-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGaWYjc90+19yv7RtvoT6BM64ZuA5a8vhZ0DdHwyXFbdC5WVgErLna/+GgwSN5jt bueg8Vgo2+wfnH2dgv5Q7w== 0000930661-99-002193.txt : 19990924 0000930661-99-002193.hdr.sgml : 19990924 ACCESSION NUMBER: 0000930661-99-002193 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990625 FILED AS OF DATE: 19990923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHWEST SECURITIES GROUP INC CENTRAL INDEX KEY: 0000878520 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 752040825 STATE OF INCORPORATION: DE FISCAL YEAR END: 0628 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19483 FILM NUMBER: 99715793 BUSINESS ADDRESS: STREET 1: SUITE 3500 STREET 2: 1201 ELM STREET CITY: DALLAS STATE: TX ZIP: 75270 BUSINESS PHONE: 2146511800 MAIL ADDRESS: STREET 1: SUITE 3500 STREET 2: 1201 ELM STREET CITY: DALLAS STATE: TX ZIP: 75270 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 25, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to ______ Commission file number 0-19483 SOUTHWEST SECURITIES GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 75-2040825 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 Elm Street, Suite 3500, Dallas, Texas 75270 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 859-1800 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $0.10 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------- ____________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _________ As of September 14, 1999, there were 11,814,793 shares of the Registrant's common stock, $.10 par value, outstanding. The aggregate market value of Common Stock held by non-affiliates was approximately $258,562,000 using a market price of $27.50 on that date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be used in connection with the solicitation of proxies to be voted at the Registrant's Annual Meeting of Stockholders to be held November 3, 1999, which will be filed with the Commission pursuant to Regulations 240.14a (6)(c) within 120 days after the Registrant's fiscal year end, are incorporated by reference into Part I and Part III of the Report on Form 10-K. PART I Item 1. Business (a) General Development of Business We are a full-service securities firm using technology to deliver a broad range of investment and related financial services to our clients, which include individual and institutional investors, broker/dealers, corporations, governmental entities and financial intermediaries. We provide clearing services to over 200 correspondent broker/dealers and 700 independent contract brokers, as well as full-service and online discount brokerage services to individual investors. Clearing involves maintaining our correspondent clients' accounts, processing securities transactions, extending margin loans and performing a variety of administrative services as agent for our correspondent broker/dealers. Our clearing business is complemented by our securities trading, securities lending, investment banking and asset management businesses. Our principal subsidiary, Southwest Securities, Inc. ("Southwest") is a registered securities broker/dealer and a member of the NYSE and other major exchanges. Southwest provides correspondent services to securities broker/dealers and other financial institutions in 30 states, Canada and Europe. Southwest serves individual investors through its Private Client Group offices in Texas, New Mexico and California and institutional investors nationwide from its Dallas, New York and Chicago offices. Clients of these offices gain access to Southwest's investment research that focuses on corporations primarily in the southwestern United States. We operate three other broker/dealer subsidiaries engaged in certain aspects of the securities brokerage business. All three are NASD registered broker/dealers. SWS Financial Services, Inc. ("SWSFS") contracts with independent registered representatives for the administration of their securities business. We offer discount brokerage services through Mydiscountbroker.com, Inc. ("MDB") which began operations in 1997. SWSFS and MDB are correspondents of Southwest. Southwest Clearing Corporation ("Clearing") was incorporated in the State of Delaware on September 30, 1998 and has not yet begun operations. NorAm, formerly Equity Securities Trading Company, was sold in August 1999. We offer investment management, advisory and trust services through three subsidiaries. Westwood Management Corporation ("Westwood"), a registered investment advisor, manages the Gabelli-Westwood Family of Mutual Funds as well as equity and fixed income investments for a diverse clientele including corporate plan sponsors, charitable institutions, educational endowments and public funds. Westwood Trust ("Trust") provides trust, custodial and other management services to high net worth individuals and corporations throughout Texas and the Southwest. SW Capital Corporation ("Capital"), administers the Local Government Investment Cooperative ("LOGIC") fund for cities, counties, schools and other local governments across Texas. SWS Technologies Corporation ("Technologies") incorporated in 1997, provides Internet services, network design and engineering and disaster recovery services to the Company, its clients and other customers in the southwestern United States. On August 10, 1999, we signed a definitive merger agreement to acquire ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB, (the "Bank"). ASBI is classified as a unitary savings and loan holding company, the business of which principally consists of the ownership and management of its subsidiaries, the principal operating subsidiary of which is the Bank. The Bank, headquartered in Arlington, Texas, is a federally chartered savings association organized and existing under the laws of the United States. 1 Pursuant to the terms of the merger agreement, we will acquire ASBI and its subsidiaries, including the Bank, through the merger of one of our wholly owned subsidiaries with and into ASBI. The agreement provides that we will issue 2.6 million shares of its common stock in a private placement to the holders of all of the outstanding stock of ASBI. As a result of the merger, the shareholders of ASBI will become our stockholders. Don A. Buchholz serves as our chairman and as chairman of ASBI, and is currently the beneficial owner of approximately 7.0% of our outstanding voting securities. Mr. Buchholz also owns approximately 19.3% of the outstanding securities of ASBI. As a result of the conversion of such securities into shares of our common stock pursuant to the merger, it is anticipated that Mr. Buchholz's beneficial ownership interest will increase to 9.2% of our outstanding stock. Pursuant to the terms of a voting agreement among the shareholders of ASBI, Mr. Buchholz as the power to exercise voting control for approximately 58.6% of ASBI's outstanding voting securities. Such voting agreement, however, will not be used in conjunction with the vote of ASBI shareholders to approve the merger. The acquisition is expected to be accounted for by the pooling-of-interests method and is subject to prior regulatory and shareholder approval. Detailed information regarding the acquisition of ASBI, including a description of the terms and conditions of the definitive merger agreement, issuance of shares of our common stock to ASBI shareholders and related matters, is set forth in our Definitive Proxy Statement for our Annual Meeting of Stockholders to be held on November 3, 1999. 2 (b) Financial Information about Operations Our operations consist of various financial services provided to our clients. The following table shows our revenue by source for the last three fiscal years (dollars in thousands):
1999 1998 1997 ---- ---- ---- Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------------------- Net revenues from clearing operations $ 40,118 12% $ 26,607 9% $ 22,693 10% ------------- ----------- ----------- Commissions: Listed equities 13,481 4% 14,125 5% 9,729 4% Over-the-counter equities 15,392 4% 12,418 4% 9,635 4% Corporate bonds 7,630 2% 5,027 2% 1,906 1% Government bonds and mortgage- backed securities 3,162 1% 2,785 1% 1,970 1% Municipal bonds 5,568 2% 4,658 2% 4,026 2% Options 2,885 1% 1,820 1% 1,228 1% Mutual funds 14,310 4% 13,737 5% 9,013 4% Other 2,620 1% 4,831 2% 1,375 1% ----------- ----------- ----------- 65,048 59,401 38,882 ----------- ----------- ----------- Interest 147,006 44% 143,121 50% 119,176 55% ----------- ---------- ----------- Investment banking fees: Corporate 2,108 1% 5,786 2% 2,913 1% Municipal 10,650 3% 9,933 3% 6,218 3% ----------- ---------- ----------- 12,758 15,719 9,131 ----------- ---------- ----------- Advisory and administrative fees: Institutional and individual accounts 9,851 3% 8,135 3% 4,667 2% Money market funds 6,090 2% 3,559 1% 1,790 1% Other 401 -- 437 -- 443 -- ----------- ---------- ----------- 16,342 12,131 6,900 ----------- ---------- ----------- Net gains on principal transactions: Equity securities 36,163 10% 7,295 3% 4,377 2% Municipal securities 3,399 1% 4,095 1% 6,092 3% Other 2,127 1% 1,186 -- 1,387 1% ----------- ---------- ----------- 41,689 12,576 11,856 ----------- ---------- ----------- Other 14,309 4% 16,203 6% 9,766 4% ----------- ---------- ----------- Total revenue $337,270 100% $285,758 100% $218,404 100% =========== ========== ===========
(c) Narrative Description of Business As of June 25, 1999, we employed 928 individuals. Southwest employed 833 of these individuals, 120 of whom were full-time retail representatives. In addition, 710 full-time retail representatives were affiliated as 3 independent contractors. Through our broker/dealer subsidiaries, we provide securities services to approximately 250,000 client accounts. No single client accounts for a material percentage of our total business. BROKERAGE SERVICES Southwest Securities, Inc. Southwest's activities in the securities business include execution and clearing of securities transactions, individual and institutional securities brokerage, securities lending, management of and participation in underwriting of equity and fixed income securities, market making in corporate securities and research and investment advisory services. For the year ended June 25, 1999, revenues of Southwest accounted for 87% of consolidated revenues. Southwest is a member firm of the NYSE, the American Stock Exchange, Inc. and the Chicago Stock Exchange, Inc. It is also a member of the NASD, the Securities Investor Protection Corporation ("SIPC"), and other regulatory and trade organizations. SIPC provides protection for clients up to $500,000 each with a limitation of $100,000 for claims for cash balances. Southwest purchases insurance which, when combined with the SIPC insurance, provides total coverage in certain circumstances of up to $25 million per client for securities held in clients' accounts with no aggregate limit. Execution and Clearing. Southwest provides clearing and execution primarily on a fully-disclosed basis for other broker/dealers including general securities broker/dealers, bank affiliated firms and those firms specializing in high volume trading. In a fully disclosed clearing transaction, the identity of the correspondent's client is known to Southwest, and Southwest physically maintains the client's account and performs a variety of services as agent for the correspondent. Southwest provides clearing and execution services for over 200 correspondents throughout the United States and Europe. Correspondent firms are charged fees based on their use of services according to a standard clearing schedule. Discounts are given from the standard schedule based on total volume and type of services provided to the correspondent. Besides service charges realized from securities clearing activities, Southwest also earns substantial amounts of interest income. Southwest extends credit directly to its customers, the customers of correspondent firms and the correspondent firms themselves in order to facilitate the conduct of customer and correspondent securities transactions. This credit is termed margin lending. The correspondents indemnify Southwest against margin losses on their customers' accounts. Southwest also extends margin credit directly to correspondents to the extent that such firms pledge proprietary assets as collateral. Since Southwest must rely on the guaranties and general credit of the correspondents, Southwest may be exposed to significant risk of loss if correspondents are unable to meet their financial commitments should there be a substantial adverse change in the value of margined securities. While Southwest's correspondent relationships are with a wide range of general securities broker/dealers and bank-affiliated broker/dealers, Southwest provides clearing services for a number of high-volume trading firms. These firms specialize in providing services to those customers who trade actively on a daily basis. As of June 25, 1999, Southwest provides clearing services for 16 of these firms. The nature of services provided to the customers of these firms are substantially different from the standard correspondent relationship and, accordingly, fees for services to these correspondents are discounted from the fees normally charged in the standard clearing schedule. The following table reflects the number of client transactions processed for each of the last three years and the number of correspondents at the end of each year:
Fiscal 1999 Fiscal 1998 Fiscal 1997 --------------- --------------- -------------- Tickets for third party correspondents 21,819,847 6,439,240 3,049,700 Tickets for internal correspondents 258,948 159,156 115,963 Tickets for Southwest account executives 304,540 172,203 155,896 --------------- --------------- -------------- Total tickets 22,383,335 6,770,599 3,321,559 =============== =============== ============== Number of correspondents 216 231 227 =============== =============== ==============
In addition to clearing trades, Southwest provides other products and services to its correspondents such as recordkeeping, trade reporting, accounting, general back-office support, securities lending, reorganization and custody of securities. Southwest also attempts to enrich its correspondent relationships 4 by advising the correspondent on communications and networking functions as well as making available to them a variety of non-brokerage products and services on favorable terms. The terms of Southwest's agreements with its correspondents define the allocation of financial, operational and regulatory responsibility arising from the clearing relationship. To the extent that the correspondent has available resources, Southwest is protected against claims by customers of the correspondent arising from actions by the correspondent; however, if the correspondent is unable to meet its obligations, dissatisfied customers may attempt to seek recovery from Southwest. Individual and Institutional Securities Brokerage. As a securities broker, Southwest acts as agent in the purchase and sale of securities, options, commodities and futures contracts traded on various securities and commodities exchanges or in the over-the-counter ("OTC") market. In most cases, Southwest charges commissions to its retail clients, on both exchange and OTC transactions, in accordance with its established commission schedule. In certain instances, varying discounts from the schedule are given, generally based upon the client's level of business, the trade size and other relevant factors. Southwest discounts its commissions substantially on institutional transactions based on trade size and the amount of business conducted annually with each institution. For certain fee-based accounts, a fee is charged in lieu of standard commissions. In addition, Southwest sells a number of professionally managed mutual funds and maintains dealer-sales agreements with most major distributors of mutual fund shares sold through broker/dealers. Some account executives employed by Southwest maintain a license to sell certain insurance products. Southwest is registered with the Commodity Futures Trading Commission as a non-guaranteed introducing broker and is a member of the National Futures Association. Southwest is a fully disclosed client of one of the largest futures commodity merchants in the United States. As of June 25, 1999, Southwest had 11 retail brokerage offices, three located in Dallas and one each in Georgetown, Longview, Lufkin, Nacogdoches, and San Antonio, Texas; Albuquerque and Santa Fe, New Mexico; and Beverly Hills, California. In addition, Southwest has bond brokerage offices in Dallas, Chicago and New York; and an institutional sales office in Dallas. Customer Financing. Client transactions in securities are effected on either a cash or margin basis. In margin transactions, the client pays a portion of the purchase price, and Southwest makes a loan to the client for the balance, collateralized by the securities purchased or by other securities owned by the client. Southwest provides financing for margin transactions for its own clients as well as correspondents' clients. Southwest may extend credit on a margin basis directly to correspondents to the extent the correspondent holds securities positions for their own account. Interest is charged, at a floating rate, to clients on the amount borrowed to finance margin transactions. The rate charged is dependent on the average net debit balance in the client's accounts, the activity level in the accounts and the applicable cost of funds. The amount of the loan is subject to the margin regulations ("Regulation T") of the Board of Governors of the Federal Reserve System, NYSE margin requirements, and Southwest's internal policies, which in many instances are more stringent than Regulation T or NYSE requirements. In most transactions, Regulation T limits the amount loaned to a customer for the purchase of a particular security to 50% of the purchase price. Furthermore, in the event of a decline in the value of the collateral, the NYSE regulates the percentage of client cash or securities that must be on deposit at all times as collateral for the loans. In permitting clients to purchase on margin, Southwest is subject to the risk of a market decline, which could reduce the value of its collateral below the client's indebtedness. Agreements with margin account clients permit Southwest to liquidate clients' securities with or without prior notice in the event of an insufficient amount of margin collateral. Despite those agreements, Southwest may be unable to liquidate clients' securities for various reasons including the fact that the pledged securities may not be actively traded, there is an undue concentration of certain securities pledged, or a stop order is issued with regard to pledged securities. The primary source of funds to finance clients' margin account balances is credit balances in clients' accounts. Southwest generally pays interest to clients on these credit balances at a rate determined periodically. Available credit balances are used to lend funds to Southwest customers purchasing securities on margin. SEC regulations restrict the use of clients' funds to the financing of clients' activities including margin account balances. Excess customer credit balances are invested in short-term securities segregated for the exclusive benefit of customers as required by SEC regulations. Southwest generates net interest income from the positive interest rate spread between the rate earned from margin lending and alternative short-term investments and the rate paid on customer credit balances. 5 Securities Lending Activities. Southwest performs securities lending services for its own clients, clients of correspondents and correspondents themselves as well as for other broker/dealers and lending institutions. Southwest's securities borrowing and lending activities involve borrowing securities to cover short sales and to complete transactions in which clients have failed to deliver securities by the required settlement date, and lending securities to other broker/dealers for similar purposes. When borrowing securities, Southwest is required to deposit cash or other collateral, or to post a letter of credit with the lender and Southwest generally receives a rebate (based on the amount of cash deposited) or a fee calculated to yield a negotiated rate of return. When lending securities, Southwest receives cash or similar collateral and generally pays a rebate (based on the amount of cash deposited) to the other party to the transaction. Generally, Southwest earns net interest income based on the spread between the interest rate on cash or similar collateral deposited and the interest rate paid on cash or similar collateral received. Stock borrowing and securities lending transactions are generally executed pursuant to written agreements with counterparties which require that (1) securities borrowed and loaned be marked-to-market on a daily basis, (2) excess collateral be refunded, and (3) deficit collateral be furnished. Margin adjustments are usually made on a daily basis through the facilities of various clearing houses. Southwest is a principal in these securities borrowing and lending transactions and becomes liable for losses in the event of a failure of any other party to honor its contractual obligation. Southwest's management sets limits on transaction volumes with each counter-party and reviews these limits on a weekly basis to monitor the risk level with each counter-party. The securities lending business is conducted primarily out of the Company's New York office using a highly specialized sales force. Competition for these professionals is intense and there can be no assurance that Southwest will be able to retain these securities lending professionals. Investment Banking and Underwriting Activities. Southwest earns investment banking revenues by assisting corporate clients in planning to meet their financial needs and advising them on the most advantageous means of raising capital. Such plans are sometimes implemented by managing or co-managing public offerings of securities or by arranging private placements of securities with institutional or individual investors. These types of activities are conducted in the corporate finance department that is staffed with 12 professionals and 8 analysts. In addition to public offerings and private placements, Southwest provides other consulting services, including providing valuations of securities and companies, arranging and evaluating mergers and acquisitions and advising clients with respect to financing plans and related matters. The syndicate department coordinates the distribution of managed and co-managed corporate equity underwritings, accepts invitations to participate in competitive or negotiated underwritings managed by other investment banking firms, and allocates and merchandises Southwest's selling allotments to its branch office system, to institutional clients and to other broker/dealers. Southwest is also among the leaders in its geographic region in the origination, syndication and distribution of securities of municipalities and political subdivisions. The public finance department, which is staffed by 21 professionals, provides professional financial advisory services to public entities across Texas and the Southwest and maintains branch offices in San Antonio, Austin and Houston, Texas, and Albuquerque, New Mexico. The following table sets forth, for the last three fiscal years, the number and dollar amounts, using the full credit to the co-manager method, of municipal bond offerings senior-managed or co-managed by Southwest.
