third party vendors
fail to adequately address Year 2000 issues. Such plans principally involve
identifying alternate vendors or internal remediation. There can be no assurance
that any such plans will fully mitigate potential failures or problems.
Furthermore, there may be certain mission critical third parties, such as
utilities or telecommunication companies, where alternative arrangements or
sources are limited.
Estimated costs incurred during the nine months ended June 30, 1999, to address
Year 2000 issues were approximately $30,000. However, the Company does not
separately track internal costs and, therefore, such costs are not included in
this amount. The Company estimates additional costs to be incurred to be
approximately $2,000.
Management currently believes Year 2000 issues will not have a material impact
on the Company's consolidated financial statements. However, because Year 2000
compliance is greatly affected by entities whose Year 2000 readiness efforts the
Company does not control and generally because the result of future events is
not currently determinable, Year 2000 compliance issues could have a significant
effect on the future consolidated financial statements of the Company.
F-6
<PAGE>
Independent Auditors' Report
- ----------------------------
The Board of Directors
ASBI Holdings, Inc. and Subsidiaries
We have audited the consolidated balance sheets of ASBI Holdings, Inc. and
Subsidiaries (the Company) as of September 30, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the three years ended September 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 ASBI Holdings, Inc.
and Subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for the three years ended September 30, 1998, in
conformity with generally accepted accounting principles.
Fisk & Robinson P.C.
October 29, 1998
Dallas, Texas
F-7
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,666 $ 10,578
Loans held for sale (at market value) 75,071 14,074
Loans held for investment, net 183,768 175,602
Real estate purchased for development 2,915 --
Premises and equipment, net 866 599
Other real estate owned, net 515 354
Federal Home Loan Bank stock (at cost) 1,089 2,046
Accrued interest receivable 1,883 1,481
Other assets 742 246
---------- ----------
Total assets $ 270,515 $ 204,980
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 10,303 $ 6,431
Interest-bearing 229,385 153,923
---------- ----------
Total deposits 239,688 160,354
Advances from the Federal Home Loan Bank 4,623 23,636
Other liabilities 3,991 4,292
---------- ----------
248,302 188,282
Commitments and contingencies
Stockholders' equity:
Common stock, Class A voting, $.001 par value, 101,000,000
Class A and B shares authorized, 272,064 shares issued and
outstanding in both 1998 and 1997 -- --
Common stock, Class B nonvoting, $.001 par value, 101,000,000
Class A and B shares authorized, 26,934,336 shares issued and
outstanding in both 1998 and 1997 27 27
Additional paid-in capital 238 238
Retained earnings 21,948 16,433
---------- ----------
Total stockholders' equity 22,213 16,698
---------- ----------
Total liabilities and stockholders' equity $ 270,515 $ 204,980
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended September 30, 1998, 1997 and 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 29,620 $ 21,713 $ 18,808
Interest and dividends on investments 723 531 662
------------- ------------- -------------
Total interest income 30,343 22,244 19,470
------------- ------------- -------------
Interest expense:
Interest on deposits (including interest expense
on certificates of deposits of $100,000 and over
of $2,567, $1,708 and $1,441 in 1998,
1997 and 1996, respectively) 12,117 7,619 6,078
Interest on notes payable -- 6 128
Interest on FHLB advances 974 1,551 1,718
------------- ------------- -------------
Total interest expense 13,091 9,176 7,924
------------- ------------- -------------
Net interest income 17,252 13,068 11,546
Provision for possible loan losses 2,140 1,024 513
------------- ------------- -------------
Net interest income after provision for possible
loan losses 15,112 12,044 11,033
------------- ------------- -------------
Noninterest income:
Gain on sale of assets 2,086 1,283 699
Other 931 658 639
------------- ------------- -------------
Total noninterest income 3,017 1,941 1,338
------------- ------------- -------------
Noninterest expense:
Compensation and benefits 4,892 3,365 2,179
Occupancy and equipment 608 483 404
Other 2,055 1,979 2,312
------------- ------------- -------------
Total noninterest expense 7,555 5,827 4,895
------------- ------------- -------------
Income before income taxes and minority interest 10,574 8,158 7,476
Income taxes 55 1,766 3,020
------------- ------------- -------------
Income before minority interest 10,519 6,392 4,456
Minority interest ( 126) ( 84) 316
------------- ------------- -------------
Net income $ 10,393 $ 6,308 $ 4,772
============= ============= =============
Earnings per common share $ .38 $ .23 $ .17
============= ============= =============
Weighted average shares outstanding 27,206,400 27,206,400 27,206,400
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,393 $ 6,308 $ 4,772
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of discount on loans held
for sale, net ( 6) ( 175) ( 1,649)
Gain on sale of loans held for sale, net ( 1,889) ( 1,268) ( 699)
Provision for loan losses 2,140 1,025 513
Depreciation and amortization of premises
and equipment 180 123 105
Gain on sale of real estate owned ( 207) ( 14) ( 38)
Provision for real estate owned losses 56 136 91
Changes in operating assets and liabilities:
Increase in accrued interest receivable ( 402) ( 227) ( 278)
(Increase) decrease in other assets ( 496) 603 ( 222)
(Decrease) increase in other liabilities ( 302) 646 1,418
Purchases of loans held for sale ( 76,789) ( 9,082) ( 20,796)
Proceeds from sale and principal repayments
on loans held for sale 17,687 11,792 16,624
------------ ------------ ------------
Net cash (used in) provided by
operating activities ( 49,635) 9,867 ( 159)