Aggregate Fiscal Number of Amount of Years Issues Offerings ----------- ------------- ------------------ 1999 175 $4,846,558,000 1998 203 $5,143,646,000 1997 165 $2,444,317,000
Participation in underwritings, both corporate and municipal, can expose Southwest to material risk, since the possibility exists that securities it has committed to purchase cannot be sold at the initial offering price. Federal and state securities laws and regulations also affect the activities of underwriters and impose substantial potential liabilities for violations in connection with sales of securities by underwriters to the public. 6 Market Making Activities. Southwest is a market maker in OTC and exchange- listed equity securities as well as a dealer in tax-exempt and governmental fixed income securities. Trading securities in the OTC market involves the purchase of securities from and the sale of securities to clients of Southwest or to other dealers who may be purchasing or selling securities for their own account or acting as agent for their clients. Profits and losses are derived from the spreads between bid and asked prices, as well as market trends for the individual securities during the holding period. At June 25, 1999, Southwest made markets in 544 OTC common stocks and 61 exchange-listed stocks. Southwest frequently acts as agent in the execution of OTC orders for its clients and, as such, transacts these trades with other dealers. When Southwest receives a client order in a security in which it makes a market, it may act as principal as long as it matches or improves upon the best price in the dealer market, plus or minus a mark-up or mark-down not exceeding the equivalent agency commission charge. Recently adopted regulations require that client limit orders be satisfied prior to the brokerage firm buying securities into or selling the securities from their own inventory at the same price. While most of Southwest's principal transactions are executed to facilitate individual and institutional customer trades, Southwest also maintains certain inventory positions for its own accounts. These inventories require the commitment of capital and expose the Company to the risk of a loss if market prices of the securities held in inventory decrease. General market conditions, interest rates and the financial prospects for issuers of such securities may affect the market prices of securities held in inventory. Internal guidelines intended to limit the size and risk of inventories maintained have been established and are reviewed periodically. Research Activities. Southwest has a research department that provides analysis, investment recommendations and market information with an emphasis on companies located in the Southwest region. At June 25, 1999, Southwest had 17 senior securities analysts publishing research on 135 companies. The department focuses on particular industry groups, including consumer products, health care, real estate and technology. Information Technology. Information technology is an integral part of Southwest's clearing and brokerage activities. Southwest operates sophisticated hardware and software to execute and process securities transactions and is engaged in continuing software development and regular up-grades on its computer hardware. Southwest's data center features a twelve processor Tandem K20,000 Himalaya system and a sophisticated telecommunications network supporting over 3,300 terminals. While Southwest's software is licensed from Securities Industry Software Corporation, it employs in-house programmers to develop proprietary enhancements and to maintain its system. Southwest provides brokerage accounting, order entry and market data in a local area network/wide area network environment as well as through other traditional communication environments. Southwest is transitioning from its Himalaya mainframe processors to a family of Compaq(R) servers as a part of its migration to the Comprehensive Software Systems, Ltd. ("CSS") software. This software is being developed by CSS, a joint venture with Southwest and several other broker/dealers. This software is capable of accommodating a variety of hardware platforms and operating systems with a large degree of customization at each location. The CSS system will automate both front- and back-office brokerage processes from contact and order management to clearance and settlement. Southwest is currently operating several CSS modules and intends to have substantially all modules in place by December 31, 1999. The CSS database at Southwest uses Microsoft SQL Server 7.0 and runs on three Compaq Proliant(TM) 7000 servers using new Intel Xeon processors. Each of the Quad/400-megahertz servers provides 50 to 150 gigabytes of disk space and a gigabyte of random access memory (RAM). The CSS applications also use over 50 Compaq 1850R servers with Dual/400-megahertz processors and 512 megabytes of RAM. Southwest is also investing in Internet and other communications technology. Southwest is currently providing Internet access to account information for certain correspondents and expects to expand this service. Southwest also provides Internet service for correspondents and other end users, as well as employees. Internet and other communication mechanisms may expose the Company to increased risk of unauthorized access to data systems. SWS Financial Services, Inc. SWSFS is an NASD member broker/dealer that contracts with individual registered representatives who are NASD licensed salespersons for the conduct of their securities business. SWSFS is a correspondent of Southwest. While these registered representatives must conduct all of their 7 securities business through SWSFS, their contracts permit them to conduct insurance, real estate brokerage or other business for others or for their own accounts. The registered representatives are responsible for all of their direct expenses and are paid higher commission rates than Southwest's account executives to compensate them for their added expenses. Mydiscountbroker.com, Inc. MDB, which began operations in 1997, is a NASD member broker/dealer specializing in deep discount brokerage services with an emphasis in trading over the Internet. Although MDB's brokers do not provide investment advice or recommendations, they do offer clients the information needed, including quotes, market news, and trends, to make informed investment decisions. MDB's brokers work on a salary, rather than commission. ASSET MANAGEMENT AND TRUST SERVICES Westwood Management Corporation Westwood is a registered investment advisor founded in 1983 by Susan M. Byrne, who continues to serve as its President and Chief Executive Officer. The firm, which has headquarters in Dallas, manages equity, fixed income, cash and balanced accounts for a diverse clientele, including corporate plan sponsors, charitable institutions, educational endowments and public funds. In addition, Westwood manages the Gabelli-Westwood Family of Mutual Funds which is available to both taxable and non-taxable investors. Westwood Trust Trust was established in 1974 and provides trust, custodial and other management services to estates, charitable and other trusts and retirement plans established by high net worth individuals and corporations throughout Texas and the Southwest. Trust is chartered and regulated by the Texas Department of Banking. SW Capital Corporation Capital was established in 1994 and administers the LOGIC program. The LOGIC program is targeted to the needs of cities, counties, schools and other local governments across Texas and conforms with the Interlocal Cooperation Act and the Public Funds Investment Act of the Texas Government Code. This program allows participants to pool their available funds, resulting in increased economies of scale, which allow higher returns while maintaining a high degree of safety and liquidity. COMPETITION We encounter intense competition in our business, and we compete directly with numerous firms, many of which have substantially greater capital and other resources. We also encounter competition from banks, insurance companies and financial institutions in many elements of our business. For example, with the prior approval of the Federal Reserve Board, securities subsidiaries of bank holding companies may now underwrite and deal in corporate debt and equity securities, provided that they comply with certain "firewalls" and that the revenues from such activities do not exceed 25 percent of the security subsidiary's total revenues. Legislative proposals also under consideration would eliminate this limit on such activities and would permit commercial banks, bank holding companies and their subsidiaries and affiliates to offer additional services which have traditionally been provided only by securities and money management firms. In the past few years, a number of banks acquired securities firms and, in so doing, gained unprecedented entry into the securities industry. While the effect of such acquisitions cannot yet be determined, they have brought entirely new sources of capital into the securities industry, resulting in more formidable competition. Additionally, competition among securities firms and other competitors for successful sales representatives, securities traders, securities analysts, stock loan professionals and investment bankers is intense and continuous. We compete with other securities firms and with banks, insurance companies and other financial institutions principally on the basis of service, product selection, price, location and reputation in local markets. We operate at a price disadvantage to discount brokerage firms that do not offer equivalent services. Southwest competes for the correspondent clearing business on the basis of service, price, technology, product selection and reputation. We compete in asset management services with other portfolio managers principally based on portfolio performance, price and service. 8 REGULATION The securities industry in the United States is subject to extensive regulation under federal and state laws. The SEC is the federal agency charged with administration of the federal securities laws. Much of the regulation of broker/dealers, however, has been delegated to self-regulatory organizations, principally the NASD and the NYSE. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) for governing the industry and conduct periodic examinations of member broker/dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered. Southwest, SWSFS and MDB are registered in all 50 states. Southwest is also registered in Puerto Rico. The regulations to which broker/dealers are subject cover all aspects of the securities business, including sales methods, trade practices among broker/dealers, capital structure of securities firms, record keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules often directly affect the method of operation and profitability of broker/dealers. The SEC and the self-regulatory organizations may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker/dealer, its officers or employees. The principal purpose of regulation and discipline of broker/dealers is the protection of clients and the securities markets rather than protection of creditors and shareholders of broker/dealers. See Note 10 of the Notes to Consolidated Financial Statements for further description of certain SEC regulations. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders:
Name Age Position ---- --- -------- David Glatstein 50 Director, Chief Executive Officer and President Edward R. Anderson 50 Executive Vice President William D. Felder 41 Executive Vice President Kenneth R. Hanks 45 Executive Vice President and Chief Operating Officer Stacy M. Hodges 36 Executive Vice President, Chief Financial Officer and Treasurer Daniel R. Leland 38 Executive Vice President Richard H. Litton 52 Executive Vice President W. Norman Thompson 43 Executive Vice President and Chief Information Officer Paul D. Vinton 50 Executive Vice President
David Glatstein was elected Chief Executive Officer in May 1996 and has served as President and a director of both the Company and Southwest since May 1995. Mr. Glatstein was Chief Executive Officer of Barre & Company, Inc. from its founding in 1980 until its acquisition by Southwest in 1995; First Vice President of the Securities Division of Lehman Brothers Kuhn Loeb, Inc. from 1978 to 1980 and a securities broker with White, Weld & Company, Inc. from 1973 to 1978. Mr. Glatstein is a past Chairman of the District 6 Business Conduct Committee of the NASD. Edward R. Anderson has served as Executive Vice President of the Company in charge of the Operations Division since January 1999. Mr. Anderson joined the Company in February 1998 as Executive Vice President for Acquisitions and New Business Development. Prior to joining the Company, he spent 26 years in various positions at Principal Financial Services in Dallas including Director of Capital Markets, Chief Administrative Officer, Executive Vice President and Chief Financial Officer. Mr. Anderson is a certified public accountant and is a past Chairman of the District 6 Business Conduct Committee of the NASD. William D. Felder has served as Executive Vice President of the Company since December 1995 and as Senior Vice President of the Company since 1993. Mr. Felder has been associated with Southwest in various other capacities since 1980, including director since August 1993 and Senior Vice President in charge of Clearing Services from 1988 to 1998. Mr. Felder is a past Chairman of the District 6 Business Conduct Committee of the NASD. 9 Kenneth R. Hanks has served as Executive Vice President since June 1996 and Chief Operating Officer since August 1998. Mr. Hanks was the Company's Chief Financial Officer from June 1996 to August 1998 and has been a director of Southwest since June 1997. Mr. Hanks served in various executive capacities of Rauscher Pierce Refsnes, Inc. from 1981 to 1996, including Executive Vice President and Chief Financial Officer. He serves as an arbitrator with the NASD and formerly served as a member of the NASD's District 6 Business Conduct Committee. Stacy M. Hodges has served as Treasurer and Chief Financial Officer since August 1998 and Executive Vice President since February 1999. Ms. Hodges was Controller of the Company from September 1994 to August 1998. Ms. Hodges has been a director of Southwest since June 1997. Prior to joining Southwest, Ms. Hodges was a Senior Audit Manager in the Financial Services division of KPMG LLP. Ms. Hodges is a member of the Texas Society of CPAs. Daniel R. Leland has served as Executive Vice President of the Company since February 1999. He has served as Executive Vice President and director of Southwest since July 1995. He has been in charge of the Fixed Income Division since November 1997. Mr. Leland began his career at Barre & Company in June 1983 where he was employed in various capacities in fixed income sales and trading before becoming President of Barre & Company in 1993. Mr. Leland is an arbitrator for the NASD and is a past Vice Chairman of the District 6 Business Conduct Committee. Richard H. Litton has served as Executive Vice President of the Company and Executive Vice President in charge of the Public Finance Division and a director of Southwest since July 1995. Mr. Litton headed the Municipal Securities Group in Dallas for BA Securities, Inc. from 1993 to 1995. Mr. Litton was President with First Southwest Company, a regional investment bank from 1987 to 1993; Vice President and Regional Manager of Merrill Lynch Capital Markets Municipal Group from 1977 to 1987 and a securities broker with White, Weld & Company, Inc. from 1976 to 1977. Mr. Litton served on the Advisory Committee on the Recovery of Real Estate Finance for the Texas House of Representatives' Financial Institutions Committee. Mr. Litton is past member and director of the Municipal Advisory Council of Texas and past member of the Marketing Committee of the Public Securities Association. W. Norman Thompson has served as Executive Vice President and Chief Information Officer of the Company since January 1995. Mr. Thompson has been a director of Southwest since June 1997. Mr. Thompson was associated with Kenneth Leventhal & Co. (now a part of Ernst & Young LLP) in various capacities ranging from Audit Manager to Senior Consulting Manager from 1987 to 1994. Previously, Mr. Thompson was an Audit Manager with KPMG LLP from 1981 to 1987. In the capacities he held with both Kenneth Leventhal & Co. and KPMG LLP, he was heavily involved in Information Technology auditing and consulting. Paul D. Vinton has served as Executive Vice President of the Company since November 1998 and as Senior Vice President of Southwest since June 1995 and as a director of Southwest since May 1997. Mr. Vinton was associated with Stephens Inc. in various capacities from 1993 through 1995. Mr. Vinton has been employed within the securities industry since 1972 with various firms dealing primarily in operational, clearance and settlement activities. Mr. Vinton has served on various industry group boards including most recently the Depository Trust Company Settlement Advisory Board. Item 2. Properties Our executive offices are located in approximately 160,500 square-feet of leased space in an office building in Dallas, Texas. The lease expires in 2008. We conduct our clearing operations primarily in our principal office in Dallas, Texas and our office in New York. We have 11 retail brokerage offices, three located in Dallas, Texas and one each in Georgetown, Longview, Lufkin, Nacogdoches and San Antonio, Texas; Albuquerque and Santa Fe, New Mexico; and Beverly Hills, California. We have public finance branch offices in San Antonio, Austin and Houston, Texas and Albuquerque, New Mexico. We have fixed income branch offices in Chicago, Illinois and New York. Our present facilities and equipment are adequate for current and planned operations. 10 Item 3. Legal Proceedings On April 17, 1998, a judgment was entered against us in connection with a breach of contract lawsuit stemming from the 1995 acquisition of Barre & Company, Inc. The judge awarded the counterparty approximately $40,000 in damages and approximately $1,700,000 in attorney's fees. We believe that we have substantial grounds for appeal and we have begun the appellate process. We also believe that our reserves are adequate to cover the full amount of the judgment. On May 22, 1998, a class action claim was filed in the United States District Court for the Northern District of Texas against us and ViaGraphix Corporation alleging that material misrepresentations were made in the registration statement and prospectus that was filed with the SEC and distributed to investors in connection with the initial public offering of stock of ViaGraphix, which was managed and underwritten by us. We believe that we have meritorious defenses to the allegations of the lawsuit, and do not believe that the outcome of this claim will have a material adverse effect on our business, financial condition or operating results. In the general course of our brokerage business and the business of clearing for other brokerage firms, we have been named as defendants in various pending lawsuits and arbitration proceedings. These claims allege violation of Federal and state securities laws. We believe that resolution of these claims will not result in any material adverse effect on our business, financial condition or operating results. Item 4. Submission of Matters to a Vote of Security Holders None. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The registrant's common stock began trading on the New York Stock Exchange, Inc. on October 6, 1997 under the symbol "SWS". Previously, the registrant's stock was traded on the NASDAQ National Market System. At September 14, 1999, there were 137 holders of record of our common stock and in excess of 9,500 total holders of our common stock. The following table sets forth for the periods indicated the high and low market prices for the common stock and the cash dividend declared per common share:
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Cash dividend declared per common share /(2)/ $ .063 $ .063 $ .063 $ .063 Stock Price Range /(2)/ High $22.90 $22.73 $36.99 $76.36 Low $14.72 $14.44 $19.15 $25.69 1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Cash dividend declared per common share /(2)/ $ .052 $ .052 $ .052 $ .052 Stock Price Range /(2)/ High $21.26 $23.65 $23.81 $25.87 Low $15.25 $18.29 $19.05 $19.86
Item 6. Selected Financial Data SELECTED FINANCIAL DATA (In thousands, except ratios and per share amounts)
Year Ended ------------------------------------------------------------ June 25, June 26, June 27, June 28, June 30, 1999 1998 1997 1996 1995 ------------------------------------------------------------ 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
/(1)/ Adjusted to consider goodwill of $7,244 at June 25, 1999, $7,558 at June 26, 1998, $8,002 at June 27, 1997, $2,976 at June 28, 1996 and $2,940 at June 30, 1995. /(2)/ Adjusted to reflect a ten percent stock dividend which was effective October 1, 1997, a five percent dividend which was effective August 3, 1998 and a ten percent stock dividend which was declared on May 6, 1999, payable August 2, 1999 to shareholders of record on July 15, 1999. /(3)/ Fiscal years 1998, 1997, 1996 and 1995 were adjusted to reflect the implementation of Statement of Financial Accounting Standards No. 128, "Earnings per Share." 12 /(4)/ For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before the provision for income taxes and fixed charges consist of interest expense and one-third of rental expense which is deemed representative of an interest factor. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FACTORS AFFECTING FORWARD-LOOKING STATEMENTS From time to time, Southwest Securities Group, Inc. (the "Parent") and subsidiaries (collectively, the "Company") may publish "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, (the "Acts") or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to (1) transaction volume in the securities markets; (2) volatility of the securities markets; (3) fluctuations in interest rates; (4) changes in regulatory requirements which could affect the cost of doing business; (5) general economic conditions, both domestic and foreign; (6) changes in the rate of inflation and related impact on securities markets; (7) competition from existing financial institutions and other new participants in the securities markets; (8) legal developments affecting the litigation experience of the securities industry; (9) successful implementation of technology solutions; and (10) changes in federal and state tax laws which could affect the popularity of products sold by the Company. The Company does not undertake any obligation to publicly update or revise any forward-looking statements. The Company's discussion of the issues surrounding the Year 2000 contain forward-looking statements as defined in the Acts. These forward-looking statements could relate to, but are not limited to (1) the financial impact of the Year 2000 project; (2) the Company's estimated timetables for completion of each phase of the project; (3) the Company's estimates of the availability of vendor software upgrades and consulting services; (4) the readiness of third- party service providers; and (5) contingency plans. The Company cautions that many factors, including those outside of the control of the Company, could cause actual results to be materially different than those anticipated and expressed in the forward-looking statements. GENERAL The Company is primarily engaged in securities execution and clearance, securities brokerage, investment banking, securities lending and borrowing and trading as a principal in equity and fixed income securities. All of these activities are highly competitive and are sensitive to many factors outside the control of the Company, including volatility of securities prices and interest rates; trading volume of securities; economic conditions in the regions where the Company does business; income tax legislation; and demand for investment banking and securities brokerage services. While revenues are dependent upon the level of trading and underwriting volume, which may fluctuate significantly, a large portion of the Company's expenses remain fixed. Consequently, net earnings can vary significantly from period to period. Effective May 1, 1997, NorAm Investment Services, Inc. ("NorAm"), formerly Equity Securities Trading Company, Inc. ("Equity"), became a wholly owned subsidiary of the Company through the issuance of 445,845 shares of common stock. The acquisition was accounted for under the purchase method of accounting and, accordingly, assets and liabilities were recorded at their fair market values on the date of the acquisition. Goodwill relating to this acquisition of approximately $5,113,000 is recorded in other assets in the consolidated statements of financial condition. The Company sold NorAm in August 1999. RESULTS OF OPERATIONS During fiscal 1999, net income totaled $26,219,000, an increase of $5,589,000, or 27%, from fiscal 1998, which is a Company record. In 1998, net income totaled $20,630,000, an increase of $3,647,000, or 21%, from fiscal 1997. For the past three years, the equity markets have experienced an unprecedented rise, spurring record levels of transaction volume and capital market activity. These conditions have led to 13 record results in many sectors of the financial services industry, including most of the Company's primary lines of business. These industry factors, coupled with the Company's effort to grow into new areas of the industry, have allowed the Company to reach earnings records. The following is a summary of year-to-year increases (decreases) in categories of net revenues and operating expenses (dollars in thousands):
1999 vs. 1998 1998 vs. 1997 Amount Percent Amount Percent ------------------------------------------------- Net revenues Net revenues from clearing operations $13,511 51% $ 3,914 17% Commissions 5,647 10% 20,519 53% Net interest 4,638 11% 6,479 18% Investment banking, advisory and administrative fees 1,250 4% 11,819 74% Net gains on principal transactions 29,113 231% 720 6% Other (1,894) (12%) 6,437 66% -------- ----------- 52,265 28% 49,888 37% -------- ----------- Operating expenses Commissions and other employee compensation 32,874 36% 26,755 41% Occupancy, equipment and computer service costs 3,680 21% 5,447 45% Communications 1,229 10% 1,483 13% Floor brokerage and clearing organization charges 1,005 20% 943 23% Other 4,855 19% 9,105 54% -------- ----------- 43,643 28% 43,733 40% -------- ----------- Income before income taxes $ 8,622 27% $ 6,155 24% ======== ===========
Net Revenues from Clearing Operations. Net revenues from clearing increased $13,511,000, or 51%, from 1998 to 1999, as a result of an increase in transaction volumes. Total transactions processed in fiscal 1999 increased 229% to approximately 22.4 million from approximately 6.8 million in fiscal 1998. Turbulent market conditions during the first six months of fiscal 1999 and high trading volumes in the Internet and technology sectors lead to heavy trading volume in securities markets. The rate of increase in transactions processed has outpaced the increase in revenues from clearing, because, in recent years, the Company has increased the number of high-volume trading Correspondents in its customer base, and a substantial portion of the increase in transactions processed were related to these Correspondents. These customers use a relatively low level of clearing services and, accordingly, are charged substantially discounted clearing fees from the Company's standard clearing schedule. As transaction volumes increase, revenue per clearing transaction tends to decrease as Correspondents take advantage of volume discounts. Net revenues from clearing increased $3,914,000, or 17%, from 1997 to 1998, primarily as a result of an increased number of Correspondents and an increase in total transaction volumes. The number of Correspondents increased to 231 at June 26, 1998 from 227 at June 27, 1997, an increase of 1.7%. Total transactions processed in fiscal 1998 increased 106% to approximately 6.8 million from approximately 3.3 million in fiscal 1997. Commissions. Commissions from the Company's client transactions increased $5,647,000 to $65,048,000, an increase of 10% when compared with revenues in fiscal 1998 of $59,401,000. This increase is primarily attributable to an increase in fixed income sales, as well as an increase in the number of brokers in the Company's independent contractor network. Fixed income sales increased 46% over the prior fiscal year. The number of independent contractor sales representatives increased to 710 at June 25, 1999 from 697 at June 26, 1998. Also contributing to the increase were increased commissions from Mydiscountbroker.com, Inc. ("MDB"), the Company's on-line investing subsidiary which began offering on-line trading in the third 14 quarter of fiscal 1998. Commissions at MDB increased approximately 193% over the prior year. The number of MDB on-line accounts increased approximately 393% from June 26, 1998 to June 25, 1999. Commissions from the Company's client transactions in fiscal 1998 increased $20,519,000 to $59,401,000, an increase of 53% when compared with revenues in fiscal 1997 of $38,882,000. This increase was evenly divided between the Southwest Securities, Inc. ("Southwest") Private Client Group network and the SWS Financial Services, Inc. ("SWSFS"), formerly Brokers Transaction Services, independent contractor network. Commissions from account executives increased due to increased sales to individual and institutional investors of (1) offerings managed or co-managed by the Company, (2) over-the-counter corporate bonds and (3) mutual funds. The increase in SWSFS commissions was primarily related to an increased number of independent contractor sales representatives. The number of independent contractors was 697 and 536 at June 26, 1998 and June 27, 1997, respectively. Net Interest Income. The Company's net interest income is dependent upon the level of customer and stock loan balances as well as the spread between the rate it earns on those assets compared with the cost of funds. The components of interest earnings are as follows (in thousands):
June 25, June 26, June 27, 1999 1998 1997 --------------------------------------------------- Interest revenue: Customer margin accounts $ 47,865 $ 39,662 $ 28,906 Assets segregated for regulatory purposes 11,511 9,806 15,190 Stock borrowed 80,688 83,332 65,906 Other 6,942 10,321 9,174 --------------- -------------- ------------ 147,006 143,121 119,176 --------------- -------------- ------------ Interest expense: Customer funds on deposit 31,870 27,723 28,365 Stock loaned 65,868 67,956 50,204 Other 2,213 5,025 4,669 --------------- -------------- ------------ 99,951 100,704 83,238 --------------- -------------- ------------ Net interest $ 47,055 $ 42,417 $ 35,938 =============== ============== ============
For the year ended June 25, 1999, net interest income accounted for 20% of the Company's net revenue versus 23% in the prior fiscal year. Interest revenue from customer margin balances and interest expense from customer funds on deposit have fluctuated in relation to average balances over the past two fiscal years. Net interest revenue generated from securities lending activities has remained relatively stable in the current fiscal year versus the prior fiscal year. Average customer balances and average balances from securities lending activities are as follows (in thousands):
Fiscal Years Ended June 25, 1999 June 26, 1998 -------------------------------------- Average customer margin balances $ 604,000 $ 477,000 Average customer funds on deposit 699,000 544,000 Average stock borrowed 2,219,000 2,139,000 Average stock loaned 2,189,000 2,113,000
Rates on customer margin balances and funds on deposit are influenced by changes in leading market interest rates and competitive factors. Spreads on securities lending transactions are influenced by the types of securities borrowed or loaned, market conditions and counter-party risk. Securities lending activities are conducted out of the Company's New York office using a highly specialized sales force. Competition for these individuals is intense and there can be no assurance that the Company will be able to retain these individuals. 15 In fiscal 1998, net interest income accounted for 23% of the Company's net revenue, while in fiscal 1997, net interest income was 27% of net revenue. Interest income from customer accounts increased 37% in 1998 as compared to 1997 primarily due to increases in margin account balances as favorable market conditions coupled with comparatively low interest rates made margin borrowing popular. Additionally, the Company's acquisition of Equity in May of 1997 resulted in an increase in customer margin accounts of approximately $80 million. Interest expense related to customer funds on deposit in fiscal 1998 decreased 2% from 1997 due to a decrease in the average balances of customer funds on deposit. During 1998, the Company transferred approximately $190 million of its customer funds on deposit to a money market mutual fund program for which the Company acts as underwriter through its SWSFS subsidiary. The transfers occurred as a result of the Company's offering new cash management products to qualified plan customers. The decrease in average customer credit balances caused a corresponding decrease in assets segregated for regulatory purposes. Interest income from these assets declined $5,384,000, or 35%, in fiscal 1998 versus fiscal 1997 as the average balance of these assets decreased to $167,583,000 in 1998 versus $294,678,000 in 1997. Interest income from stock borrowed transactions increased $17,426,000, or 26%, in fiscal 1998 compared to fiscal 1997, while interest expense from stock loaned transactions increased $17,752,000, or 35%. These increases were due to increases in the average balances borrowed and loaned in the Company's conduit business. Average stock borrowed balances increased 26% to $2,139,310,000 from $1,696,668,000 in fiscal 1997 while average stock loaned balances increased 28% to $2,112,604,000 from $1,656,708,000 in fiscal 1997. Investment Banking, Advisory and Administrative Fees. Investment banking, advisory and administrative fees include revenues derived from the underwriting and distribution of corporate and municipal securities, unit trusts and money market and other mutual funds. Investment banking, advisory and administrative fees increased in fiscal 1999 when compared to fiscal 1998 due to increases in fees from investment advisory services, offset by decreases in corporate and municipal finance fees. Advisory fees earned on investment management increased as assets under management at June 25, 1999 were approximately $3.5 billion versus $2.9 billion at June 26, 1998. The number and offering amount of senior and co-managed municipal finance offerings in which the Company participated decreased 14% and 6%, respectively, over the prior year. Investment banking, advisory and administrative fees in 1998 increased $11,819,000, or 74%, to $27,850,000 when compared to $16,031,000 in fiscal 1997 due to increased volume of transactions in both equity and municipal investment banking markets. Additionally, advisory fees earned on investment management increased as average assets under management in 1998 were approximately $2.9 billion versus $2.2 billion in fiscal 1997. Net Gains on Principal Transactions. Net gains on principal transactions have experienced significant growth over prior year, increasing 231% to $41,689,000. This growth is due to the expansion of the Company's equity trading area. The number of market makers employed in this area has increased to 20 at June 25, 1999 from 15 at June 26, 1998, while coverage from market making activities has increased to 544 over-the-counter securities and 61 exchange-listed securities in which the Company makes a market. Revenue in this area can fluctuate significantly from quarter to quarter based on market conditions. Other Income. Other income decreased over the prior year due to non-recurring revenue in fiscal 1998. The Parent owned a minority interest in Roundtable Partners, LLC ("Roundtable"), the predecessor of Knight/Trimark Group, Inc. ("Knight"), which filed an S-1 registration statement with the U.S. Securities and Exchange Commission on May 1, 1998 for an initial public offering of stock. In accordance with the terms of the limited partnership agreement, prior to the offering, previously undistributed earnings of Roundtable, approximately $3.7 million, were distributed to the Parent in fiscal 1998. Other income increased $6,437,000, or 66%, to $16,203,000 for the year ended June 26, 1998 primarily as a result of the transaction described above. The remaining increase in other income was due to increased revenue from transaction and account fees. Commissions and Other Employee Compensation. Commissions and other employee compensation are generally affected by the level of operating revenues, earnings and the number of employees. During the fiscal year ended June 25, 1999, commissions and other employee compensation expense increased over the same periods in the prior year. This was principally due to (1) increased commissions and benefits paid to revenue-producing employees generating higher levels of operating revenues; (2) as previously discussed, 16 increased headcount among the independent contractor network; and (3) the addition of 149 full-time employees. The number of full-time employees increased to 928 at June 25, 1999 compared to 779 at June 26, 1998. Approximately 57% of the increased employee count relates to those employed in the information technology area. During fiscal 1998, commissions and other employee compensation expense increased $26,755,000, or 41%, compared to the prior year. This was principally due to (1) increased commissions and benefits paid to revenue-producing employees generating higher levels of operating revenues; (2) increased headcount among the Company's independent contractor network; (3) the addition of 90 full-time employees, including 37 in the technology area; and (4) increased incentive compensation accruals. The number of employees increased to 779 at June 26, 1998 compared to 689 at June 27, 1997. Occupancy, Equipment and Computer Service Costs. Occupancy, equipment and computer service costs increased primarily due to upgrades in computer processing equipment as the Company continues to focus its resources on the implementation of its new brokerage software, Comprehensive Software Systems, Ltd. ("CSS") (see YEAR 2000 discussion below) as well as the redesign of the Company's customer statements. Occupancy, equipment and computer service costs increased $5,447,000, or 45%, during fiscal 1998 primarily due to upgrades in computer processing equipment, an increase in office space and the completion of the remodeling of the Company's headquarters. Communications. Communications expense increased 10% and 13%, respectively, in fiscal years 1999 and 1998, due to expanded computer networking and the expansion of the equity trading area. Other Expenses. In fiscal 1999, other expenses increased 19% primarily due to increases in contract labor, professional services and promotional expenses. Contract labor and professional service expenses relate to, among other things, the Company's involvement in developing Year 2000 compliant software (see YEAR 2000 discussion below). In fiscal 1998, other expenses increased $9,105,000, or 54%, to $26,043,000, primarily due to increases in expenses associated with underwriting fixed income securities, consulting and legal services and increases in the Company's litigation and other reserves. FINANCIAL CONDITION The Parent's investment in Knight is classified as marketable equity securities available for sale, and the unrealized holding gain, net of tax, is recorded as other comprehensive income as a part of stockholders' equity on the consolidated statements of financial condition in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At June 25, 1999, the Parent owned approximately 3.3 million shares of Knight, as adjusted for the two-for-one stock split effective May 17, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's assets are substantially liquid in nature and consist mainly of cash or assets readily convertible into cash. These assets are financed by the Company's equity capital, short-term bank borrowings, interest bearing and non- interest bearing client credit balances, correspondent deposits and other payables. The Company maintains an allowance for doubtful accounts which represents amounts, in the judgment of management, that are necessary to adequately absorb losses from known and inherent risks in receivables from clients, clients of correspondents and correspondents. The Company has credit arrangements with commercial banks, which include broker loan lines up to $192,500,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers' margin accounts. These credit arrangements are provided on an "as offered" basis and are not committed lines of credit. Outstanding balances under these credit arrangements are due on demand, bear interest at rates indexed to the federal funds rate and are collateralized by securities of the Company and its clients. At June 25, 1999, the amount outstanding under these secured arrangements was $2,700,000 which was collateralized by securities held for firm accounts valued at $29,724,000. In the opinion of management, these credit arrangements are adequate to meet the short-term operating capital needs of the Company. 17 In addition to the broker loan lines, the Company also has a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. There were no amounts outstanding at June 25, 1999 under this unsecured line of credit. On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated Notes (the "Notes") due June 30, 2004. At maturity, the principal of the notes will be paid in shares of the Class A common stock of Knight or, at the option of the Company, their cash equivalent. The Notes, which are in the form of DARTS(SM) (or, "Derivative Adjustable Ratio Securities(SM)"), were issued in denominations of $56.6875, the closing bid price of Knight on June 10, 1999. At maturity, Noteholders are entitled to one share of Knight common stock for each DARTS if the average price for the 20 days immediately preceding the Note's maturity is equal to or less than the DARTS issue price. Noteholders are entitled to .833 shares of Knight common stock for each DARTS if the average price of Knight's common stock is 20% or more greater than the DARTS' issue price. If the average price of the Knight common stock is between the Note's issue price and 20% greater than the issue price, the exchange rate will be determined by a formula. Net cash used in operating activities during the fiscal year ended June 25, 1999 was $47,941,000. The use of cash was due to the increase in securities owned and assets segregated for regulatory purposes and was adequately financed by increased customer funds on deposit and the proceeds from the issuance of the Notes. The Company's broker/dealer subsidiaries are subject to the requirements of the Securities and Exchange Commission relating to liquidity, capital standards and the use of client funds and securities. The Company has historically operated in excess of the minimum net capital requirements. MARKET RISK Market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, equity prices, and changes in credit ratings of the issuer. The Company's exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading activities. Interest Rate Risk. Interest rate risk is a consequence of maintaining inventory positions and trading in interest-rate-sensitive financial instruments. The Company does not maintain material positions in interest-rate- sensitive financial instruments. The Company's fixed income activities also expose it to the risk of loss related to changes in credit spreads. Credit spread risk arises from the potential that changes in an issuers credit rating or credit perception could affect the value of financial instruments. Equity Price Risk. The Company is exposed to equity price risk as a result of making markets in equity securities. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock, a basket of stocks or a stock index. Credit Risk. Credit risk arises from the potential nonperformance by counterparties, customers or debt security issuers. The Company is exposed to credit risk as a trading counterparty to dealers and customers, as a holder of securities and as a member of exchanges and clearing organizations. Managing Risk Exposure. The Company manages risk exposure through the involvement of various levels of management. Position limits in trading and inventory accounts are well established and monitored on an ongoing basis. Current and proposed underwriting, banking and other commitments are subject to due diligence reviews by senior management, as well as professionals in the appropriate business and support units involved. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. The Company monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. Market Risk Analysis. The Company has performed an analysis of the Company's financial instruments and has assessed the related risk and materiality in accordance with the rules. Based on this analysis, in the opinion of management, the market risk associated with the Company's financial instruments at June 25, 1999 will not have a material adverse effect on the consolidated financial position or operating results of the Company. 18 YEAR 2000 The widespread use of computer programs that rely on two-digit date programs to perform computations and decision-making functions may cause information technology ("IT") systems to malfunction in the Year 2000 and may lead to significant business delays in the U.S. and internationally. The Year 2000 problem has the potential to impact the securities industry since information is moved to and from the exchanges and trading partners on a real-time basis from computer system to computer system with little human interaction. In addition to potential problems from computer systems, potential problems could arise from equipment with embedded chips, such as fax machines, elevators and other non-IT systems. The Company has defined a Year 2000-compliant system as one capable of correct identification, manipulation and calculation when processing data in connection with the year change from December 31, 1999 to January 1, 2000. A Year 2000- compliant system is also capable of correct identification, manipulation and calculation using leap years both alone and in conjunction with other dates. The Company's systems are compliant under the above definition. The Company addressed issues with regard to Year 2000 compliance as described below. In the first stage, the Company prepared an inventory of all IT and non-IT systems, as well as equipment that could have embedded chips, whether or not critical to the operation of the business. The Company also compiled a listing of material relationships with third parties. These relationships include various exchanges, clearing houses, banks, telecommunications companies and public utilities. This stage of the Year 2000 process is 100% complete. The Company continually reviews areas of the business to address any new items added since the initial inventories. In stage two, results from the inventory discussed above were assessed to determine the Year 2000 impact and what actions needed to be taken to obtain Year 2000 compliance. For the Company's internal systems, actions needed ranged from obtaining vendor certification of Year 2000 compliance, remediation of internal systems or replacement of systems and equipment that could not be remediated. This stage is 100% complete. The Company has determined a course of action for remediation or replacement of all critical internal systems. The Company continues surveying and obtaining information about Year 2000 readiness of its material third-party relationships. Contingency plans have been developed for those third parties who cannot satisfactorily demonstrate Year 2000 compliance. The plans are continually refined, updated and tested as changes in third-party readiness occurs. The third stage includes the repair, replacement or retirement of systems. This stage of the Year 2000 process is complete. The Company has upgraded packaged software throughout the organization. Desktop system upgrades and upgrades of the communications infrastructure are finished. The main telephone switch and critical branch office switches have been upgraded where necessary, and upgraded network operating systems have been loaded into place. The rollout of the Year 2000 compliant version of the BRASS(R) Equity Trading System has also been completed. The primary financial system used for financial reporting purposes for the Company was replaced during fiscal 1998 to prepare for Year 2000 as well as to derive other benefits from the financial reporting system. Updates to this system were installed in the second quarter of fiscal 1999 and testing was completed in the third quarter of fiscal 1999. The financial system itself is certified by the vendor as Year 2000 compliant. The Company's primary operational system is the Securities Industry Software ("SIS") application, which provides both front- and back-office services to Correspondents, customers and our internal users. For several years, the Company has self-supported the SIS application. The Company has been pursuing a replacement strategy for SIS and is implementing a new client-server based information system ("CSS"). CSS is being developed by Comprehensive Software Systems, Ltd., an entity in which several securities firms own interests, including the Company, which owns an 