------------ ------------ ------------
Cash flows from investing activities:
Loan originations and purchases, net of repayments ( 10,442) ( 42,013) ( 31,242)
Increase in factored receivables, net of repayments ( 2,511) ( 2,773) ( 837)
Purchases of premises and equipment ( 447) ( 388) ( 200)
Proceeds from sale of real estate owned 2,687 1,315 839
Capitalized improvements of real estate owned ( 48) ( 62) ( 61)
Purchases of Federal Home Loan Bank stock, net -- ( 127) ( 695)
Proceeds from sale of FHLB stock 957 -- --
Purchase of real estate for development ( 2,916) -- --
------------ ------------ ------------
Net cash used in investing activities ( 12,720) ( 44,048) ( 32,196)
------------ ------------ ------------
</TABLE>
(continued)
F-10
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended September 30, 1998, 1997 and 1996
(Continued)
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits, NOW,
savings and money market accounts 9,534 988 1,712
Net increase in certificates of deposit 69,800 35,266 35,379
Net (decrease) increase in advances from
the Federal Home Loan Bank ( 19,013) 2,342 1,209
Proceeds from note payable -- -- 550
Payments on note payable -- ( 550) ( 2,220)
Sale of common stock -- 52 187
Repurchase of preferred stock -- ( 1,557) ( 1,027)
Dividends paid ( 4,878) ( 2,920) ( 198)
------------ ------------ ------------
Net cash provided by financing activities 55,443 33,621 35,592
------------ ------------ ------------
Net decrease (increase) in cash and cash
equivalents ( 6,912) ( 560) 3,237
Cash and cash equivalents at beginning of year 10,578 11,138 7,901
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,666 $ 10,578 $ 11,138
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Redeemable Additional
Preferred Common Paid-In Retained
Stock Stock Capital Earnings Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $ 2,525 $ 27 $ -- $ 8,529 $ 11,081
Issuance of common stock -- - 186 -- 186
Repurchase and retirement of preferred stock ( 1,026) - -- -- ( 1,026)
Dividends on preferred stock -- - -- ( 199) ( 199)
Net income -- - -- 4,772 4,772
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1996 1,499 27 186 13,102 14,814
Sale of common stock -- - 52 -- 52
Repurchase and retirement of preferred stock ( 1,499) - -- ( 58) ( 1,557)
Dividends on common stock -- - -- ( 2,919) ( 2,919)
Net income -- - -- 6,308 6,308
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1997 -- 27 238 16,433 16,698
Dividends on common stock -- - -- ( 4,878) ( 4,878)
Net income -- - -- 10,393 10,393
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 $ -- $ 27 $ 238 $ 21,948 $ 22,213
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
ASBI HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
1. Basis of Presentation
ASBI Holdings, Inc. (Company) was formed January 31, 1995 when the owners of the
common stock of Arlington Savings Bancshares, Inc. (ASBI) contributed their
shares of stock in ASBI to the Company in return for an equivalent ownership
interest in the Company. The Company then owned 100% of the outstanding common
stock of ASBI. ASBI was subsequently merged with and into Arlington Savings
Bancshares of Delaware, Inc. (ASB Delaware), a wholly owned subsidiary of the
Company also formed on January 31, 1995. The Company, through ASB Delaware, owns
100% of First Savings Bank, FSB (Bank). The Bank began operations in 1986.
2. Summary of Significant Accounting Policies
The following is a description of the more significant accounting policies which
the Company follows in preparing and presenting its consolidated financial
statements.
Principles of Consolidation The consolidated financial statements
include the accounts of the Company and those of its wholly-owned subsidiaries,
ASB Delaware and the Bank. In addition, the consolidated financial statements
include the accounts of First Consumer Credit, L.L.C. (First Consumer), FSB
Financial, L.L.C. (FSB) and FSB Development, L.L.C. (FSBD), limited liability
companies. The Bank owns a 82% voting interest in First Consumer, a 51% voting
interest in FSB and a 100% interest in FSBD. An officer of the Bank owns 4% of
First Consumer. All material intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates The preparation of 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 as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
Cash and Cash Equivalents For purposes of the consolidated statement
of cash flows, the Company considers funds due from banks, interest bearing
deposits in other banks, and all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Loans Held for Sale Loans held for sale are valued at the lower of
cost or market as determined by outstanding commitments from investors or
current investor yield requirements calculated on the aggregate note basis.
Discounts are amortized using a method approximating the interest method over
the remaining period to contractual maturity. Loans held for sale consisted of
first mortgage loans and home improvement loans which had been purchased but had
not yet been sold in the secondary market. Gains and losses on the sale of loans
held for sale are determined using the specific identification method. At
September 30, 1998, 1997 and 1996, the cost of loans held for sale approximated
market.
Loans and Allowance for Possible Loan Losses Loans that management
has the intent and ability to hold for the foreseeable future or until maturity
or pay-off are reported at their outstanding principal balance adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans.
Loan origination and commitment fees and certain related direct costs are
deferred and amortized to interest income,
F-13
<PAGE>
generally over the contractual lives of the loans, using the interest method.
Subject to management's assessment of loan performance and other factors,
discounts on first mortgage, consumer and other loans are amortized to income
using a method approximating the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Impaired loans (as defined by SFAS Statement No. 114 and as amended by SFAS No.