8.18% interest. While replacement of the SIS system with CSS was our primary solution for Year 2000 issues associated with the SIS system, in September 1998 the Company engaged an independent consulting firm to begin remediation of the SIS system. As of June 30, 1999, 100% of the code was remediated by the consulting firm, tested by the Company and installed in the production environment. The Company has been working on the CSS project since 1992, as implementation of this system was in process before the Company began assessment of critical Year 2000 issues. In fiscal 1997, the Company accelerated the pace of the CSS project so that it would be available as the Year 2000 solution for the SIS system. Through fiscal 1997 and 1998, costs associated with the joint venture, including personnel, 19 hardware, software and related costs, were approximately $4 million. During fiscal 1997 and 1998, the Company incurred an additional $1 million in costs related to the Year 2000 project primarily related to compensation and benefits, software upgrades and hardware replacement for financial and other systems. In fiscal 1999, the Company has incurred an additional $8.4 million in expenses related to the CSS project and other Year 2000 initiatives. Implementation of the CSS system should result in the reduction of certain existing hardware and software lease, maintenance and licensing costs. In the first half of fiscal 2000, the Company expects to incur an additional $600,000 related to Year 2000 project costs. These costs will be funded out of working capital and substantially all will be expensed. The budgeted expenditures include compensation and benefits for IT and other operational staff. The Company is also heavily dependent upon the power and telecommunications infrastructure within the United States and would be subject to business interruptions as a result of the failure of those systems. Additionally, the Company would experience disruption in certain of its businesses if the various exchanges, clearing houses or banks used by the Company reported a system failure. The Company is communicating with these third parties in order to obtain assurances regarding Year 2000 readiness. The Company's contingency plans also address potential failure of these systems. The last stage of the implementation process includes testing all of the changes implemented individually and integrating those changes with all of the Company's systems and those of its customers and trading partners. Testing takes on various forms depending on the type of change implemented. Each upgrade, to the extent economically feasible, is run through a test environment before it is implemented. It is then tested to see how well it integrates into the Company's overall IT environment. The Company has also engaged in point-to-point testing with various exchanges, clearing houses and utilities and has established a future date environment for testing the CSS and SIS applications. The Company participated in the Securities Industry Association's industry-wide testing which occurred over a series of weekends in March and April 1999 and simulated the first trading cycle to settle in the Year 2000. The Company successfully completed each phase of the testing. Additional tests have continued with vendors not included in the industry-wide test as well as with Correspondent customers. There are no material unresolved Year 2000 testing exceptions as of June 25, 1999. The Company has prepared contingency plans that deal with a variety of failures that could potentially be caused by Year 2000 or other problems. These plans range from global issues like the loss of a major stock exchange or utility, to infrastructure issues like the loss of the primary data communications carrier or regional electrical power supplier, to failures within the Company's facilities like the loss of an owned telephone switch or the failure of an internally maintained application. The Company will continue to refine and test these plans up through the Year 2000 as the various exchanges and utilities update their plans for different kinds of failures. Testing related to contingency plans will focus on those failures we assume are more likely to occur because of incomplete work or inadequate information on the part of mission critical vendors. As a part of the contingency planning process, the Company is preparing a formal command center at both the primary and backup facilities. Although the Company's mission critical systems are Year 2000 compliant, there are many factors beyond the Company's control that could have an adverse effect. The Company continues to work diligently to minimize the potential impact of such external forces on its Year 2000 readiness. ACQUISITION OF ASBI HOLDINGS, INC. On August 10, 1999, the Company signed a definitive merger agreement to acquire ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB, Arlington, Texas. The agreement provides that the Company will issue 2.6 million shares of its common stock to the holders of all of the outstanding stock of ASBI. Don A. Buchholz serves as chairman of both the Company and ASBI, and is the beneficial owner of approximately 7.0% of the Company's outstanding voting securities. Mr. Buchholz is the beneficial owner of approximately 19.3% of the outstanding securities of ASBI, and he exercises voting control for approximately 58.6% of ASBI's outstanding voting securities. The acquisition is expected to be accounted for by the pooling-of-interests method and is subject to regulatory and shareholder approval. EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" was issued in June 1997 and establishes standards for reporting and display of comprehensive income and its 20 components in a set of general-purpose financial statements. The Company adopted SFAS 130 in the first quarter of fiscal 1999. All prior periods have been restated to conform with SFAS 130. The Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in June 1997. This statement establishes standards for the way that a public business enterprise reports information about operating segments in the annual financial statements and requires that those enterprises report selected information about operating segments in interim reports to shareholders. The Company adopted SFAS 131 in the fiscal 1999 financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires derivatives to be recognized in the consolidated statements of financial condition at fair value. Changes in such fair value are required to be recognized in earnings to the extent the derivative is not effective as a hedge. This statement will apply to the Company's 5% Exchangeable Subordinated Notes and the Company's underlying investment in Knight common stock. The impact on the financial statements will depend on a variety of factors, including future interpretive guidance from the FASB. Management is currently reviewing the impact of this new pronouncement, and the impact on the Company's financial position is unknown at this time. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and should be applied prospectively. However, the FASB has subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral of the Effective Date of FASB Statement No. 133" which postpones initial application until fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in fiscal 2001. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption Market Risk. Item 8. Financial Statements and Supplementary Data (a) Financial statements, schedules and exhibits filed under this item are listed in the index appearing on page F-1 of this report. (b) QUARTERLY FINANCIAL INFORMATION (In thousands, except per share amounts)
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Revenues $73,197 $79,296 $90,042 $94,735 Income before income taxes $ 7,356 $ 9,351 $11,706 $12,107 Net income $ 4,683 $ 6,142 $ 7,533 $ 7,861 Earnings per share - basic /(2)/ $ .40 $ .52 $ .64 $ .67 Earnings per share - diluted /(2)/ $ .40 $ .52 $ .64 $ .66 Cash dividend declared per common share /(2)/ $ .063 $ .063 $ .063 $ .063 Stock Price Range /(2)/ High $ 22.90 $ 22.73 $ 36.99 $ 76.36 Low $ 14.72 $ 14.44 $ 19.15 $ 25.69 1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------- -------- -------- -------- Revenues $65,296 $70,465 $68,841 $81,156 Income before income taxes $ 7,785 $ 8,405 $ 7,369 $ 8,339 Net income $ 5,045 $ 5,390 $ 4,863 $ 5,332 Earnings per share - basic /(1) (2) (3)/ $ .43 $ .45 $ .42 $ .45 Earnings per share - diluted /(1) (2) (3)/ $ .43 $ .45 $ .41 $ .45 Cash dividend declared per common share /(1) (2)/ $ .052 $ .052 $ .052 $ .052 Stock Price Range /(1) (2)/ High $ 21.26 $ 23.65 $ 23.81 $ 25.87 Low $ 15.25 $ 18.29 $ 19.05 $ 19.86
21 (1) Adjusted to reflect a ten percent stock dividend which was effective October 1, 1997 and a five percent stock dividend which was effective August 3, 1998. (2) Adjusted to reflect a ten percent stock dividend declared May 6, 1999, payable on August 2, 1999 to shareholders of record on July 15, 1999. (3) The first quarter of fiscal 1998 was adjusted to reflect the implementation of Statement of Financial Accounting Standards No. 128, "Earnings per Share." Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant For information with respect to executive officers of the registrant, see "Executive Officers of the Registrant" at the end of Part I, Item 1 of this report. The information under the heading "Proposal One - Election of Directors" in the definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120 days after the Company's fiscal year end is incorporated herein by reference. Item 11. Executive Compensation The information under the subheading "Executive Compensation" under the heading "Management" in the definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120 days after the Company's fiscal year end is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the subheading "Stock Ownership of Principal Owners and Management" under the heading "Management" in the definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120 days after the Company's fiscal year end is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the heading "Proposal One - Election of Directors"; under the subheadings "Background of the Transaction" and "Relationship of the Parties and Interests of Certain Persons in the Transaction" under the heading "Proposal Two - Issuance of 2,600,000 Shares of Common Stock in Connection with the Proposed Acquisition of ASBI Holdings, Inc."; and under the heading "Management" in the definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 240.14a (6)(c) within 120 days after the Company's fiscal year end is incorporated herein by reference. 22 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of documents filed as a part of the report: 1. Exhibits required by this Item are either listed in the index appearing on page F-1 of this report or have been previously filed with the SEC. 2. The following consolidated financial statement schedules of the Registrant and its subsidiaries, and Independent Auditors' Report thereon, are attached hereto as required by Item 14 (d):
Exhibit Number -------------- S-1 Schedule I - Condensed Financial Information of Registrant
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. The following exhibits of the Registrant and its subsidiaries are attached hereto as required by Item 14(d):
Exhibit Number -------------- 2.1 Agreement and Plan of Reorganization dated as of August 10, 1999 between the Registrant and ASBI Holdings, Inc.* 3.1 Certificate of Incorporation of the Registrant incorporated by reference to the Registrant's Registration Statement No. 33-42338 filed August 21, 1991 3.2 By-laws of the Registrant incorporated by reference to Amendment No. 1 to the Registrant's Registration Statement No. 33-42338 filed October 7, 1991 3.3 Certificate of Amendment of Certificate of Incorporation incorporated by reference to the Registrant's Annual Report on Form 10-K filed September 25, 1997 10.1 Deferred Compensation Plan* 10.2 Employee Stock Purchase Plan incorporated by reference to the Registrant's Registration Statement on Form S-8, filed November 10, 1994 (Registration No. 33-86234) 10.3 Stock Option Plan incorporated by reference to the Registrant's Proxy Statement filed September 24, 1996 10.4 Phantom Stock Plan incorporated by reference to the Registrant's Proxy Statement filed September 24, 1996 10.5 1997 Stock Option Plan incorporated by reference to the Registrant's Annual Report on Form 10-K filed September24, 1998 10.6 Stock Purchase Plan (Restated) incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed February 16, 1999 12 Computation of Ratio of Earnings to Fixed Charges* 23 Consent of KPMG LLP* 27 Financial Data Schedule* 99 Press Release dated June 6, 1999 filed as an exhibit to Current Report on Form 8-K filed on June 7, 1999
* Filed herewith 23 (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K on June 7, 1999. Item 5 of the referenced Report refers to the Company's press release dated June 6, 1999 announcing the execution of a Letter of Intent to acquire ASBI Holdings, Inc. No financial statements were filed with the Report. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Southwest Securities Group, Inc. ------------------------------------------------ (Registrant) September 23, 1999 /S/ David Glatstein - ------------------ ------------------------------------------------ (Date) (Signature) David Glatstein Director and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. September 23, 1999 /S/ Don A. Buchholz - ------------------ ------------------------------------------------ (Date) (Signature) Don A. Buchholz Chairman of the Board September 23, 1999 /S/ David Glatstein - ------------------ ------------------------------------------------ (Date) (Signature) David Glatstein Director and Chief Executive Officer (Principal Executive Officer) September 23, 1999 /S/ Stacy M. Hodges - ------------------ ------------------------------------------------ (Date) (Signature) Stacy M. Hodges Treasurer and Chief Financial Officer (Principal Financial Officer) September 23, 1999 /S/ Laura Leventhal - ------------------ ------------------------------------------------ (Date) (Signature) Laura Leventhal Controller (Principal Accounting Officer) September 23, 1999 - ------------------ ________________________________________________ (Date) (Signature) Brodie L. Cobb Director September 23, 1999 - ------------------ ________________________________________________ (Date) (Signature) J. Jan Collmer Director 25 September 23, 1999 - ------------------ ________________________________________________ (Date) (Signature) R. Jan LeCroy Director September 23, 1999 /S/ Frederick R. Meyer - ------------------ ------------------------------------------------ (Date) (Signature) Frederick R. Meyer Director September 23, 1999 /S/ Jon L. Mosle, Jr. - ------------------ ------------------------------------------------ (Date) (Signature) Jon L. Mosle, Jr. Director 26 SOUTHWEST SECURITIES GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE(S) Consolidated Statements of Financial Condition F-2 as of June 25, 1999 and June 26, 1998 Consolidated Statements of Income and Comprehensive Income F-3 for the years ended June 25, 1999, June 26, 1998 and June 27, 1997 Consolidated Statements of Stockholders' Equity F-4 for the years ended June 25, 1999, June 26, 1998 and June 27, 1997 Consolidated Statements of Cash Flows F-5 for the years ended June 25, 1999, June 26, 1998 and June 27, 1997 Notes to Consolidated Financial Statements F-6-18 Independent Auditors' Report F-19
F-1 Southwest Securities Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 25, 1999 and June 26, 1998 (In thousands, except par values and share amounts)
1999 1998 ----------- ----------- Assets Cash $ 11,334 $ 13,706 Assets segregated for regulatory purposes 225,736 130,728 Marketable equity securities available for sale 172,928 -- Receivable from brokers, dealers and clearing organizations 3,088,005 2,365,635 Receivable from clients, net 679,652 648,464 Securities owned, at market value 74,486 32,144 Other assets 41,133 29,429 ----------- ----------- $4,293,274 $3,220,106 =========== =========== Liabilities and Stockholders' Equity Short-term borrowings $ 2,700 $ -- Payable to brokers, dealers and clearing organizations 3,000,096 2,293,731 Payable to clients 812,559 720,813 Securities sold, not yet purchased, at market value 24,350 1,662 Drafts payable 37,013 41,688 Other liabilities 104,222 36,745 Exchangeable subordinated notes 50,000 -- ----------- ----------- 4,030,940 3,094,639 Minority interest in consolidated subsidiary 50 -- Stockholders' equity: Preferred stock of $1.00 par value. Authorized 100,000 shares; none issued -- -- Common stock of $.10 par value. Authorized 20,000,000 shares; issued and outstanding 11,805,925 shares in 1999; issued 10,687,583 and outstanding 10,678,406 shares in 1998. 1,180 1,069 Additional paid-in capital 127,092 69,462 Accumulated other comprehensive income - unrealized holding gain, net of tax of $60,374 112,123 -- Retained earnings 21,896 55,022 Receivable from employees under the Employee Stock Purchase Plan (7) (12) Treasury stock (9,177 shares, at cost, in 1998) -- (74) ----------- ----------- Total stockholders' equity 262,284 125,467 ----------- ----------- Commitments and contingencies $4,293,274 $3,220,106 =========== ===========
See accompanying Notes to Consolidated Financial Statements. F-2 Southwest Securities Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years ended June 25, 1999, June 26, 1998 and June 27, 1997 (In thousands, except share and per share amounts)
1999 1998 1997 ----------- ----------- ----------- Net revenues from clearing operations $ 40,118 $ 26,607 $ 22,693 Commissions 65,048 59,401 38,882 Interest 147,006 143,121 119,176 Investment banking, advisory and administrative fees 29,100 27,850 16,031 Net gains on principal transactions 41,689 12,576 11,856 Other 14,309 16,203 9,766 ----------- ----------- ----------- 337,270 285,758 218,404 ----------- ----------- ----------- Commissions and other employee compensation 124,691 91,817 65,062 Interest 99,951 100,704 83,238 Occupancy, equipment and computer service costs 21,343 17,663 12,216 Communications 13,738 12,509 11,026 Floor brokerage and clearing organization charges 6,129 5,124 4,181 Other 30,898 26,043 16,938 ----------- ----------- ----------- 296,750 253,860 192,661 ----------- ----------- ----------- Income before income taxes 40,520 31,898 25,743 Income taxes 14,301 11,268 8,760 ----------- ----------- ----------- Net income 26,219 20,630 16,983 Other comprehensive income - unrealized holding gain arising during period, net of tax of $60,374 112,123 -- -- ----------- ----------- ----------- Comprehensive income $ 138,342 $ 20,630 $ 16,983 =========== =========== =========== Earnings per share - basic $ 2.23 $ 1.76 $ 1.51 =========== =========== =========== Earnings per share - diluted $ 2.21 $ 1.75 $ 1.51 =========== =========== =========== Weighted average shares outstanding - basic 11,766,377 11,743,228 11,269,666 =========== =========== =========== Weighted average shares outstanding - diluted 11,838,723 11,763,605 11,282,885 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. F-3 Southwest Securities Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended June 25, 1999, June 26, 1998 and June 27, 1997 (In thousands, except share and per share amounts)
Receivable from employees under Accumulated Employee Additional other Stock Common Stock paid-in comprehensive Retained Purchase Treasury Shares Amount capital income earnings Plan stock Total --------------------------------------------------------------------------------------------- Balance at June 28, 1996 8,783,630 $ 879 $ 27,107 $ -- $ 56,815 $(278) $(74) $ 84,449 Net income -- -- -- -- 16,983 -- -- 16,983 Dividends ($.15/share) -- -- -- -- (1,779) -- -- (1,779) Issuance of common stock for acquisition 445,845 45 7,089 -- -- -- -- 7,134 Stock dividend declared on August 28, 1997 922,947 92 21,943 -- (22,035) -- -- -- Proceeds from employees for Employee Stock Purchase Plan -- -- -- -- -- 141 -- 141 --------------------------------------------------------------------------------------------- Balance at June 27, 1997 10,152,422 1,016 56,139 -- 49,984 (137) (74) 106,928 Net income -- -- -- -- 20,630 -- -- 20,630 Dividends ($.21/share) -- -- -- -- (2,441) -- -- (2,441) Exercise of stock options 16,000 2 498 -- (275) -- -- 225 Stock dividend on exercised options 1,600 -- 38 -- (38) -- -- -- Adjustment for fractional shares on stock dividend declared on August 28, 1997 (36) -- -- -- -- -- -- -- Stock dividend declared on May 22, 1998 508,420 51 12,787 -- (12,838) -- -- -- Proceeds from employees for Employee Stock Purchase Plan -- -- -- -- -- 125 -- 125 --------------------------------------------------------------------------------------------- Balance at June 26, 1998 10,678,406 1,069 69,462 -- 55,022 (12) (74) 125,467 Net income -- -- -- -- 26,219 -- -- 26,219 Dividends ($.25/share) -- -- -- -- (2,997) -- -- (2,997) Exercise of stock options 36,465 3 2,391 -- (1,285) -- -- 1,109 Stock dividend declared on May 6, 1999 1,073,266 107 54,956 -- (55,063) -- -- -- Unrealized holding gain, net of tax of $60,374 -- -- -- 112,123 -- -- -- 112,123 Proceeds from employees for Employee Stock Purchase Plan -- -- -- -- -- 5 -- 5 Reissuance of treasury stock for Stock Purchase Plan 9,177 -- 101 -- -- -- 74 175 Issuance of common stock and amortization of deferred compensation expense for Stock Purchase Plan 8,611 1 182 -- -- -- -- 183 --------------------------------------------------------------------------------------------- Balance at June 25, 1999 11,805,925 $1,180 $127,092 $112,123 $ 21,896 $ (7) $ -- $262,284 =============================================================================================
See accompanying Notes to Consolidated Financial Statements. F-4 Southwest Securities Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 25, 1999, June 26, 1998 and June 27, 1997 (In thousands)
1999 1998 1997 ---------- --------- --------- Cash flows from operating activities: Net income $ 26,219 $ 20,630 $ 16,983 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,057 3,426 2,750 Provision for doubtful accounts 625 1,241 -- Deferred income taxes (1,086) (371) (1,198) Deferred compensation expense 62 -- -- Decrease (increase) in assets segregated for regulatory purposes (95,008) 221,469 (128,167) Net change in broker, dealer and clearing organization accounts (16,005) 70,789 1,452 Net change in client accounts 59,933 (321,983) 203,161 Decrease (increase) in securities owned (42,342) (223) 2,672 Decrease (increase) in other assets (8,274) (179) 4,089 Increase (decrease) in drafts payable (4,675) 10,652 5,878 Increase (decrease) in securities sold, not yet purchased 22,688 (3,640) 4,545 Increase in other liabilities 6,865 11,556 3,770 ---------- --------- --------- Net cash provided by (used in) operating activities (47,941) 13,367 115,935 ---------- --------- --------- Cash flows from investing activities: Purchase of fixed assets (3,472) (3,525) (7,597) Proceeds from sale of fixed assets -- -- 96 ---------- --------- --------- Net cash used in investing activities (3,472) (3,525) (7,501) ---------- --------- --------- Cash flows from financing activities: Proceeds from issuance of exchangeable subordinated notes 50,000 -- -- Debt issue costs (1,813) -- -- Net change in short-term borrowings 2,700 (4,000) (100,984) Payments on liabilities subordinated to claims of general creditors -- (1,400) -- Proceeds from employees for Employee Stock Purchase Plan 5 125 141 Proceeds from employees for Stock Purchase Plan 296 -- -- Net proceeds from exercise of stock options 659 225 -- Net proceeds from issuance of stock of consolidated subsidiary 50 -- -- Payment of cash dividends on common stock (2,856) (1,831) (2,130) ---------- --------- --------- Net cash provided by (used in) financing activities 49,041 (6,881) (102,973) ---------- --------- --------- Net increase (decrease) in cash (2,372) 2,961 5,461 Cash at beginning of year 13,706 10,745 5,284 ---------- --------- --------- Cash at end of year $ 11,334 $ 13,706 $ 10,745 ========== ========= =========
See accompanying Notes to Consolidated Financial Statements. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES (a) General and Basis of Presentation The consolidated financial statements include the accounts of Southwest Securities Group, Inc. ("Parent") and its consolidated subsidiaries listed below (collectively, the "Company"): Southwest Securities, Inc. "Southwest" SWS Financial Services, Inc. "SWSFS" (formerly Brokers Transaction Services, Inc.) Mydiscountbroker.com, Inc. "MDB" (formerly Sovereign Securities, Inc.) NorAm Investment Services, Inc. "NorAm" Southwest Clearing Corporation "Clearing" Westwood Management Corporation "Westwood" Westwood Trust "Trust" SW Capital Corporation "Capital" Southwest Investment Advisors, Inc. "Advisors" SWS Technologies Corporation "Technologies" (formerly SWST Computer Corp.)
Southwest, SWSFS, MDB and NorAm are National Association of Securities Dealers ("NASD") registered broker/dealers under the Securities Exchange Act of 1934 ("1934 Act"). NorAm was acquired May 1, 1997 through the issuance of 445,845 shares of common stock. The acquisition was accounted for under the purchase method of accounting, and, accordingly, assets and liabilities were recorded at their fair market values on the date of acquisition. Goodwill relating to this acquisition of approximately $5,113,000 is recorded in other assets in the accompanying consolidated statements of financial condition. NorAm was sold in August 1999 (Note 19). Clearing was incorporated in the State of Delaware on September 30, 1998 and has not yet begun operations. Advisors and Westwood are registered investment advisors under the Investment Advisors Act of 1940. Trust is chartered and regulated by the Texas Department of Banking. All significant intercompany balances and transactions have been eliminated. The annual consolidated financial statements are prepared as of the close of business on the last Friday of June. Accordingly, the fiscal years for 1999, 1998 and 1997 ended June 25, 1999, June 26, 1998 and June 27, 1997, respectively. (b) Securities Transactions Securities transactions are recorded on a settlement date basis with such transactions generally settling three business days after trade date. Revenues and expenses related to such transactions are also recorded on settlement date, which is not materially different than trade date. (c) Securities Owned Marketable securities are carried at quoted market value. The increase or decrease in net unrealized appreciation or depreciation of securities owned is credited or charged to operations and is included in net gains on principal transactions in the consolidated statements of income and comprehensive income. As of December 31, 1998, the Company began determining the market value of these securities on a trade date basis rather than a settlement date basis. (d) Depreciation and Amortization Depreciation of furniture and equipment is provided over the estimated useful lives of the assets (5 or 7 years), and depreciation on leasehold improvements is provided over the lease term (up to 9 years). Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over periods to be benefited ranging from twenty-five to forty years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. F-6 (e) Drafts Payable In the normal course of business, the Company uses drafts to make payments relating to its brokerage transactions. These drafts are presented for payment through the Company's bank and are sent to the Company daily for review and acceptance. Upon acceptance, the drafts are paid and charged against cash. (f) Reverse Repurchase and Repurchase Agreements Securities purchased under agreements to resell ("Reverse Repurchase Agreements") and securities sold under agreements to repurchase ("Repurchase Agreements") are carried at the amounts at which these securities will be subsequently resold or reacquired as specified in the respective agreements. Management regularly monitors the market value of the underlying securities relating to outstanding repurchase and reverse repurchase agreements. (g) Federal Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Cash Flow Reporting For the purposes of the consolidated statements of cash flows, the Company considers cash to include cash on hand and in depository accounts. Assets segregated for regulatory purposes are not included as cash equivalents for purposes of the consolidated statements of cash flows because such assets are segregated for the benefit of customers only. Cash paid during the year for interest was $99,935,000, $100,422,000 and $82,936,000, in 1999, 1998 and 1997, respectively. Cash paid during the year for income taxes was $18,691,000, $10,332,000 and $9,235,000 in 1999, 1998 and 1997, respectively. In a non-cash transaction in 1999, the Parent received approximately 1.7 million common shares (approximately 3.3 million shares after a two-for-one stock split effective May 17, 1999) of Knight/Trimark Group, Inc. ("Knight") subsequent to Knight's initial public offering completed July 10, 1998. During 1997, the Company issued common stock valued at approximately $7,134,000 related to the acquisition of NorAm. (i) Earnings Per Share The Company has adopted and retroactively applied the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" for all periods presented. SFAS No. 128 requires dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by weighted average common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised. (j) Minority Interest Southwest has issued 50 shares of Series A Preferred Stock at $1,000 per share to certain qualified broker/dealers. Qualified broker/dealers are broker/dealers registered under the 1934 Act who clear their proprietary transactions through Southwest and who represent that they are subject to net capital rules of the SEC and other self-regulatory organizations to which such broker/dealers report. A total of 5,000 shares of Series A Preferred Stock are reserved for issuance to such broker/dealers. This investment by third-parties in Southwest is classified as minority interest in consolidated subsidiary on the Consolidated Statements of Financial Condition. (k) Stock-Based Compensation The Company accounts for employee stock-based compensation using the intrinsic value method of accounting prescribed by Accounting Principles Bulletin No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company provides pro forma disclosures of net income and earnings per share for stock option grants as if the fair value based method had been applied. Prior to fiscal year 1998, the impact of recording the compensation expense related to the stock options granted by the Company was not material to the consolidated financial statements. F-7 (l) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Fair Value of Financial Instruments Substantially all of the Company's financial assets and liabilities are carried at market value or at amounts which, because of their short-term nature, approximate current fair value. The Company's short-term borrowings, if recalculated based on current interest rates, would not significantly differ from the amounts recorded at June 25, 1999. The fair value of exchangeable subordinated notes, issued on June 16, 1999 would not significantly differ from the amount recorded at June 25, 1999. (n) Accounting Pronouncements SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and establishes standards for reporting and display of comprehensive income and its components in a set of general-purpose financial statements. The Company adopted SFAS 130 in the first quarter of fiscal 1999. All prior periods have been restated to conform with SFAS 130. The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in June 1997. This statement establishes standards for the way that a public business enterprise reports information about operating segments in the annual financial statements and requires that those enterprises report selected information about operating segments in interim reports to shareholders. The Company adopted SFAS 131 in the fiscal 1999 financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires derivatives to be recognized in the consolidated statements of financial condition at fair value. Changes in such fair value are required to be recognized in earnings to the extent the derivative is not effective as a hedge. This statement will apply to the Company's 5% Exchangeable Subordinated Notes and the Company's underlying investment in Knight common stock. The impact on the financial statements will depend on a variety of factors, including future interpretive guidance from the FASB. Management is currently reviewing the impact of this new pronouncement, and the impact on the Company's financial position is unknown at this time. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and should be applied prospectively. However, the FASB has subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which postpones initial application until fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in fiscal 2001. 2. ASSETS SEGREGATED FOR REGULATORY PURPOSES At June 25, 1999, the Company had U.S. Treasury securities with a market value of $28,465,000 and reverse repurchase agreements of $197,271,000 segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the 1934 Act. Reverse repurchase agreements at June 25, 1999 were collateralized by U.S. Government securities with market values of approximately $198,298,000. At June 26, 1998, the Company had U.S. Treasury securities with a market value of $59,515,000 and reverse repurchase agreements of $71,213,000 segregated in these accounts. The reverse repurchase agreements were collateralized by U.S. Government securities with market values of approximately $71,871,000 at June 26, 1998. 3. MARKETABLE EQUITY SECURITIES The investment in Knight is classified as marketable equity securities available for sale, and the unrealized holding gain, net of tax, is recorded as other comprehensive income as a part of stockholders' equity on the consolidated statements of financial condition. Subsequent to Knight's two-for-one stock split effective May 17, 1999, the Company owns approximately 3.3 million shares of Knight common stock. F-8 The following table summarizes the cost and market value of the investment in Knight at June 25, 1999 (in thousands):
Gross Gross Unrealized Unrealized Market Cost Gains Losses Value ------------------------------------------ Marketable equity securities $432 172,496 -- $172,928 ==========================================
4. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS At June 25, 1999 and June 26, 1998, the Company had receivable from and payable to brokers, dealers and clearing organizations related to the following (in thousands):
1999 1998 ------------- ------------- Receivable: Securities failed to deliver $ 27,505 $ 18,880 Securities borrowed 2,987,910 2,229,587 Correspondent broker/dealers 47,805 62,673 Clearing organizations 1,444 1,245 Other 23,341 53,250 ------------- ------------- $ 3,088,005 $ 2,365,635 ============= ============= Payable: Securities failed to receive $ 23,634 $ 45,956 Securities loaned 2,945,007 2,227,874 Correspondent broker/dealers 15,273 11,300 Other 16,182 8,601 ------------- ------------- $ 3,000,096 $ 2,293,731 ============= =============
Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received subsequent to settlement date. Securities borrowed and loaned represent deposits made to or received from other broker/dealers relating to these transactions. These deposits approximate the market value of the underlying securities. The Company clears securities transactions for Correspondent broker/dealers. Settled securities and related transactions for these Correspondents are included in the receivable from and payable to brokers, dealers and clearing organizations. The Company participates in the securities borrowing and lending business by borrowing and lending securities other than those of its clients. All open positions are adjusted to market values daily. The amounts receivable and payable, relating to open positions for the securities borrowed and securities loaned other than those of the Company's clients, were $2,963,865,000 and $2,926,386,000, respectively, at June 25, 1999 and $2,192,459,000 and $2,198,278,000, respectively, at June 26, 1998. 5. RECEIVABLE FROM AND PAYABLE TO CLIENTS Receivable from and payable to clients include amounts due on cash and margin transactions. Included in these amounts are receivable from and payable to noncustomers (as defined by Rule 15c3-3 of the 1934 Act, principally officers, directors and related accounts), which aggregated approximately $2,935,000 and $4,794,000, respectively, at June 25, 1999 and $1,916,000 and $2,649,000, respectively, at June 26, 1998. Securities accounts of noncustomers are subject to the same terms and regulations as those of customers. Securities owned by customers and noncustomers that collateralize the receivable are not reflected in the accompanying consolidated financial statements. The Company pays interest on certain customer "free credit" balances available for reinvestment. The aggregate balance of such funds was approximately $699,793,000 and $542,822,000 at June 25, 1999 and June 26, 1998, respectively. During fiscal years 1999 and 1998, the interest rates paid on these balances ranged from 4.0% to 4.75%. F-9 The Company maintains an allowance for doubtful accounts which represents amounts, in the judgment of management, that are necessary to adequately absorb losses from known and inherent risks in receivables from customers. Provisions made to this allowance are charged to operations. At June 25, 1999 and June 26, 1998, all unsecured customer receivables had been provided for in this allowance. 6. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED Securities owned and securities sold, not yet purchased at June 25, 1999 and June 26, 1998, which are carried at market value, include the following (in thousands):
1999 1998 ----------- ---------- Securities owned Corporate equity securities $ 35,671 $ 5,220 Municipal obligations 19,391 13,633 U.S. Government and Government agency obligations 9,470 8,696 Corporate obligations 4,114 1,479 Commercial paper -- 446 Other 5,840 2,670 ----------- ---------- $ 74,486 $ 32,144 =========== ========== Securities sold, not yet purchased Corporate equity securities $ 14,972 $ 1,208 Municipal obligations 6,184 124 U.S. Government and Government agency obligations 2,491 175 Corporate obligations 372 98 Commercial paper -- 50 Other 331 7 ----------- ---------- $ 24,350 $ 1,662 =========== ==========
Certain of the above securities have been pledged to secure short-term borrowings and as security deposits at clearing organizations for the Company's clearing business. These pledged securities amounted to $3,647,000 and $3,572,000 at June 25, 1999 and June 26, 1998, respectively. 7. SHORT-TERM BORROWINGS The Company has credit arrangements with commercial banks, which include broker loan lines up to $192,500,000. These lines of credit are used primarily to finance securities owned, securities held for Correspondent broker/dealer accounts and receivables in customers' margin accounts. These lines may also be used to release pledged collateral against day loans. These credit arrangements are provided on an "as offered" basis and are not committed lines of credit. These arrangements can be terminated at any time by the lender. Any outstanding balances under these credit arrangements are due on demand and bear interest at rates indexed to the federal funds rate (4.63% at June 25, 1999). At June 25, 1999, the amount outstanding under these secured arrangements was $2,700,000 which was collateralized by securities held for firm accounts valued at $29,724,000. There were no amounts outstanding at June 26, 1998 on these credit arrangements. The Company also has an irrevocable letter of credit agreement aggregating $60,000,000 at June 25, 1999 and $32,000,000 at June 26, 1998 pledged to support its open options positions with an options clearing organization. The letter of credit bears interest at the brokers' call rate, if drawn, and is renewable annually. This letter of credit is fully collateralized by marketable securities held in clients' and nonclients' margin accounts with a value of $110,719,000 and $55,328,000 at June 25, 1999 and June 26, 1998, respectively. In addition, the Company has a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. There were no amounts outstanding on this unsecured line of credit at either June 25, 1999 or June 26, 1998. F-10 At June 25, 1999 and June 26, 1998, the Company had no repurchase agreements outstanding. 8. INCOME TAXES Income tax expense for the fiscal years ended June 25, 1999, June 26, 1998 and June 27, 1997 (effective rate of 35.3% in 1999 and 1998, and 34.0% in 1997) differs from the amount that would otherwise have been calculated by applying the Federal corporate tax rate (35% in 1999, 1998 and 1997) to income before income taxes and is comprised of the following (in thousands):
1999 1998 1997 --------- --------- --------- Income tax expense at the statutory rate $14,182 $11,164 $9,010 Tax exempt interest (242) (285) (321) Other, net 361 389 71 --------- --------- --------- $14,301 $11,268 $8,760 ========= ========= =========
Income taxes as set forth in the consolidated statements of income and comprehensive income consisted of the following components (in thousands):
1999 1998 1997 ---------- --------- --------- Current $15,402 $11,639 $ 9,958 Deferred (1,101) (371) (1,198) --------- --------- --------- Total income taxes $14,301 $11,268 $ 8,760 ========= ========= =========
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of June 25, 1999 and June 26, 1998 are presented below (in thousands):
1999 1998 ---------- ---------- Deferred tax assets: Expenses for book, not deductible until paid $ 3,567 $3,235 Management incentive compensation 1,258 910 Depreciation at rates different for tax than for financial reporting 61 52 Stock options exercised 546 96 Other 681 446 ---------- -------- Total gross deferred tax assets 6,113 4,739 Deferred tax liabilities: Unrealized holding gain on marketable equity securities (60,374) -- Unrealized (gains) losses 8 (11) Other (250) (408) ---------- -------- Total gross deferred tax liabilities (60,616) (419) ---------- -------- Net deferred tax assets (liabilities) $(54,503) $4,320 ========== ========
As a result of the Company's history of taxable income and the nature of the items from which deferred tax assets are derived, management believes that it is more likely than not that the Company will realize the benefit of the deferred tax assets. 9. EXCHANGEABLE SUBORDINATED NOTES On June 16, 1999, the Company issued $50 million of 5% Exchangeable Subordinated Notes (consisting of 882,028 Derivative Adjustable Ratio Securities(SM), each a "DARTS(SM)"). The Notes mature on June 30, 2004, and are not redeemable or exchangeable until that time. Interest will be paid quarterly in arrears on March 31, June 30, September 30, and December 31, commencing September 30, 1999. Accrued interest at June 25, 1999 totaled $104,000. F-11 Legal and accounting fees, printing costs and other expenses associated with the issuance of the DARTS totaled $1.8 million and are being amortized on the straight-line method over the term of the bonds. In fiscal 1999, amortization expense charged to operations was $15,000. At maturity, the principal of the notes will be paid in shares of the Class A common stock of Knight or, at the option of the Company, their cash equivalent. The Notes were issued in denominations of $56.6875, the closing bid price of Knight on June 10, 1999. At maturity, Noteholders are entitled to one share of Knight common stock for each DARTS if the average price for the 20 days immediately preceding the Note's maturity is equal to or less than the DARTS issue price. Noteholders are entitled to .833 shares of Knight common stock for each DARTS if the average price of Knight's common stock is 20% or more greater than the DARTS' issue price. If the average price of the Knight common stock is between the Note's issue price and 20% greater than the issue price, the exchange rate will be determined by a formula. The amount of Knight common stock delivered at maturity may be adjusted as a result of certain distribution and recapitalization events involving Knight. The DARTS are subordinated and unsecured general debts of the Company and are subordinated to all existing and future indebtedness of the Company and all liabilities of the Company's subsidiaries. DARTS will rank equal to future debt for money borrowed that is not designated as senior to the DARTS and future debt that is exchangeable for capital stock. 10. NET CAPITAL REQUIREMENTS The broker/dealer subsidiaries are subject to the Securities and Exchange Commission's Uniform Net Capital Rule (the "Rule"), which requires the maintenance of minimum net capital. Southwest has elected to use the alternative method, permitted by the Rule, which requires that it maintain minimum net capital, as defined in Rule 15c3-1 under the 1934 Act, equal to the greater of $1,500,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 under the 1934 Act. At June 25, 1999, Southwest had net capital of $119,329,000, or approximately 15% of aggregate debit balances, which is $103,619,000 in excess of its minimum net capital requirement of $15,710,000 at that date. Additionally, the net capital rule of the New York Stock Exchange, Inc. (the "Exchange") provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debit items. At June 25, 1999, Southwest had net capital of $80,054,000 in excess of 5% of aggregate debit items. SWSFS, MDB and NorAm follow the primary (aggregate indebtedness) method under Rule 15c3-1, which requires the maintenance of minimum net capital of $250,000. On June 29, 1999, Clearing was approved to be a NASD broker/dealer and will begin its filings under Rule 15c3-1 in fiscal 2000. At June 25, 1999, the net capital and excess net capital of SWSFS, MDB and NorAm was as follows: Net Capital Excess Net Capital ------------------------------------------ SWSFS $317,000 $ 67,000 MDB 307,000 57,000 NorAm 371,000 121,000 Trust is subject to the capital requirements of the Texas Department of Banking, and has a minimum capital requirement of $1,000,000. Trust had total stockholder's equity of approximately $2,671,000, which is $1,671,000 in excess of its minimum capital requirement at June 25, 1999. 11. EMPLOYEE BENEFITS At June 25, 1999, the Company had two stock option plans, the Southwest Securities Group, Inc. Stock Option Plan (the "1996 Plan") and the Southwest Securities Group, Inc. 1997 Stock Option Plan (the "1997 Plan"). The 1996 Plan was adopted by the Board of Directors on September 17, 1996 and approved by the shareholders on November 6, 1996. The 1996 Plan reserves 1,270,500 shares of the Company's common stock for issuance to eligible employees of the Company or its subsidiaries, as well as to non-employee members of the Board of Directors. On August 20, 1997, the Board of Directors approved the 1997 Plan, which reserves 190,575 shares of the Company's common stock for eligible employees or potential employees of the Company or its subsidiaries. Shares reserved under these option plans reflect all stock dividends issued by the Company (Note 13). Officers and directors are not eligible to receive options under the 1997 Plan. Options granted under the 1996 and 1997 Plans have a maximum ten-year term, and the vesting period is determined on an individual basis by the Stock Option Committee. Options granted to F-12 non-employee directors under the 1996 Plan are fully vested six months after grant and have a five-year term. The Company also has options outstanding that were granted on May 25, 1995 in conjunction with the acquisition of Barre & Company, Inc. ("Barre"). These options were vested immediately upon grant and have a five-year term. A summary of the status of the Company's outstanding stock options as of June 25, 1999, June 26, 1998 and June 27, 1997 is presented below:
1999 1998 1997 ---------------------------- ------------------------ ------------------------ Weighted- Weighted- Weighted- Average Average Average Underlying Exercise Underlying Exercise Underlying Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------------------- Outstanding, beginning of period 253,012 $21.00 52,000 $ 11.17 32,000 $ 8.07 Granted 244,408 18.84 210,973 23.72 20,000 16.13 Exercised (36,465) 16.42 (16,000) 8.07 -- -- Forfeited (19,819) 19.58 (6,000) 23.63 -- -- Adjustment for five/ten percent stock dividends 44,581 -- 12,039 -- -- -- --------- -------- ------- Outstanding, end of period 485,717 $19.15 253,012 $ 21.00 52,000 $ 11.17 ========= ======== ======= Exercisable, end of period 75,303 46,200 52,000 Weighted-average fair value of options granted $ 18.78 $ 22.83 $ 16.13 during fiscal year