118) are accounted for at the net present value of expected future cash flows,
discounted at the loan's effective interest rate, the observable market price of
the loan or at the fair value of the collateral if the loan is collateral
dependent.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized generally to the extent cash payments
are received.
The allowance for possible loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Factored Receivables Interest income from factored receivables is
recorded on an accrual basis in accordance with the terms of the agreements.
Certain fees charged in connection with the factored receivables are earned and
recorded in the month in which the receivables are purchased.
The Company disburses approximately 80% of the invoice amount at the time a
receivable is purchased from a customer. On collection of the purchased
invoices, amounts collected in excess of finance income, net of initial payment,
are remitted to the customers. At September 30, 1998, 1997 and 1996,
approximately $1,491,000, $1,399,000 and $824,000, respectively, of amounts due
to customers under this program arrangement are classified in other liabilities
in the consolidated balance sheet.
Premises and Equipment Premises and equipment are stated at cost less
accumulated depreciation. Provisions for depreciation are computed using the
straight-line method. Average useful lives used for depreciation with respect to
major classifications of property are as follows:
Type Term
- ---- ----
Building 7 years
Furniture and equipment 5 to 10 years
Automobile 3 years
Leasehold improvements Lease term
Maintenance and repairs are charged to expense; betterments and renewals are
capitalized. Upon retirement or replacement, the cost of the asset and the
related accumulated depreciation are eliminated with the resulting gain or loss
included in the statement of income.
Other Real Estate Owned Real estate properties acquired through, or
in lieu of, loan foreclosure are to be sold and are initially recorded at fair
value at the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in other noninterest expense.
F-14
<PAGE>
Income Taxes The Company has elected S corporation status effective
January 1, 1997. Earnings and losses after that date will be included in the
personal income tax returns of the stockholders and taxed depending on their
personal tax strategies. Except as discussed in Note 13, the Company will not
incur additional income tax obligations, and future financial statements will
not include a provision for federal income taxes. Prior to the change, deferred
income taxes related primarily to differences between the basis of loans for
financial and income tax reporting were recorded in the financial statements.
Because the Company's stockholders are now obligated to pay federal income taxes
on the earnings of the Company, the Company expects to declare cash dividends
sufficient to fund stockholders' tax payments as they come due.
Fair Value of Financial Instruments SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose the fair
values of its financial instruments (see Note 15). The following methods and
assumptions were used by the Company to estimate the fair value of each class of
financial instruments.
(1) Cash and cash equivalents, accrued interest receivable and accrued
interest payable
These assets and liabilities are considered short-term instruments for which the
carrying amount is a reasonable estimate of fair value.
(2) Loans held for sale
Fair values are determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate note basis.
(3) Loans receivable
Fair values are estimated for portfolios of loans with similar characteristics.
Loans are segregated by type such as real estate, commercial and consumer which
are also segregated into fixed and adjustable rate interest terms. The fair
value of loans receivable is calculated by discounting scheduled cash flows
through the estimated maturity using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Loan fair
values estimates include judgments regarding future expected loss experience and
risk characteristics.
(4) Stock in Federal Home Loan Bank of Dallas
No secondary market exists for Federal Home Loan Bank (FHLB) of Dallas stock.
The stock is bought and sold at par by the FHLB. The fair value, therefore, is
the carrying value of FHLB stock.
(5) Deposits, advances from Federal Home Loan Bank, note payable and
subordinated debt
The fair value of deposits with no stated maturity, such as interest-bearing
checking accounts, passbook savings accounts and advance payments from borrowers
for taxes and insurance are equal to the amount payable on demand (carrying
value). The fair value of certificates of deposits and advances from FHLB is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits and borrowings of
similar remaining maturities.
Forward-Looking Statements Certain phrases contained in these
financial statements including, without limitation, statements containing the
words "believes", "anticipates", "estimates", "expects" and words of similar
meaning, constitute forward-looking statements, as defined in securities law.
Among others, notes to the financial statements concerning financial
instruments, contingencies, and Year 2000 readiness identify important risk
factors that could cause actual results to differ significantly from those
contained in the forward-looking statements.
F-15
<PAGE>
Earnings Per Share Earnings per common share were computed by
dividing net income available to common stockholders by the weighted average
number of shares of common stock outstanding during each year presented. The
weighted average number of common shares has not been adjusted, as there exist
no options, warrants or other potentially dilutive securities.
Reclassification Certain amounts in prior year financial statements
have been reclassified to conform to the 1998 presentation.
3. Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Under this guidance, the
Company is required to recognize the financial and servicing assets it controls
and the liabilities it has incurred, derecognize financial assets when control
has been surrendered and derecognize liabilities when extinguished. SFAS 125
became effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. However,
certain provisions of the Statement were delayed for one year. The Company did
not experience a significant impact upon implementation of SFAS 125.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", which establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management has
not yet fully evaluated the effects of this change in its operations. The
Company, should it acquire such derivative instruments or should it engage in
such hedging activities, will adopt SFAS No. 133 as required for its year ended
September 30, 2001.
4. Statement of Cash Flows
The Company reports on a net basis its cash receipts and cash payments for time
deposits accepted and repayments of those deposits and loans made to customers
and principal collection on those loans.