The following table summarizes information for the stock options outstanding at June 25, 1999:
Options Outstanding Options Exercisable --------------------------------------------- ------------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------------------------------------------------------------------------------- $6.99 to $19.70 272,928 8.5 years $17.61 27,060 $10.31 $19.70 to $23.27 207,446 8.0 years 20.55 48,243 20.52 $23.27 to $50.00 5,343 7.8 years 43.26 -- -- ------------- --------- $6.99 to $50.00 485,717 8.3 years $19.15 75,303 $16.85 ============= =========
The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock options. Had compensation cost been determined consistent with SFAS 123 for the options granted, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended June 25, 1999 and June 26, 1998:
1999 1998 --------- --------- Net income (in thousands) As reported $26,219 $20,630 ========= ========= Pro forma $25,297 $20,357 ========= =========
F-13
1999 1998 ------------ ----------- Earnings per share As reported - basic $2.23 $1.76 ============ =========== As reported - diluted $2.21 $1.75 ============ =========== Pro forma - basic $2.15 $1.74 ============ =========== Pro forma - diluted $2.14 $1.73 ============ ===========
The fair value of each option was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1999 and 1998:
1999 1998 ----------------- ------------------- Expected volatility 33% 30% Risk-free interest rate 4.50% 5.09% Expected dividend yield .40% 1.25% Expected life 5 to 10 years 5 to 10 years
The Company has a defined contribution profit sharing plan covering substantially all employees. Profit sharing plan benefits become fully vested after six years of service by the participant. Costs of the profit sharing plan are accrued and funded at the Company's discretion. Profit sharing expense for fiscal years 1999, 1998 and 1997 was approximately $5,264,000, $4,599,000 and $3,338,000, respectively. On November 6, 1996, the shareholders of the Company approved the Phantom Stock Plan ("Phantom Plan") adopted by the Board of Directors on September 17, 1996. The Phantom Plan allows non-employee directors to receive directors fees in the form of common stock equivalent units. As of June 25, 1999, 869 dividend adjusted units have been issued under the Phantom Plan. On August 20, 1997, the Board of Directors adopted a Stock Purchase Plan ("Stock Purchase Plan") to enable employees of the Company and its subsidiaries to purchase up to 1,270,500 shares of common stock of the Company, as adjusted for stock dividends (Note 13). At June 25, 1999, approximately 19,000 shares were issued under the Stock Purchase Plan, as adjusted for the most recent ten percent stock. Subsequent to year end, an additional approximately 7,000 stock dividend adjusted shares were issued to participants. 12. EARNINGS PER SHARE A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows (in thousands, except share and per share amounts):
1999 1998 1997 ----------- ----------- ----------- Net income $ 26,219 $ 20,630 $ 16,983 =========== =========== =========== Weighted average shares outstanding - basic 11,766,377 11,743,228 11,269,666 Effect of dilutive securities: Assumed exercise of stock options 72,346 20,377 13,219 ----------- ----------- ----------- Weighted average shares outstanding - diluted 11,838,723 11,763,605 11,282,885 =========== =========== =========== Earnings per share - basic $ 2.23 $ 1.76 $ 1.51 =========== =========== =========== Earnings per share - diluted $ 2.21 $ 1.75 $ 1.51 =========== =========== ===========
F-14 At June 25, 1999, there were approximately 442,000 options outstanding under the 1996 Plan and approximately 27,000 options outstanding under the 1997 Plan. The Company also has approximately 17,000 options outstanding that were granted in conjunction with the acquisition of Barre & Company, Inc. ("Barre Options"). As of June 25, 1999, all but 264 outstanding options were dilutive and were included in the calculation of weighted average shares outstanding - diluted. 13. STOCK DIVIDENDS On August 28, 1997, the Board of Directors declared a ten percent stock dividend which was paid on October 1, 1997 to shareholders of record at the close of business on September 15, 1997. Additionally, on May 22, 1998, the Board of Directors declared a five percent stock dividend which was paid on August 3, 1998 to shareholders of record at the close of business on July 15, 1998. On May 6, 1999, the Board declared another ten percent stock dividend which was paid on August 2, 1999 to shareholders of record on July 15, 1999. Per share amounts, dividends per share and weighted average shares outstanding have been restated in the accompanying financial statements to reflect the effect of these stock dividends. At the discretion of the Stock Option Committee, the stock options outstanding, as well as the options' exercise prices, were adjusted for the five percent stock dividend effective August 3, 1998 and the ten percent stock dividend effective August 2, 1999. The number of stock options outstanding, the number of stock options exercisable and the weighted-average exercise prices at June 25, 1999 and June 26, 1998, as well as the weighted-average fair value of options granted during the fiscal years, have been restated. 14. COMMITMENTS AND CONTINGENCIES The Company leases its offices under noncancelable operating lease agreements. During fiscal years 1999, 1998 and 1997, the Company entered into various noncancelable operating lease agreements relating to data processing equipment used in the brokerage operations. Rental expense for facilities leases for fiscal years 1999, 1998 and 1997 aggregated approximately $5,329,000, $4,833,000 and $3,172,000, respectively. At June 25, 1999, the future rental payments for the noncancelable leases for each of the following five fiscal years and thereafter follow (in thousands):
Year ending: 2000 $ 7,418 2001 5,801 2002 3,912 2003 2,940 2004 2,909 Thereafter 11,007 ------- Total payments due $33,987 =======
During fiscal 1999, the Company committed approximately $10.6 million through December 2000 to expand and promote MDB. On April 17, 1998, a judgment was entered against the Company in connection with a breach of contract lawsuit stemming from the 1995 acquisition of Barre. The judge awarded the counterparty approximately $40,000 in damages and approximately $1,700,000 in attorney's fees. The Company believes it has substantial grounds for appeal and has begun the appellate process. The Company also believes its reserves are adequate to cover the full amount of the judgment. In the general course of its brokerage business and the business of clearing for other brokerage firms, the Company and/or its subsidiaries have been named as defendants in various lawsuits and arbitration proceedings. These claims allege violation of Federal and state securities laws. Management believes that resolution of these claims will not result in any material adverse effect on the Company's consolidated financial position or results of operations. 15. AFFILIATE TRANSACTIONS The Company, through its principal subsidiary, Southwest, provides accounting and administrative services for its subsidiaries and clears all customer transactions for SWSFS, MDB and NorAm. Westwood serves as F-15 the investment manager for the assets discussed in Note 2. Trust acts as an agent on behalf of Southwest in the direction of transactions related to these assets. In addition, Westwood serves as the investment manager of the common trust funds of Trust. 16. FINANCIAL INSTRUMENTS WITH OFF-STATEMENT OF FINANCIAL CONDITION RISK In the normal course of business, the broker/dealer subsidiaries engage in activities involving the execution, settlement and financing of various securities transactions. These activities may expose the Company to off- statement of financial condition credit and market risks in the event the customer or counterparty is unable to fulfill its contractual obligation. Such risks may be increased by volatile trading markets. As part of its normal brokerage activities, the Company sells securities not yet purchased (short sales) for its own account. The establishment of short positions exposes the Company to off-statement of financial condition market risk in the event prices increase, as the Company may be obligated to acquire the securities at prevailing market prices. The Company seeks to control the risks associated with its customer activities, including customer accounts of its Correspondents for which it provides clearing services, by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The required margin levels are monitored daily and, pursuant to such guidelines, customers are required to deposit additional collateral or to reduce positions when necessary. A portion of the Company's customer activity involves short sales and the writing of option contracts. Such transactions may require the Company to purchase or sell financial instruments at prevailing market prices in order to fulfill the customer's obligations. At times, the Company lends money using reverse repurchase agreements. All positions are collateralized by U.S. Government or U.S. Government agency securities. Such transactions may expose the Company to off-statement of financial condition risk in the event such borrowers do not repay the loans and the value of collateral held is less than that of the underlying receivable. These agreements provide the Company with the right to maintain the relationship between market value of the collateral and the receivable. The Company arranges secured financing by pledging securities owned and unpaid customer securities for short-term borrowings to satisfy margin deposits of clearing organizations. The Company also actively participates in the borrowing and lending of securities. In the event the counterparty in these and other securities loaned transactions is unable to return such securities pledged or borrowed or to repay the deposit placed with them, the Company may be exposed to the risks of acquiring the securities at prevailing market prices or holding collateral possessing a market value less than that of the related pledged securities. The Company seeks to control the risks by monitoring the market value of securities pledged and requiring adjustments of collateral levels where necessary. 17. SEGMENT REPORTING In 1999 and prior years, the Company operated two principal segments within the financial services industry: the Broker/Dealer Group and the Asset Management Group. Such segments are managed separately based on types of products and services offered and their related client bases. The Company evaluates the performance of its segments based primarily on income before income taxes. The Broker/Dealer Group is comprised of Southwest, SWSFS, MDB, NorAm and Clearing. Southwest provides Correspondent clearing and execution services to securities broker/dealers, including SWSFS, MDB and NorAm, and other financial institutions. Southwest serves individual and institutional investors through its 19 branch offices. Through these offices, clients gain access to Southwest's investment research. Southwest also provides municipal finance and investment banking and underwriting services. SWSFS contracts with independent registered representatives for the administration of their securities business. MDB specializes in deep discount brokerage services over the Internet. NorAm contracts with Canadian broker/dealers on an independent contractor basis for administration of their U.S. securities business. F-16 The Asset Management Group is composed of Westwood and Trust (together, the Westwood Group) and Capital. Westwood manages the Gabelli-Westwood Family of Mutual Funds as well as equity and fixed income investments for a diverse clientele including corporate plan sponsors, charitable institutions, educational endowments and public funds. Trust provides trust, custodial and other management services to high net worth individuals and corporations throughout Texas and the Southwest. Capital administers the Local Government Investment Cooperative ("LOGIC") fund for cities, counties, schools and other local governments across Texas. All accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.
Consolidated Asset Other Southwest Broker/Dealer Management Consolidated Securities (in thousands) Group Group Entities Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ June 25, 1999 Net revenues from external sources $ 324,119 $12,044 $ 1,107 $ 337,270 Net intersegment revenues -- 940 2,209 -- Net interest revenue 46,846 197 12 47,055 Depreciation and amortization 2,540 201 316 3,057 Income before income taxes 41,315 3,065 (3,860) 40,520 Segment assets $4,099,509 $ 9,907 $183,858 $ 4,293,274 Expenditures for long-lived assets 3,174 274 24 3,472 June 26, 1998 Net revenues from external sources $ 271,241 $ 9,629 $ 4,888 $ 285,758 Net intersegment revenues -- 715 1,741 -- Net interest revenue 42,357 182 (122) 42,417 Depreciation and amortization 2,873 179 374 3,426 Income before income taxes 29,092 1,850 956 31,898 Segment assets $3,207,940 $ 8,276 $ 3,890 $ 3,220,106 Expenditures for long-lived assets 3,237 78 210 3,525 June 27, 1997 Net revenues from external sources $ 210,809 $ 6,521 $ 1,074 $ 218,404 Net intersegment revenues -- 648 1,867 -- Net interest revenue 35,750 278 (90) 35,938 Depreciation and amortization 2,530 190 30 2,750 Income before income taxes 26,688 203 (1,148) 25,743 Segment assets $3,263,080 $ 8,958 $ 4,354 $ 3,276,392 Expenditures for long-lived assets 7,072 155 370 7,597
18. ACQUISITION OF ASBI HOLDINGS, INC. On August 10, 1999, the Company signed a definitive merger agreement to acquire ASBI Holdings, Inc. ("ASBI"), the holding company for First Savings Bank, FSB, Arlington, Texas. The agreement provides that the Company will issue 2.6 million shares of its common stock to the holders of all of the outstanding stock of ASBI. Don A. Buchholz serves as chairman of both the Company and ASBI, and is the beneficial owner of approximately 7.0% of the Company's outstanding voting securities. Mr. Buchholz is the beneficial owner of approximately 19.3% of the outstanding securities of ASBI, and he exercises voting control for approximately 58.6% of ASBI's outstanding voting securities. The acquisition is expected to be accounted for by the pooling-of-interests method and is subject to regulatory and shareholder approval. F-17 19. SUBSEQUENT EVENTS In July 1999, the Company issued an additional $7.5 million of 5% Exchangeable Subordinated Notes (132,304 DARTS) as the underwriters exercised their over- allotment option. These DARTS have the same terms as the DARTS issued in June 1999 (Note 9). The Company received proceeds of $7.3 million net of underwriters' fees. Effective August 6, 1999, the Company sold all of its shares in NorAm for $478,788. F-18 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Southwest Securities Group, Inc.: We have audited the consolidated financial statements of Southwest Securities Group, Inc. and subsidiaries as listed in the accompanying index on page F-1. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index at Part IV. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwest Securities Group, Inc. and subsidiaries as of June 25, 1999 and June 26, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 25, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas July 27, 1999, except as to the second paragraph of Note 19 which is as of August 6, 1999 and Note 18 which is as of August 10, 1999 F-19 S-1 Schedule I - Condensed Financial Information of Registrant Southwest Securities Group, Inc. Condensed Financial Information of Registrant Condensed Statements of Financial Condition ------------------------------------------- June 25, 1999 and June 26, 1998 (In thousands)
1999 1998 ----------------- ----------------- Assets Investment in subsidiaries, at equity $ 127,519 $ 98,258 Marketable equity securities 172,928 -- Notes receivable from subsidiary 58,000 19,700 Other assets 18,912 12,958 ----------------- ------------------ $ 377,359 $ 130,916 ================= ================== Liabilities and Stockholders' Equity Other liabilities $ 65,025 $ 5,449 Exchangeable subordinated notes 50,000 -- Minority interest in consolidated subsidiary 50 -- Stockholders' equity 262,284 125,467 ----------------- ----------------- $ 377,359 $ 130,916 ================= =================
S-1 (continued) Schedule I - Condensed Financial Information of Registrant - Continued Southwest Securities Group, Inc. Condensed Financial Information of Registrant Condensed Statements of Income, Comprehensive Income ----------------------------------------------------- and Stockholders' Equity ------------------------ Years Ended June 25, 1999, June 26, 1998 and June 27, 1997 (In thousands)
1999 1998 1997 --------- --------- ---------- Revenues - Interest and other income $ 2,366 $ 6,361 $ 2,941 --------- --------- --------- Expenses: Interest expense 104 90 23 Other expenses 3,780 3,293 1,972 --------- --------- --------- 3,884 3,383 1,995 --------- --------- --------- Income (loss) before income tax expense and equity in earnings of subsidiaries (1,518 2,978 946 Income tax (expense) benefit 341 (1,183) (400) --------- --------- --------- Income (loss) before equity in earnings of subsidiaries (1,177) 1,795 546 Equity in earnings of subsidiaries 27,396 18,835 16,437 --------- --------- --------- Net income 26,219 20,630 16,983 Other comprehensive income - unrealized holding gain, net of tax of $60,374 112,123 -- -- --------- --------- --------- Comprehensive income 138,342 20,630 16,983 Stockholders' equity at beginning of year 125,467 106,928 84,449 Dividends (2,997) (2,441) (1,779) Exercise of stock options 1,109 225 -- Net proceeds from employees for Employee Stock Purchase Plan 5 125 141 Reissuance of treasury stock 175 -- -- Issuance of common stock and amortization of deferred compensation expense for Stock Purchase Plan 183 -- -- Issuance of common stock for acquisition -- -- 7,134 --------- --------- --------- Stockholders' equity at end of year $262,284 $125,467 $106,928 ========= ========= =========
S-1 (continued) Schedule I - Condensed Financial Information of Registrant - Continued Southwest Securities Group, Inc. Condensed Financial Information of Registrant Condensed Statements of Cash Flows ---------------------------------- Years Ended June 25, 1999, June 26, 1998 and June 27, 1997 (In thousands)
1999 1998 1997 ---------- --------- --------- Cash flows from operating activities: Net income $ 26,219 $ 20,630 $ 16,983 Adjustments: Depreciation and amortization 241 303 -- Undistributed equity in earnings of subsidiaries (29,261) (10,180) (20,695) Other 730 3,528 186 ---------- --------- --------- Net cash provided by (used in) operating activities (2,071) 14,281 (3,526) ---------- --------- --------- Cash flows from investing activities: Proceeds from (payments on) notes and other accounts with subsidiaries (42,862) (8,800) 1,515 Purchase of investments (2,058) -- -- Return of investment 650 -- -- ---------- --------- --------- Net cash provided by (used in) investing activities (44,270) (8,800) 1,515 ---------- --------- --------- Cash flows from financing activities: Proceeds from issuance of exchangeable subordinated notes 50,000 -- -- Debt issue costs (1,813) -- -- Net change in short-term borrowings -- (4,000) 4,000 Proceeds from employees for Employee Stock Purchase Plan 5 125 141 Net proceeds from exercise of stock options 659 225 -- Proceeds from employees for Stock Purchase Plan 296 -- -- Proceeds from issuance of stock of consolidated subsidiary 50 -- -- Payment of cash dividends on common stock (2,856) (1,831) (2,130) ---------- --------- --------- Net cash provided by (used in) financing activities 46,341 (5,481) 2,011 ---------- --------- --------- Net change in cash -- -- -- Cash at beginning of year 1 1 1 ---------- --------- --------- Cash at end of year $ 1 $ 1 $ 1 ========== ========= =========
_______________ Non-cash transactions: During 1997, the Company issued common stock valued at $7,134,000 related to the acquisition of Equity Securities Trading Company ("Equity"). At June 26, 1998, goodwill amounting to $4,729,000 related to the acquisition was transferred to the Company from NorAm Investment Services, Inc., formerly Equity, a fully consolidated subsidiary. In a non-cash transaction, the Company received approximately 1.7 million common shares (approximately 3.3 million shares after a two-for-one stock split effective May 17, 1999) of Knight/Trimark Group, Inc. ("Knight") subsequent to Knight's initial public offering completed July 10, 1998. EX-2.1 2 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 2.1 ================================================================================ AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN SOUTHWEST SECURITIES GROUP, INC. DALLAS, TEXAS AND ASBI HOLDINGS, INC. ARLINGTON, TEXAS Dated as of August 10, 1999 ================================================================================
TABLE OF CONTENTS ARTICLE I.ACQUISITION OF ASBI BY SWS............................................................. 2 SECTION 1.01 Merger of Newco with and into ASBI............................................ 2 SECTION 1.02 Effects of the Merger......................................................... 2 SECTION 1.03 Articles of Incorporation and Bylaws.......................................... 2 SECTION 1.04 Directors and Officers........................................................ 2 SECTION 1.05 Conversion of the ASBI Common Stock........................................... 2 SECTION 1.06 ASBI Dissenting Shares........................................................ 4 SECTION 1.07 SWS Common Stock.............................................................. 4 SECTION 1.08 ASBI Shareholders' Meeting.................................................... 4 SECTION 1.09 SWS Shareholders' Meeting..................................................... 5 SECTION 1.10 Exchange of Certificates...................................................... 5 SECTION 1.11 Rights of Former ASBI Shareholders............................................ 6 SECTION 1.12 Piggyback Registration........................................................ 6 SECTION 1.13 Escrow of Shares.............................................................. 7 ARTICLE II.THE CLOSING AND THE CLOSING DATE...................................................... 8 SECTION 2.01 Time and Place of the Closing and Closing Date................................ 8 SECTION 2.02 Effective Time................................................................ 8 SECTION 2.03 Actions to be Taken at the Closing by ASBI.................................... 8 SECTION 2.04 Actions to be Taken at the Closing by SWS..................................... 10 SECTION 2.05 Further Assurances............................................................ 11 ARTICLE III.REPRESENTATIONS AND WARRANTIES OF ASBI............................................... 11 SECTION 3.01 Organization and Qualification................................................ 11 SECTION 3.02 Execution and Delivery........................................................ 12 SECTION 3.03 ASBI Capitalization........................................................... 12 SECTION 3.04 ASBI Subsidiaries............................................................. 13 SECTION 3.05 Compliance with Laws, Permits and Instruments................................. 13 SECTION 3.06 ASBI Financial Statements..................................................... 14 SECTION 3.07 The Bank...................................................................... 14 SECTION 3.08 Litigation.................................................................... 15 SECTION 3.09 Consents and Approvals........................................................ 16 SECTION 3.10 Undisclosed Liabilities....................................................... 16 SECTION 3.11 Title to Assets............................................................... 16 SECTION 3.12 Absence of Certain Changes or Events.......................................... 16 SECTION 3.13 Leases, Contracts and Agreements.............................................. 19 SECTION 3.14 Taxes......................................................................... 19 SECTION 3.15 Insurance..................................................................... 21 SECTION 3.16 No Adverse Change............................................................. 21 SECTION 3.17 Proprietary Rights............................................................ 21 SECTION 3.18 Transactions with Certain Persons and Entities................................ 21 SECTION 3.19 Evidences of Indebtedness..................................................... 22 SECTION 3.20 Employee Relationships........................................................ 22 SECTION 3.21 Condition of Assets........................................................... 22