The Company uses the indirect method to present cash flows from operating
activities. Other supplemental cash flow information is presented as follows (in
thousands):
1998 1997 1996
---- ---- ----
Cash transactions:
Interest expense paid $ 12,962 $ 9,081 $ 7,908
========= ======== ========
Federal income tax paid $ 16 $ 763 $ 2,823
========= ======== ========
Noncash transactions:
Net acquisition of other real estate owned $ 2,648 $ 859 $ 1,171
========= ======== ========
F-16
<PAGE>
5. Loans Held for Investment and Allowance for Loan Losses
Loans held for investment at September 30, 1998 and 1997, are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First mortgage loans (principally conventional):
Real estate $ 105,145 $ 115,514
Construction 57,658 45,654
------------- -------------
162,803 161,168
------------- -------------
Consumer and other loans:
Commercial 15,516 17,001
Other 12,008 8,269
------------- -------------
27,524 25,270
------------- -------------
Factored receivables 7,909 5,397
------------- -------------
198,236 191,835
Unearned income ( 10,809) ( 13,526)
Allowance for loan losses ( 3,659) ( 2,707)
------------- -------------
$ 183,768 $ 175,602
============= =============
</TABLE>
The Company grants loans to customers primarily within the Dallas/Fort Worth,
Texas metropolitan area. Also, the Company purchases loans, in the ordinary
course of business, which have been originated in various other areas of the
United States. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the general economic conditions of the area. At September 30,
1998 and 1997, substantially all of the Company's loans are collateralized with
real estate or automobiles.
An analysis of the allowance for possible loan losses for the years ended
September 30, 1998, 1997 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 2,707 $ 2,051 $ 2,101
Provision for loan losses 2,140 1,024 513
Loans charged to the allowance, net ( 1,188) ( 368) ( 563)
----------- ----------- -----------
Balance at end of year $ 3,659 $ 2,707 $ 2,051
=========== =========== ===========
</TABLE>
Impairment of loans with a recorded investment of approximately $9,541,000,
$6,103,000 and $3,402,000 at September 30, 1998, 1997 and 1996, respectively,
has been recognized in conformity with SFAS 114 as amended by SFAS 118. The
average recorded investment in impaired loans during 1998 and 1997 was
approximately $7,822,000 and $4,753,000, respectively. The total allowance for
loan losses related to these loans was approximately $1,362,000 and $1,986,000
at September 30, 1998 and 1997, respectively. No material amount of interest
income on impaired loans was recognized for cash payments received in 1998, 1997
or 1996.
F-17
<PAGE>
6. Other Real Estate Owned
An analysis of the allowance for possible losses on other real estate owned for
the years ended September 30, 1998, 1997 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 253 $ 156 $ 117
Provision for losses 56 136 91
Charge-offs ( 290) ( 39) ( 52)
---------- ---------- ----------
Balance at end of year $ 19 $ 253 $ 156
---------- ---------- ----------
</TABLE>
7. Premises and Equipment
Bank premises and equipment at September 30, 1998 and 1997, consists of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 376 $ --
Building 174 174
Leasehold improvements 215 215
Furniture and equipment 860 827
Automobiles 55 55
---------- ----------
1,680 1,271
Less accumulated depreciation ( 814) ( 672)
---------- ----------
$ 866 $ 599
========== ==========
</TABLE>
Depreciation expense of approximately $180,000, $124,000 and $105,000 for the
years ended September 30, 1998, 1997 and 1996, respectively, has been included
in occupancy and equipment expense in the accompanying consolidated statement of
income.
8. Deposits
Deposits at September 30, 1998 and 1997, are summarized as follows (in
thousands, except percentages):
<TABLE>
<CAPTION>
1998 1997
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand
accounts $ 10,303 4.1% $ 6,431 4.0%
Interest-bearing demand
accounts 938 0.4 1,093 0.7
Savings accounts 351 0.1 312 0.2
Limited access money market
accounts 9,961 4.2 4,183 2.6
Certificates of deposit, less
than $100,000 188,423 78.8 115,774 72.2
---------- ----- ----------- -----
Certificates of deposit,
$100,000 and greater 29,712 12.4 32,561 20.3
---------- ----- ----------- -----
$ 239,688 100.0% $ 160,354 100.0%
---------- ----- ----------- -----
</TABLE>
F-18
<PAGE>
The weighted average interest rates on deposits at September 30, 1998, 1997 and
1996, were approximately 5.2%, 5.8% and 5.9%, respectively.
At September 30, 1998, scheduled maturities of certificates of deposit were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 2000 2001 Thereafter Total
---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C>
4.00% to 4.99% $ 1,119 $ -- $ -- $ -- $ 1,119
5.00% to 5.99% 111,375 16,436 1,917 1,103 130,831
6.00% to 6.99% 50,981 12,319 5,019 11,129 79,448
7.00% to 7.99% 100 6,637 -- -- 6,737
---------- --------- -------- ---------- ----------
$ 163,575 $ 35,392 $ 6,936 $ 12,232 $ 218,135
========== ========= ======== ========== ==========
</TABLE>
9. Line of Credit
The Company executed a $2,000,000 line of credit note with an unrelated
commercial bank on September 1, 1998. The note is secured by 100% of the common
stock of ASB Delaware and the Bank. There have been no amounts advanced on the
note as of September 30, 1998. The note matures on September 30, 1999.
10. Related Party Transactions
In the ordinary course of business, the Company has transactions, including
borrowings, with its employees, directors and their affiliates. In the opinion
of management, such transactions are on the same terms, including interest rates
and collateral requirements, as those prevailing at the time for comparable
transactions with unaffiliated persons. The aggregate amount of such loans was
approximately $1,628,000 and $4,081,000 at September 30, 1998 and 1997,
respectively. During the period ended September 30, 1997, repayments of loans
totaled approximately $2,459,000 and new loans funded totaled approximately
$6,000.
11. Commitments and Contingencies
The Company and the Bank are involved in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters is not expected to have a material effect
on the consolidated financial position or results of operations of the Company.
At September 30, 1998, the Company was obligated under noncancelable operating
leases for office space. Net rent expense under operating leases, included in
occupancy and equipment expense, was approximately $282,000, $188,000 and
$154,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
The projected minimum rental payments under leases having initial or remaining
noncancelable lease terms in excess of one year at September 30, 1998, are as
follows (in thousands):
Year Amount
---- ------
1999 $ 232
2000 74
2001 7
------
$ 313
======
F-19
<PAGE>
12. Advances from the Federal Home Loan Bank
At September 30, 1998 and 1997, advances from the FHLB were due as follows (in
thousands):
1998 1997
---- ----
Due within one year $ -- $ --
Due within two years -- --
Due within five years 531 473
Due within seven years 1,500 21,000
Due within ten years 998 545
Due within twenty years 1,594 1,618
---------- -----------
$ 4,623 $ 23,636
========== ===========
Pursuant to collateral agreements, the advances from the FHLB, with interest
rates ranging from 5.3% to 6.8%, are secured by approximately $83,559,000 of
collateral value (as defined) in qualifying first mortgage loans.
13. Income Taxes
The provision for income taxes consists of the following components for the
years ended September 30, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
---- ---- ----
Current - Federal $ -- $ 514 $ 2,811
Deferred - Federal -- 910 ( 138)
Current - State 55 243 365
Deferred - State -- 99 ( 18)
------- -------- --------
Total $ 55 $ 1,766 $ 3,020
======= ======== ========
The 1996 tax provision differs from the expense that would result from applying
federal statutory tax rates to income before income taxes primarily because
certain expenses are not tax deductible.
As discussed in Note 1, the Company changed its tax status from taxable to
nontaxable effective as of January 1, 1997. The deferred tax liability recorded
at September 30, 1998 and 1997, is related to the Company's future taxable
income due primarily to the recapture (for tax return purposes) of the reserve
for loan losses and certain built in gains primarily associated with purchased
loan pools, which may be taxable at the corporate level in future years. The
effect of the change in tax status as of January 1, 1997, was to reduce the
deferred tax asset by approximately $458,000, and record a deferred tax
liability of approximately $551,000 resulting in a $1,009,000 charge to the
deferred tax provision during the year ended September 30, 1997.
A deferred tax liability of approximately $551,000, related to loans, is
recorded in other liabilities at September 30, 1998.
F-20
<PAGE>
14. Employee Stock Ownership Plan
In 1988, the Company established an employee stock ownership plan (Plan) which
was a noncontributory plan established to acquire shares of the Company's common
stock for the benefit of substantially all employees of the Company.
No contribution was made to the Plan in 1998 and 1997. The Plan was terminated
as of June 30, 1997, and was liquidated in December 1997.
15. Employee Benefit Plan
The Company has a 401(k) defined contribution plan covering substantially all of
its employees. The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974. The Plan allows eligible employees' contributions
to be limited so as to meet the nondiscriminatory test of Section 401(m) of the
Internal Revenue Code.
The Company's matching contribution percentage is approximately 50% of up to 6%
of a participant's compensation. Contributions by the Company in 1998, 1997 and
1996 totaled approximately $37,000, $27,000 and $22,000, respectively.
16. Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. At
September 30, 1998 and 1997, the approximate amounts of these financial
instruments were as follows (in thousands):
1998 1997
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to fund loans $ 68,891 $ 51,730
Standby letters of credit 183 521
--------- ---------
$ 69,074 $ 52,251
========= =========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount and type of collateral obtained,
if deemed necessary by the Company upon extension of credit, varies and is based
on management's credit evaluation of the counterparty. The
F-21
<PAGE>
Company has not incurred any significant losses on its commitments in the years
ending September 30, 1998, 1997 or 1996.
Further, management believes the Company will not incur material losses as a
result of the commitments existing at September 30, 1998.
17. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments as of September
30, 1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,666 $ 3,666 $ 10,578 $ 10,578
Loans held for sale, net 75,071 75,071 14,074 14,074
Loans receivable, net 183,768 184,891 175,602 177,660
Accrued interest receivable 1,883 1,883 1,481 1,481
FHLB stock 1,089 1,089 2,046 2,046
Financial liabilities:
Deposits $ 239,688 $ 240,632 $ 160,354 $ 161,605
Advances from FHLB 4,623 4,623 23,636 23,789
Accrued interest payable 586 586 457 457
</TABLE>
18. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
federal agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting practices must be
met. The Company's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures, established by regulation to ensure capital adequacy,
require the maintaining of minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1998 and 1997, the Bank is considered "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized," the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table.