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SECTION 3.22 Environmental Compliance...................................................... 22 SECTION 3.23 Regulatory Compliance......................................................... 23 SECTION 3.24 Absence of Certain Business Practices......................................... 23 SECTION 3.25 Information for Proxy Statements.............................................. 24 SECTION 3.26 Dissenting Shareholders....................................................... 24 SECTION 3.27 Books and Records............................................................. 24 SECTION 3.28 Forms of Instruments, Etc..................................................... 24 SECTION 3.29 Fiduciary Responsibilities.................................................... 24 SECTION 3.30 Guaranties.................................................................... 24 SECTION 3.31 Voting Trust or Buy-Sell Agreements........................................... 24 SECTION 3.32 Employee Benefit Plans........................................................ 25 SECTION 3.33 Year 2000..................................................................... 26 SECTION 3.34 Accounting, Tax, and Regulatory Matters....................................... 27 SECTION 3.35 Nonaccredited Investors....................................................... 27 SECTION 3.36 Information Systems........................................................... 28 SECTION 3.37 Representations Not Misleading................................................ 28 ARTICLE IV.REPRESENTATIONS AND WARRANTIES OF SWS................................................ 28 SECTION 4.01 Organization and Qualification............................................... 28 SECTION 4.02 Execution and Delivery....................................................... 28 SECTION 4.03 Authorized and Outstanding Stock of SWS...................................... 29 SECTION 4.04 Authorized and Outstanding Stock of Newco.................................... 29 SECTION 4.05 Compliance with Laws, Permits and Instruments................................ 29 SECTION 4.06 Litigation................................................................... 29 SECTION 4.07 Consents and Approvals....................................................... 30 SECTION 4.08 SEC Filings; SWS Financial Statements........................................ 30 SECTION 4.09 Proxy Statement.............................................................. 30 SECTION 4.10 Representations Not Misleading............................................... 31 ARTICLE V.COVENANTS OF ASBI..................................................................... 31 SECTION 5.01 Best Efforts................................................................. 31 SECTION 5.02 Merger Agreement............................................................. 31 SECTION 5.03 Information for Regulatory Applications and Proxy Statements................. 31 SECTION 5.04 Required Acts of the ASBI Companies......................................... 32 SECTION 5.05 Prohibited Acts of the ASBI Companies........................................ 33 SECTION 5.06 Access; Pre-Closing Investigation............................................ 35 SECTION 5.07 Invitations to and Attendance at Directors' and Committee Meet............... 36 SECTION 5.08 Additional Financial Statements.............................................. 36 SECTION 5.09 Untrue Representations....................................................... 36 SECTION 5.10 Litigation and Claims........................................................ 36 SECTION 5.11 Notice of Material Adverse Changes........................................... 36 SECTION 5.12 No Negotiation with Others................................................... 37 SECTION 5.13 Consents and Approvals....................................................... 37 SECTION 5.14 Environmental Investigation; Right to Terminate Agreement.................... 37 SECTION 5.15 Proxies...................................................................... 38 SECTION 5.16 S Corporation Termination.................................................... 39
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SECTION 5.17 Conforming Accounting and Reserve Policies; Restructuring Expenses............ 39 SECTION 5.18 Affiliate Agreements.......................................................... 39 SECTION 5.19 Environmental Matters......................................................... 40 ARTICLE VI.COVENANTS OF SWS...................................................................... 40 SECTION 6.01 Best Efforts.................................................................. 40 SECTION 6.02 Incorporation and Organization of Newco....................................... 40 SECTION 6.03 Merger Agreement.............................................................. 40 SECTION 6.04 Information for Regulatory Applications and Proxy Statements.................. 40 SECTION 6.05 Acts of Newco................................................................. 41 SECTION 6.06 Untrue Representations........................................................ 41 SECTION 6.07 Litigation and Claims......................................................... 41 SECTION 6.08 Regulatory and Other Approvals................................................ 41 SECTION 6.09 Adverse Change................................................................ 41 SECTION 6.10 Employee Benefits and Contracts............................................... 41 ARTICLE VII.CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASBI...................................... 42 SECTION 7.01 Compliance with Representations, Warranties and Agreements.................... 42 SECTION 7.02 Shareholder Approvals......................................................... 42 SECTION 7.03 Government and Other Approvals................................................ 42 SECTION 7.04 No Litigation................................................................. 42 SECTION 7.05 Pooling Letter................................................................ 43 SECTION 7.06 SWS Common Stock.............................................................. 43 SECTION 7.07 Tax Opinion................................................................... 43 SECTION 7.08 Opinion of Counsel............................................................ 43 SECTION 7.09 Registration Rights Agreement................................................. 43 SECTION 7.10 No Material Adverse Change.................................................... 43 ARTICLE VIII.CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SWS...................................... 43 SECTION 8.01 Compliance with Representations, Warranties and Agreements.................... 43 SECTION 8.02 Shareholder Approvals......................................................... 44 SECTION 8.03 Government and Other Approvals................................................ 44 SECTION 8.04 No Litigation................................................................. 44 SECTION 8.05 Accounting Treatment.......................................................... 45 SECTION 8.06 No Material Adverse Change.................................................... 45 SECTION 8.07 Dissenters.................................................................... 45 SECTION 8.08 Tax Opinion................................................................... 45 SECTION 8.09 Pooling Letter................................................................ 45 SECTION 8.10 Fairness Opinion.............................................................. 45 SECTION 8.11 Releases of Directors and Officers of ASBI Companies.......................... 45 SECTION 8.12 Non Compete and Employment Agreements......................................... 46 SECTION 8.13 Affiliate Agreements.......................................................... 46 SECTION 8.14 Opinion of Counsel............................................................ 46 SECTION 8.15 Compliance with the 1933 Act.................................................. 46 SECTION 8.16 Termination of Shareholder Agreement and Voting Agreement.................... 46 SECTION 8.17 Escrow Agreement; Environmental Liabilities................................... 46
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ARTICLE IX.TERMINATION AND ABANDONMENT........................................................... 46 SECTION 9.01 Right of Termination.......................................................... 46 SECTION 9.02 Notice of Termination......................................................... 48 SECTION 9.03 Effect of Termination......................................................... 48 SECTION 9.04 Break-Up Fee.................................................................. 48 ARTICLE X.CONFIDENTIAL INFORMATION............................................................... 49 SECTION 10.01 Definition of "Recipient," "Disclosing Party" and" Representat............... 49 SECTION 10.02 Definition of "Subject Information".......................................... 49 SECTION 10.03 Confidentiality.............................................................. 49 SECTION 10.04 Securities Law Concerns...................................................... 49 SECTION 10.05 Return of Subject Information................................................ 50 SECTION 10.06 Specific Performance/Injunctive Relief....................................... 50 ARTICLE XI.MISCELLANEOUS......................................................................... 50 SECTION 11.01 Survival of Representations and Warranties................................... 50 SECTION 11.02 Expenses..................................................................... 50 SECTION 11.03 Brokerage Fees and Commissions............................................... 50 SECTION 11.04 Entire Agreement............................................................. 51 SECTION 11.05 Further Cooperation.......................................................... 51 SECTION 11.06 Severability................................................................. 51 SECTION 11.07 Notices...................................................................... 51 SECTION 11.08 GOVERNING LAW................................................................ 53 SECTION 11.09 Multiple Counterparts........................................................ 53 SECTION 11.10 Certain Definitions.......................................................... 53 SECTION 11.11 Specific Performance......................................................... 55 SECTION 11.12 Attorneys' Fees and Costs.................................................... 56 SECTION 11.13 Rules of Construction........................................................ 56 SECTION 11.14 Binding Effect; Assignment................................................... 56 SECTION 11.15 Public Disclosure............................................................ 56 SECTION 11.16 Extension; Waiver............................................................ 57 SECTION 11.17 Amendments................................................................... 57 SECTION 11.18 Binding Arbitration Relating to Environmental Escrow......................... 57
iv AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of the 10th day of August, 1999, by and between SOUTHWEST SECURITIES GROUP, INC., a Delaware corporation with its principal offices in Dallas, Texas ("SWS"), and ASBI HOLDINGS, INC., a Texas corporation and unitary savings and loan holding company with its principal offices in Arlington, Texas ("ASBI"). W I T N E S S E T H: ------------------- WHEREAS, ASBI owns all of the stock of Arlington Savings Bancshares, Inc., a Delaware corporation and unitary savings and loan holding company ("ASBI Delaware"), and ASBI Delaware owns all of the stock of First Savings Bank, F.S.B., Arlington, Texas, a federal savings bank (the "Bank"); WHEREAS, SWS wishes to acquire all of the issued and outstanding shares of ASBI Voting Common Stock, par value $0.001 per share ("ASBI Voting Common Stock") and ASBI Non-Voting Common Stock, par value $0.001 per share (the "ASBI Non-Voting Common Stock") (collectively, the ASBI Voting Common Stock and ASBI Non-Voting Common Stock are referred to herein as the "ASBI Common Stock") in exchange for shares of common stock of SWS, par value $0.10 per share ("SWS Common Stock") in a transaction that qualifies (i) for federal tax purposes as a reorganization pursuant to Section 368(a) of the Internal Revenue Code of 1986 (the "Code"), and (ii) for accounting purposes for pooling-of-interests treatment; WHEREAS, SWS desires to effect such acquisition through its wholly-owned subsidiary, SWS Acquisition Corporation, a Texas corporation ("Newco"), by causing Newco to be merged with and into ASBI (the "Merger"); WHEREAS, SWS and ASBI believe that the Merger, as provided for and subject to the terms and conditions set forth in this Agreement and all exhibits, schedules and supplements hereto, is in the best interests of SWS, ASBI and their respective shareholders; WHEREAS, SWS and ASBI desire to set forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of this Agreement and certain additional agreements related to the transactions contemplated hereby; and WHEREAS, the respective boards of directors of SWS and ASBI have approved this Agreement and the proposed transactions substantially on the terms and conditions set forth in this Agreement. NOW, THEREFORE, for and in consideration of the foregoing and of the mutual representations, warranties, covenants and agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the conditions set forth below, SWS and ASBI undertake, promise, covenant and agree with each other as follows: ARTICLE I. ACQUISITION OF ASBI BY SWS SECTION 1.01 Merger of Newco with and into ASBI. Subject to the terms and ---------------------------------- conditions of this Agreement and the Agreement and Plan of Merger to be entered into between ASBI and Newco and joined by SWS (the "Merger Agreement"), attached hereto as Exhibit A, SWS shall cause Newco to be merged with and into ASBI --------- pursuant to the provisions of Part Five of the Texas Business Corporation Act (the "TBCA"). SECTION 1.02 Effects of the Merger. The Merger shall have the effects set --------------------- forth in Article 5.06 of the TBCA. Following the Merger, ASBI shall continue as the corporation resulting from the Merger (the "Surviving Corporation"), and the separate corporate existence of Newco shall cease. The name of the Surviving Corporation shall be "ASBI Holdings, Inc." The existing offices and facilities of ASBI immediately preceding the Merger shall be the principal offices and facilities of the Surviving Corporation following the Merger. At the Effective Time (as hereinafter defined), all rights, title and interests to all real estate and other property owned by each of Newco and ASBI shall be allocated to and vested in the Surviving Corporation without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing liens or encumbrances thereon. At the Effective Time, all liabilities and obligations of Newco and ASBI shall be allocated to the Surviving Corporation, and the Surviving Corporation shall be the primary obligor therefor and no other party to the Merger shall be liable therefor. At the Effective Time, a proceeding pending by or against either Newco or ASBI may be continued as if the Merger did not occur, or the Surviving Corporation may be substituted in the proceedings. SECTION 1.03 Articles of Incorporation and Bylaws. The Articles of ------------------------------------ Incorporation and Bylaws, respectively, of the Surviving Corporation shall be the Articles of Incorporation and Bylaws of ASBI (as such Articles of Incorporation and Bylaws may be amended and restated pursuant to the terms of the Merger Agreement). SECTION 1.04 Directors and Officers. The directors and officers, ---------------------- respectively, of the Surviving Corporation shall be as set forth in the Merger Agreement. SECTION 1.05 Conversion of the ASBI Common Stock. At the Effective Time of ----------------------------------- the Merger: A. Subject to the terms of this Agreement and adjustment pursuant to Section 1.05B of this Agreement, each share of ASBI Common Stock outstanding immediately prior to the Effective Time, other than any Dissenting Shares (as such term is defined in the Merger Agreement), shall be converted into the right to receive shares of SWS Common Stock (the "Merger Consideration") in the amount equal to the quotient of (i) 2,600,000 shares of SWS Common Stock divided by (ii) the number of shares of ASBI Common Stock outstanding immediately prior to the Effective Time (herein the "Exchange Ratio"). B. Except for payment of a 10% stock dividend payable to SWS shareholders of record on July 15, 1999 (the "SWS Stock Dividend"), in the event SWS changes the number of shares of SWS Common Stock issued and outstanding prior to the Effective Time 2 as a result of a stock split, stock dividend, recapitalization, or similar transaction with respect to such stock and the record date therefor (in the case of a stock dividend) or the effective time thereof (in the case of a stock split or similar recapitalization for which a record date is not established) shall be prior to the Effective Time, the Exchange Ratio shall be proportionately adjusted. No adjustment shall be made as a result of the SWS Stock Dividend. C. Notwithstanding any other provision of this Agreement, each holder of shares of ASBI Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of SWS Common Stock (after taking into account all certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of SWS Common Stock multiplied by the market value of one share of SWS Common Stock at the Effective Time. The market value of one share of SWS Common Stock at the Effective Time shall be the last sale price of SWS Common Stock on the New York Stock Exchange (as reported by The Wall Street Journal or, if not reported thereby, any other authoritative source selected by SWS) on the last trading day preceding the Effective Time. No such holder will be entitled to dividends, voting rights, or any other rights as a shareholder in respect of any fractional shares. D. Each Dissenting Share shall be converted into the right to receive payment from the Surviving Corporation with respect thereto in accordance with the provisions of the TBCA; E. The shares of Newco (the "Newco Stock") outstanding at the Effective Time shall, at the Effective Time and by virtue of the Merger and without any action on the part of SWS or any other party as holder thereof, be converted into a like number of shares of common stock of the Surviving Corporation with a par value of $0.001 per share, with the effect that the number of shares of the common stock of the Surviving Corporation outstanding immediately after the Effective Time shall be equal to the aggregate number of shares of Newco Stock outstanding immediately before the Effective Time. The authorized number of shares of common stock of the Surviving Corporation shall be the same as the authorized number of shares of Newco Stock immediately prior to the Effective Time. F. The shares of ASBI Common Stock issued and outstanding at the Effective Time shall, by operation of law and without any action on the part of the holder thereof, unless dissenters' rights under applicable law are being perfected with respect thereto, be converted into the right to receive the Merger Consideration. G. On or following the Effective Time, each holder of ASBI Common Stock shall be required to surrender, in accordance with Section 1.10, his or her shares of ASBI Common Stock to the exchange agent designated by SWS (the "Exchange Agent"), and upon such surrender, each such holder shall be entitled to receive from SWS within ten (10) business days thereafter, the Merger Consideration which such holder is entitled to receive as described in Section 1.05A of this Agreement. Until so surrendered, each such outstanding certificate representing shares of ASBI Common Stock shall be deemed for all 3 purposes, subject only to dissenters' rights under applicable law, to evidence solely the right to receive such Merger Consideration from SWS. SECTION 1.06 ASBI Dissenting Shares. ASBI shall give SWS prompt notice ---------------------- upon receipt by ASBI of any written notice from any ASBI shareholder of such shareholder's intent to dissent from the Merger pursuant to Articles 5.11 and 5.12 of the TBCA, and will keep SWS apprised of all details known to ASBI relating to all such notices of intent to dissent including but not limited to informing SWS of the names of all shareholders providing such notice, the number of shares owned by such shareholders and the dates of their respective notices. SECTION 1.07 SWS Common Stock. ASBI acknowledges and agrees that the ---------------- shares of SWS Common Stock to be issued in the Merger will not have been registered under the Securities Act of 1933, as amended (the "1933 Act"), or under any state securities laws, and the certificates representing shares of SWS Common Stock will bear an appropriate legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities laws and neither such securities nor any interest therein may be offered, sold, pledged, assigned or otherwise transferred unless (1) a registration statement with respect thereto is effective under the Act and any applicable state securities laws or (2) the Company receives an opinion of counsel, which counsel and opinion are reasonably satisfactory to the Company, that such securities may be offered, sold, pledged, assigned or transferred in the manner contemplated without an effective registration statement under the Act or applicable state securities laws." SECTION 1.08 ASBI Shareholders' Meeting'. ASBI, acting through its board --------------------------- of directors, shall, in accordance with applicable law: A. Duly call, give notice of, convene and hold a meeting of its shareholders (the "ASBI Shareholders' Meeting") as soon as practicable for the purpose of approving and adopting the Merger and the Merger Agreement and the transactions contemplated hereby and thereby; B. Require no greater than the minimum vote of the holders of ASBI Common Stock required by applicable law in order to approve the Merger and the Merger Agreement; C. Subject to its fiduciary duties to the shareholders of ASBI, include in the ASBI Proxy Statement/PPM (defined in Section 1.08D below) the recommendation of its board of directors that the shareholders of ASBI vote in favor of the approval and adoption of the Merger and the Merger Agreement and the transactions contemplated hereby and thereby; and D. Cause the ASBI Proxy Statement/PPM to be mailed to the shareholders of ASBI as soon as practicable, and use its best efforts to obtain the approval and adoption of the Merger and the Merger Agreement by shareholders holding at