F-22
<PAGE>
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands, except percentages):
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998:
Total capital (to risk-weighted assets) $ 23,460 10.6% $ 17,752 8.0% $ 22,190 10.0%
Tier I capital (to risk-weighted assets) 22,626 10.2 8,876 4.0 13,314 6.0
Tier 1 capital (to adjusted total assets) 22,626 8.4 10,774 4.0 13,467 5.0
September 30, 1997:
Total capital (to risk-weighted assets) $ 17,045 10.2% $ 13,416 8.0% $ 16,770 10.0%
Tier I capital (to risk-weighted assets) 16,868 10.1 6,708 4.0 10,062 6.0
Tier I capital (to adjusted total assets) 16,868 8.3 8,149 4.0 10,181 5.0
</TABLE>
19. Year 2000 Readiness (Unaudited)
The Year 2000 issue relates to the ability of computer systems and certain other
systems (involving imbedded microchips) to properly handle year 2000 date
sensitive data and the potential risk to the Company because of relationships
with third parties (e.g. software and hardware vendors, loan customers,
correspondent banks, utility companies and others) who do not adequately address
the year 2000 issue. Failure in any of these areas could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. The Company has established a Year 2000 Project Committee
to evaluate and assess the Company's exposure to this issue. The Committee
reports the progress of the Year 2000 project to the Company's Board of
Directors on a regular basis. This Committee has implemented an approach to the
Year 2000 issue consisting of five phases. These phases include Awareness,
Assessment, Renovation, Validation and Implementation.
The Awareness phase consisted of defining the Year 2000 problem, developing the
resources necessary to perform compliance work, establishing a Year 2000 program
committee and program coordinator and developing an overall strategy that
encompasses in-house systems, service bureaus, vendors, auditors, customers, and
other suppliers (including correspondents). This phase has generally been
completed.
The Assessment phase consists of evaluating the size and complexity of the
potential problems and detailing the magnitude of the effort necessary to
address the Year 2000 issue. The objective of this phase is to identify
hardware, software, networks, automated teller machines, other various
processing platforms, and customer and vendor interdependencies affected by Year
2000 date change. The assessment project goes beyond the Company's information
systems and includes environmental systems that are dependent on embedded
microchips, such as security systems, elevators, sprinkler systems, alarm and
vaults. The assessment phase is substantially completed, but management
considers it an ongoing process for the Company because of the need to evaluate
any new vendor and customer relationships and information system hardware and
software obtained through the Year 2000.
The Renovation phase includes the remediation of systems identified in the
awareness phase as not Year 2000 compliant. Management believes the Renovation
phase to be substantially complete with identified problem areas being
addressed.
Testing of mission critical systems was substantially complete by December 31,
1998. Further testing with mission critical vendors and other significant third
party vendors is expected to be completed by June 30, 1999. The Company
F-23
<PAGE>
has not identified problems thus far with any of its systems that management
believes would have a material impact upon its operations.
The Company is developing contingency plans for implementation in the event that
mission critical third party vendors or other significant third party vendors
fail to adequately address Year 2000 issues. Such plans principally involve
identifying alternate vendors or internal remediation. There can be no assurance
that any such plans will fully mitigate potential failures or problems.
Furthermore, there may be certain mission critical third parties, such as
utilities or telecommunication companies, where alternative arrangements or
sources are limited.
Estimated costs incurred during the year ended September 30, 1998, to address
Year 2000 issues were approximately $15,000. However, the Company does not
separately track internal costs and, therefore, such costs are not included in
this amount. The Company estimates additional costs to be incurred to be
approximately $35,000.
Management currently believes Year 2000 issues will not have a material impact
on the Company's financial statements. However, because Year 2000 compliance is
greatly affected by entities whose Year 2000 readiness efforts the Company does
not control and generally because the result of future events is not currently
determinable, Year 2000 compliance issues could have a significant effect on the
future financial statements of the Company.
20. Supplementary Income and Expense Information
The following amounts are included in other noninterest income and noninterest
expense in the accompanying consolidated statement of income for the years ended
September 30, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
----- ----- -----
Noninterest income
Factoring fee income $ 766 $ 521 $ 325
All other 165 137 314
-------- -------- --------
$ 931 $ 658 $ 639
======== ======== ========
Noninterest expense
FDIC assessment $ 61 $ 113 $ 779
All other 1,994 1,866 1,533
-------- -------- --------
$ 2,055 $ 1,979 $ 2,312
======== ======== ========
21. Condensed Financial Statements of ASBI Holdings, Inc. (Parent)
Presented below are the condensed statements of income, balance sheet and
statement of cash flows for ASBI Holdings, Inc., the Parent Company.
F-24
<PAGE>
ASBI HOLDINGS, INC.
Statements of Income
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue -- Equity in earnings of subsidiary $ 10,399 $ 6,311 $ 4,776
Expenses -- Other 5 3 4
------------ --------- ---------
Income before income taxes 10,394 6,308 4,772
Income tax -- -- --
------------ --------- ---------
Net income $ 10,394 $ 6,308 $ 4,772
============ ========= =========
</TABLE>
ASBI HOLDINGS, INC.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
Noninterest-bearing deposits in subsidiary banks $ 192 $ 197
Investment in subsidiary 22,021 16,501
------------- -------------
Total assets $ 22,213 $ 16,698
============= =============
Liabilities and Stockholders' Equity:
Common stock $ 27 $ 27
Additional paid in capital 238 238
Retained earnings 21,948 16,433
------------- -------------
Total stockholders' equity 22,213 16,698
------------- -------------
Total liabilities and stockholders' equity $ 22,213 $ 16,698
============= =============
</TABLE>
F-25
<PAGE>
ASBI HOLDINGS, INC.
Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,394 $ 6,308 $ 4,772
Adjustments to reconcile cash
provided by operating activities:
Equity in undistributed earnings
of subsidiary ( 5,521) ( 3,392) ( 4,578)
------------ ----------- -----------
Net cash provided by operating activities 4,873 2,916 194
Cash flows from financing activities:
Dividends paid ( 4,878) ( 2,919) ( 198)
Proceeds from issuance of common stock -- -- 187
------------ ----------- -----------
Net cash used by financing activities ( 4,878) ( 2,919) ( 11)
------------ ----------- -----------
Net (decrease) increase in cash and
cash equivalents ( 5) ( 3) 183
Cash and cash equivalents, beginning of year 197 200 17
------------ ----------- -----------
Cash and cash equivalents, end of year $ 192 $ 197 $ 200
============ =========== ===========
</TABLE>
F-26
<PAGE>
EXHIBIT A - FAIRNESS OPINION
August 10, 1999
The Special Committee of the
Board of Directors
Southwest Securities Group, Inc.
1201 Elm Street
Dallas, Texas 75270
Gentlemen:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR") provide
you with its opinion as to the farness, from a financial point of view, to all
of the holders of common stock ("Stockholders") of Southwest Securities Group,
Inc. ("SWS" or the "Company") of the Consideration (as hereinafter defined) to
be paid pursuant to the Agreement and Plan of Reorganization by and between SWS,
ASBI Holdings, Inc. ("ASBI") and its wholly-owned subsidiary First Savings Bank,
FSB ("First Savings Bank" and collectively with ASBI referred to as "ASBI"),
dated August 10, 1999 (the "Merger Agreement"), pursuant to which SWS will
acquire ASBI (the "Merger"). The Merger Agreement provides, among other things,
that each issued and outstanding share of common stock of ASBI (other than those
shares subject to dissenters' rights) shall be converted into the right to
receive from SWS .0956 shares of SWS common stock (the "Consideration"), subject
to certain terms and conditions. The Merger Agreement will be considered at a
meeting of the Stockholders of SWS. The terms of the Merger are more fully set
forth in the Merger Agreement.
In delivering this opinion, FBR has completed the following tasks:
1. reviewed the First Savings Bank's Call Report data filed with the Federal
Deposit Insurance Corporation ("FDIC") for the fiscal quarter ended March
31, 1999, and the fiscal years ended December 31, 1998, 1997, 1996, 1995
and 1994, reviewed the audited financial statements for ASBI for the fiscal
years ended September 30, 1998, 1997, 1996 and 1995;
2. reviewed the internal financial statements for ASBI for the five months
ended May 31, 1999;
3. conducted and participated in due diligence reviews of ASBI along with
other specialists and experts engaged by the Special Committee to perform
due diligence;
4. discussed the financial condition, results of operations, earnings
projections, business and prospects of ASBI with the management of ASBI;
5. reviewed the SWS Annual Report to Stockholders for the fiscal years ended
June 27, 1997, and June 26, 1998, and the SWS Annual Report on Form 10-K
filed with the SEC for the fiscal years ended June 27, 1997, and June 26,
1998; reviewed the SWS Annual Proxy Statement dated September 24, 1998,
reviewed the SWS Quarterly Report on Form 10-Q filed with the SEC for the
quarter ended March 31, 1999;
6. discussed the financial condition, results of operations, earnings
projections, business and prospects of SWS with the management of SWS;
7. reviewed and discussed SWS's strategy and business plan relating to the
Merger and the Company on a post-merger basis;
Exhibit A - Page 1 of 3
<PAGE>
8. reviewed the reported market prices and trading activity for SWS common
stock for the period January 1, 1998, through August 10, 1999;
9. compared the results of operations and financial condition of First Savings
Bank with those of certain other federal savings and loans (or their
holding companies) that FBR deemed to be reasonably comparable to First
Savings Bank;
10. reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions that FBR deemed to be reasonably comparable to the
Merger;
11. reviewed the potential pro forma impact of the Merger to the Stockholders
of SWS;
12. reviewed a copy of the Merger Agreement; and
13. performed such other financial analyses and reviewed and analyzed such
other information as FBR deemed appropriate, including an assessment of
general economic, market and monetary conditions.
In rendering this opinion, FBR did not assume responsibility for independent
verifying, and did not independently verify, any financial or other information
concerning SWS and ASBI furnished to it by SWS or ASBI, or the publicly-
available financial and other information regarding SWS, ASBI and other
financial services organizations (or their holding companies). FBR has assumed
that all such information is accurate and complete and has no reason to believe
otherwise. FBR has further relied on the assurances of management of SWS and
ASBI that they are not aware of any facts that would make such financial or
other information relating to such entities inaccurate or misleading. With
respect to financial forecasts for SWS provided to FBR by its management, FBR
has assumed, for purposes of this opinion, that the forecasts have been
reasonably prepared on bases reflecting the best available estimates and
judgments of such management at the time of preparation as to the future
financial performance of SWS and ASBI. FBR has assumed that there has been no
undisclosed material change in ASBI's assets, financial condition, result of
operations, business or prospects since May 31, 1999. FBR did not undertake an
independent appraisal of the assets or liabilities of ASBI nor was FBR furnished
with any such appraisals. FBR is not an expert in the evaluation of allowances
for loan losses, was not requested to and did not independently review such
allowances, and was not requested to and did not independently review any
individual credit files of ASBI. FBR is not an expert in the evaluation of
environmental liabilities and did not independently examine potential
liabilities of two properties associated with ASBI where environmental problems
are known to exist. As set forth in the Merger Agreement, ASBI will use best
efforts to eliminate the potential liability to SWS. If such potential liability
is not eliminated, the Merger Agreement provides that a portion of the
Consideration will be allocated to an escrow (the "Environmental Escrow")
established to diminish the impact, in whole or in part, of any future liability
to SWS. FBR expresses no opinion as to the adequacy of such potential
Environmental Escrow. FBR's conclusions and opinion are necessarily based upon
economic, market and other conditions and the information made available to FBR
as of the date of this opinion. FBR expresses no opinion on matters of a legal,
regulatory, tax, environmental or accounting nature related to the Merger.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
savings institutions and financial services holding companies, initial and
secondary offerings and mutual-to-stock conversions of savings institutions, as
well as business valuations for other corporate purposes for financial services
organizations. FBR has experience in, and knowledge of, the valuation of banks
and thrifts in Texas and the rest of the United States.
Exhibit A - Page 2 of 3
<PAGE>
FBR has acted as a financial advisor to the Special Committee of the Board of
Directors of SWS in connection with the Merger and will receive a fee for
services rendered. In the ordinary course of FBR's business, it may effect
transactions in the securities of SWS for its own account and/or for the
accounts of its customers and, accordingly, may at any time hold long or short
positions in such securities. From time to time, principals and/or employees of
FBR may also have positions in such securities.
Based upon and subject to the foregoing, as well as any such other matters as we
consider relevant, it is FBR's opinion, as of the date hereof, that the
Consideration is fair, from a financial point of view, to the Stockholders of
SWS.
This letter is solely for the information of the Board of Directors, Special
Committee and Stockholders of SWS and may not be relied upon by any other person
or used for any other purposes, reproduced, disseminated, quoted from or
referred to without FBR's prior written consent; provided, however, this letter
may be referred to and reproduced in its entirety in proxy materials sent to the
Stockholders in connection with the solicitation of approval for the Merger
Notwithstanding the foregoing, the FBR acknowledges that any such Fairness
Opinion may be described in and filed as an exhibit for informational purposes
in filings made by the Company with the Office of Thrift Supervision and other
related agencies.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Exhibit A - Page 3 of 3
<PAGE>
SOUTHWEST SECURITIES GROUP, INC.
PROXY
The undersigned hereby (i) acknowledges receipt of the Notice dated September
24, 1999, of the Annual Meeting of Stockholders of Southwest Securities Group,
Inc. (the "Company") to be held at the Adolphus Hotel located at 1321 Commerce
Street, Dallas, Texas at noon local time on Wednesday, November 3, 1999, and the
Proxy Statement in connection therewith; and (ii) appoints Don A. Buchholz and
David Glatstein, and each of them, his proxies with full power of substitution,
for and in the name, place and stead of the undersigned, to vote upon and act
with respect to all of the shares of Common Stock of the Company standing in the
name of the undersigned or with respect to which the undersigned is entitled to
vote and act, at the meeting and at any adjournment thereof, and the undersigned
directs that his proxy be voted as follows:
(a) Proposal to elect eight directors to serve until the 2000 Annual Meeting of
Stockholders, or until their respective successors are elected and
qualified.
[_] FOR all nominees listed below [_] WITHHOLD AUTHORITY to
(except as marked to the vote for all nominees
contrary) listed below
Directors: Don Buchholz, David Glatstein, Brodie L. Cobb, J. Jan Collmer,
Robert F. Gartland, R. Jan LeCroy, Frederick R. Meyer and Jon
L. Mosle, Jr.
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.)
________________________________________________________________________________
(b) Proposal to approve the issuance of 2,600,000 shares of the Company's
Common Stock in connection with the proposed acquisition of ASBI Holdings,
Inc.
[_] FOR [_] AGAINST [_] ABSTAIN
(c) Proposal to approve the amendment to the Company's Certificate of
Incorporation to increase the authorized number of shares of Common Stock
from 20,000,000 to 60,000,000 shares.
[_] FOR [_] AGAINST [_] ABSTAIN
(d) In the discretion of the proxies on any other matter that may properly come
before the meeting or any adjournment thereof.
[_] FOR [_] AGAINST [_] ABSTAIN
THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED FOR THE MATTERS SPECIFICALLY REFERRED TO ABOVE.
---
If more than one of the proxies named above shall be present in person or by
substitute at the meeting or any adjournment thereof, both of the proxies so
present and voting, either in person or by substitute, shall exercise all of the
proxies hereby given.
(Continued and to be signed on reverse side)
<PAGE>
(Continued from other side)
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such Common Stock and hereby ratifies and confirms
all that the proxies, their substitutes, or any of them may lawfully do by
virtue hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
[ ] I PLAN TO ATTEND THE ANNUAL MEETING AND LUNCHEON.
Dated:__________________________
________________________________
________________________________
Please date this Proxy and sign
your name exactly as it appears
hereon. Where there is more than
one owner, each should sign. When
signing as an attorney,
administrator, executor, guardian
or trustee, please add your title
as such. If executed by a
corporation or other entity, the
Proxy should be signed by a duly
authorized officer or
representative of such entity.
Please date, sign and mail this
proxy card in the enclosed
envelope. No postage is required.