least the minimum number of shares of ASBI Common Stock entitled to vote at the ASBI Shareholders' Meeting 4 necessary to approve the Merger and the Merger Agreement under applicable law. The letter to ASBI shareholders, notice of meeting, proxy statement/private placement memorandum and form of proxy to be distributed to shareholders in connection with the Merger and the Merger Agreement shall be in form and substance satisfactory to SWS and are collectively referred to herein as the "ASBI Proxy Statement/PPM." SECTION 1.09 SWS Shareholders' Meeting. SWS, acting through its board of ------------------------- directors, shall, in accordance with applicable law: A. Duly call, give notice of, convene and hold a meeting of its shareholders (the "SWS Shareholders' Meeting") for the purpose of obtaining the shareholder approval in connection with the transactions contemplated by this Agreement and the Merger Agreement, including without limitation, approving the issuance of the SWS Common Stock pursuant to the terms of this Agreement and increasing the number of authorized shares of SWS, if necessary; B. Subject to its fiduciary duties to the shareholders of SWS, include in the SWS Proxy Statement (defined in Section 1.09C below) the recommendation of its board of directors that the shareholders of SWS vote in favor of the approval of the issuance of the SWS Common Stock and the transactions contemplated by this Agreement and the Merger Agreement; and C. Prepare and file with the Securities and Exchange Commission ("SEC") the SWS Proxy Statement in accordance with Regulation 14A of the Securities Exchange Act of 1934 (the "1934 Act"), and once SWS is permitted pursuant to Regulation 14 to mail it shareholders the SWS Proxy Statement as a definitive proxy statement, SWS shall mail the SWS Proxy Statement to the shareholders of SWS as soon as practicable, and use its best efforts to obtain the approval of the issuance of the SWS Common Stock and the transactions contemplated by this Agreement and the Merger Agreement by SWS shareholders holding at least the minimum number of shares required by applicable law of SWS Common Stock entitled to vote at the SWS Shareholders' Meeting. The letter to SWS shareholders, notice of meeting, proxy statement and form of proxy to be distributed to shareholders in connection with the Merger and the Merger Agreement are collectively referred to herein as the "SWS Proxy Statement." SECTION 1.10 Exchange of Certificates. Promptly after the Effective Time, ------------------------ SWS and ASBI shall cause the Exchange Agent to mail to the former shareholders of ASBI appropriate transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of ASBI Common Stock shall pass, only upon proper delivery of such certificates to the Exchange Agent). After the Effective Time, each holder of shares of ASBI Common Stock issued and outstanding at the Effective Time shall surrender the certificate or certificates representing such shares to the Exchange Agent and shall promptly upon surrender thereof receive in exchange therefor the Merger Consideration provided in Section 1.05A of this Agreement, together with all undelivered dividends or distributions in respect of such shares (without interest thereon) pursuant to Section 1.11 of this Agreement, subject to any shares of the Merger Consideration being placed in escrow pursuant to Section 1.13 of this Agreement. To the 5 extent required by Section 1.05C of this Agreement, each holder of shares of ASBI Common Stock issued and outstanding at the Effective Time also shall receive, upon surrender of the certificate or certificates representing such shares, cash in lieu of any fractional share of SWS Common Stock to which such holder may be otherwise entitled (without interest). SWS shall not be obligated to deliver the consideration to which any former holder of ASBI Common Stock is entitled as a result of the Merger until such holder surrenders such holder's certificate or certificates representing the shares of ASBI Common Stock for exchange as provided in this Section 1.10. If any record shareholder of ASBI is unable to locate any certificate evidencing the ASBI Common Stock, such shareholder shall submit to the Exchange Agent an affidavit of lost certificate and indemnification agreement in form reasonably acceptable to SWS and, if required by SWS, a surety bond in an amount equal to the amount to be delivered to such shareholder, in lieu of such certificate. The certificate or certificates of ASBI Common Stock so surrendered shall be duly endorsed as the Exchange Agent may require. Any other provision of this Agreement notwithstanding, neither the Surviving Corporation, SWS nor the Exchange Agent shall be liable to a holder of ASBI Common Stock for any amounts paid or property delivered in good faith to a public official pursuant to any applicable abandoned property law. SECTION 1.11 Rights of Former ASBI Shareholders. At the Effective Time, ---------------------------------- the stock transfer books of ASBI shall be closed as to holders of ASBI Common Stock immediately prior to the Effective Time and no transfer of ASBI Common Stock by any such holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 1.10 of this Agreement, each certificate theretofore representing shares of ASBI Common Stock shall from and after the Effective Time represent for all purposes only the right to receive the Merger Consideration, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which have been declared or made by ASBI in respect of such shares of ASBI Common Stock in accordance with the terms of this Agreement and which remain unpaid at the Effective Time. To the extent permitted by law, former shareholders of record of ASBI shall be entitled to vote after the Effective Time at any meeting of SWS shareholders the number of whole shares of SWS Common Stock into which their respective shares of ASBI Common Stock are converted, regardless of whether such holders have exchanged their certificates representing ASBI Common Stock for certificates representing SWS Common Stock in accordance with the provisions of this Agreement. Whenever a dividend or other distribution is declared by SWS on the SWS Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares of SWS Common Stock issuable pursuant to this Agreement, but no dividend or other distribution payable to the holders of record of SWS Common Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of ASBI Common Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section 1.10 of this Agreement. However, upon surrender of such ASBI Common Stock certificate, both the SWS Common Stock certificate (together with all such undelivered dividends or other distributions without interest) and any undelivered dividends and cash payments to be paid for fractional share interests (without interest) shall be delivered and paid with respect to each share represented by such certificate. SECTION 1.12 Piggyback Registration. If at any time within the five (5) ---------------------- year period after the Effective Time, SWS shall determine to register any of its securities (for itself or for any other 6 holder of securities of SWS) under the 1933 Act or any successor legislation (other than a registration relating to stock option plans, employee benefit plans or a transaction pursuant to Rule 145 under the 1933 Act), and in connection therewith SWS may lawfully register the SWS Common Stock acquired by the ASBI shareholders in connection with the Merger (the "Registrable Securities"), SWS will promptly give written notice to the then holders (the "Holders") of all outstanding Registrable Securities and will include in such registration and effect the registration under the 1933 Act of all Registrable Securities that such Holders may request in writing by notice delivered to SWS within 20 days after receipt by such Holder of the notice given by SWS; provided, however, that in connection with any such offering by SWS of any of its securities, no such registration of Registrable Securities shall be required if the managing underwriter, if any, for SWS advises SWS in writing that including all or part of the Registrable Securities in such offering will materially adversely affect the offering price of securities proposed to be sold pursuant to the registration statement. If such managing underwriter advises SWS that, in its opinion, part of the Registrable Securities may be included in such offering without having a such material adverse effect on the proposed offering, then SWS shall be obligated to include such limited number of shares of SWS Common Stock in such offering, which shares shall be taken from those owned and held by a group consisting of the Holders and other holders of SWS Common Stock having registration rights that are pari passu with those of the Holders, and such limitation shall be imposed upon the Holders and such other holders pro rata on the basis of the total number of shares of SWS Common Stock owned by the Holders and such other holders or obtainable by them upon the exercise of rights with respect to other securities owned by them. All expenses of such registration and offering (including SWS's attorneys' fees) shall be borne by SWS, except that the Holders shall bear underwriting commissions and discounts attributable to their Registrable Securities being registered and the fees and expenses of separate counsel, if any, for such Holders. The Holders shall be entitled to an unlimited number of registrations under this Section 1.12. The rights and obligations of SWS under this Section 1.12 shall be governed by that certain Registration Rights Agreement attached as Exhibit H hereto. --------- SECTION 1.13 Escrow of Shares. Prior to execution of this Agreement, SWS ---------------- has identified certain potential Environmental Liabilities (as defined in Section 11.10) relating to those properties described on Schedule 1.13 of this ------------- Agreement (the "Environmental Properties"). Pursuant to Section 5.19, prior to November 1, 1999 ASBI has agreed to use its best efforts to eliminate potential Environmental Liabilities relating to the Environmental Properties to the satisfaction of SWS, in its sole discretion. In addition, under Section 5.14, SWS has the right to conduct additional environmental investigations with respect to the Environmental Properties. If prior to November 1, 1999, SWS has determined, in its sole discretion, that ASBI's actions have eliminated any potential Environmental Liabilities, all shares of SWS Common Stock constituting the Merger Consideration shall be delivered to the ASBI shareholders in accordance with Section 1.10 of this Agreement and no shares of SWS Common Stock constituting the Merger Consideration shall be placed in escrow. If, however, prior to November 1, 1999, SWS has determined, in its sole discretion, that ASBI has been unable to eliminate any Environmental Liabilities relating to the Environmental Properties or that, as a result of SWS's subsequent environmental investigations, that any Environmental Liabilities exist with respect to the Environmental Properties, SWS and ASBI shall negotiate in good faith to establish a mutually agreeable dollar amount sufficient to protect the SWS Companies or the ASBI Companies from the Environmental Liabilities (the "Environmental Escrow Amount") and the appropriate time period pursuant to which shares of SWS Common Stock 7 constituting the Merger Consideration should be escrowed (the "Escrow Period"). In such event, at the Effective Time, shares of SWS Common Stock constituting the Merger consideration shall be placed into escrow (the "Escrow Shares") in an amount equal to the quotient of (i) the Environmental Escrow Amount and (ii) the Average Closing Price (as defined in Section 11.10) of SWS Common Stock at the end of the fifth business day prior to the Closing Date (rounded to the nearest whole share of SWS Common Stock). The Escrow Shares shall be deposited with a mutually agreeable escrow agent (the "Escrow Agent") in accordance with the terms of the Escrow Agreement attached as Exhibit J hereto for the purpose of --------- protecting the SWS Companies and the ASBI Companies against the Environmental Liabilities relating to the Environmental Properties and such Escrow Shares shall either be (i) delivered to the former ASBI shareholders or (ii) returned to SWS solely in accordance with the terms of the Escrow Agreement attached as Exhibit J hereto. If prior to November 1, 1999, ASBI and SWS cannot reach a - --------- mutual agreement on the Environmental Escrow Amount and/or the appropriate Escrow Period, then either SWS or ASBI may refer such dispute to binding arbitration in accordance with Section 11.18 of this Agreement. ARTICLE II. THE CLOSING AND THE CLOSING DATE SECTION 2.01 Time and Place of the Closing and Closing Date. On a date ---------------------------------------------- mutually determined by SWS and ASBI (herein called the "Closing Date"), which date shall be within thirty (30) days after the receipt of all necessary regulatory, corporate and other approvals and the expiration of any mandatory waiting periods (unless extended as provided below), a meeting (the "Closing") will take place at which the parties to this Agreement will exchange certificates, letters and other documents in order to determine whether all of the conditions set forth in Articles VII and VIII of this Agreement have been satisfied or waived or whether any condition exists that would permit a party to this Agreement to terminate this Agreement. If no such condition then exists or if no party elects to exercise any right it may have to terminate this Agreement, then and thereupon the appropriate parties shall execute such documents and instruments as may be necessary or appropriate in order to effect the transactions contemplated by this Agreement. The Closing shall take place at a location mutually agreeable to the parties hereto. SECTION 2.02 Effective Time. The Merger and the other transactions -------------- contemplated by this Agreement shall become effective on the date and at the time the Articles of Merger reflecting the Merger shall become effective with the Secretary of State of the State of Texas (the "Effective Time"). The Articles of Merger shall be filed as soon as practicable after the Closing. SECTION 2.03 Actions to be Taken at the Closing by ASBI. At the Closing, ------------------------------------------ ASBI shall execute and acknowledge (where appropriate) and deliver to SWS, such documents and certificates necessary to carry out the terms and provisions of this Agreement, including without limitation, the following (all of such actions constituting conditions precedent to SWS's obligations to close hereunder): A. True, correct and complete copies of the Articles of Incorporation of ASBI and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Texas; 8 B. True, correct and complete copies of the Certificate of Incorporation of ASBI Delaware and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Delaware; C. True, correct and complete copies of the Charter of the Bank and all amendments thereto, duly certified as of a recent date by the Office of Thrift Supervision ("OTS"); D. Good standing and existence certificates of a recent date, issued by the appropriate state officials, duly certifying as to the existence and good standing of ASBI in the State of Texas; E. A certificate to do business, dated as of a recent date, issued by the OTS, duly certifying as to the authority of the Bank to transact the business of operating as a thrift under the laws of the United States; F. A certificate of good standing, dated as of a recent date, issued by the Texas Comptroller of Public Accounts, duly certifying as to the good standing of the Bank in the State of Texas; G. A certificate, dated as of a recent date, issued by the Federal Deposit Insurance Corporation (the "FDIC"), duly certifying that the deposits of the Bank are insured by the FDIC pursuant to the Federal Deposit Insurance Act (the "FDIA"); H. A certificate, dated as of the Closing Date, duly executed by the Secretary or an Assistant Secretary of ASBI, acting solely in his or her capacity as an officer of ASBI, pursuant to which ASBI shall certify (i) the due adoption by the board of directors of ASBI of corporate resolutions attached to such certificate authorizing the execution and delivery of this Agreement and the other agreements and documents contemplated hereby, including, but not limited to, the Merger Agreement, and the taking of all actions contemplated hereby and thereby; (ii) the due adoption by the shareholders of ASBI authorizing the transactions and the execution and delivery of this Agreement and the other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby; (iii) the incumbency and true signatures of those officers of ASBI duly authorized to act on its behalf in connection with the transactions contemplated by this Agreement and to execute and deliver this Agreement and other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby on behalf of ASBI; and (iv) that the copy of the Bylaws of ASBI attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; I. A certificate duly executed by the Cashier or an Assistant Cashier of the Bank, acting solely in his or her capacity as an officer of the Bank, pursuant to which the Bank shall certify that the copy of the Bylaws attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; 9 J. A certificate duly executed by a duly authorized officer of ASBI, acting solely in his or her capacity as an officer of ASBI, dated as of the Closing Date, pursuant to which ASBI shall certify that all of the representations and warranties made in Article III of this Agreement are true and correct on and as of the date of such certificate as if made on such date and except as expressly permitted by this Agreement there shall have been no Material Adverse Change since March 31, 1999; K. All consents and approvals required to be obtained by ASBI from third parties to consummate the transactions contemplated by this Agreement, including, but not limited to, those listed on Schedule 3.09; ------------- and L. All other documents required to be delivered to SWS by ASBI under the provisions of this Agreement, and all other documents, certificates and instruments as are reasonably requested by SWS or its counsel. SECTION 2.04 Actions to be Taken at the Closing by SWS. At the Closing, ----------------------------------------- SWS shall execute and acknowledge (where appropriate) and deliver to ASBI, such documents and certificates necessary to carry out the terms and provisions of this Agreement, including without limitation, the following (all of such actions constituting conditions precedent to ASBI's obligations to close hereunder): A. True, correct and complete copies of SWS's Certificate of Incorporation and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Delaware; B. True, correct and complete copies of Newco's Articles of Incorporation and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Texas; C. Good standing and existence certificates for SWS, dated as of a recent date, issued by the appropriate state officials, duly certifying as to the authority to do business and good standing of SWS in the State of Delaware and the State of Texas; D. A certificate, dated as of the Closing Date, executed by the Secretary or an Assistant Secretary of SWS, acting solely in his or her capacity as an officer of SWS, pursuant to which SWS shall certify (i) the due adoption by the board of directors of SWS of corporate resolutions attached to such certificate authorizing the execution and delivery of this Agreement and the other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby; (ii) the due adoption by the shareholders of SWS authorizing issuance of the shares of SWS Common Stock and the other transactions contemplated by this Agreement; (iii) the incumbency and true signatures of those officers of SWS duly authorized to act on its behalf in connection with the transactions contemplated by this Agreement and to execute and deliver this Agreement and other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby on behalf of SWS; and (iv) that the copy of the Bylaws of 10 SWS attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; E. A certificate duly executed by the Secretary or an Assistant Secretary of Newco, acting solely in his or her capacity as an officer of Newco, pursuant to which Newco shall certify (i) the due adoption by the board of directors of Newco of corporate resolutions attached to such certificate authorizing the execution and delivery of the Merger Agreement and the taking of all actions contemplated thereby; (ii) the due adoption by the sole shareholder of Newco approving the Merger Agreement and the Merger; (iii) the incumbency and true signatures of those officers of Newco duly authorized to act on its behalf in connection with the transactions contemplated by the Merger Agreement and to execute and deliver the Merger Agreement and the taking of all actions contemplated thereby on behalf of Newco; and (iv) that the copy of the Bylaws of Newco attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; F. True, correct and complete copies of the Certificate of Merger of Newco with and into ASBI, duly certified as of a recent date by the Secretary of State of the State of Texas; G. A certificate, dated as of the Closing Date, executed by a duly authorized officer of SWS, acting solely in his or her capacity as an officer of SWS, pursuant to which SWS shall certify that all of the representations and warranties made in Article IV of this Agreement are true and correct on and as of the date of such certificate as if made on such date and except as expressly permitted by this Agreement there shall have been no Material Adverse Change since March 31, 1999; H. All consents and approvals required to be obtained by SWS or Newco from third parties to consummate the transactions contemplated by this Agreement, including, but not limited to, those listed on Schedule 4.07; ------------- and I. All other documents required to be delivered to ASBI by SWS under the provisions of this Agreement, and all other documents, certificates and instruments as are reasonably requested by ASBI or its counsel. SECTION 2.05 Further Assurances. At any time and from time to time after ------------------ the Closing, at the request of any party to this Agreement and without further consideration, any party so requested will execute and deliver such other instruments and take such other action as the requesting party may reasonably deem necessary or desirable in order to effectuate the transactions contemplated hereby. In the event that, at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each party hereto shall take or cause to be taken all such action. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ASBI 11 ASBI hereby makes the representations and warranties set forth in this Article III to SWS. ASBI agrees at the Closing to provide SWS with supplemental schedules reflecting any material changes thereto between the date of this Agreement and the Closing Date. SECTION 3.01 Organization and Qualification. ASBI is a federal unitary ------------------------------ savings and loan holding company registered under the Home Owners' Loan Act ("HOLA"). ASBI is a corporation, duly organized, validly existing and in good standing under all laws, rules and regulations of the State of Texas. ASBI is duly qualified to transact business as a foreign entity in each jurisdiction in which a failure to be so qualified could have a Material Adverse Effect. ASBI has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets, including, but not limited to, the ASBI Subsidiaries, as now owned, leased or operated and to enter into and carry out its obligations under this Agreement and the Merger Agreement. True and complete copies of the Articles of Incorporation and Bylaws of ASBI as amended to date, certified by the Secretary of ASBI, have been delivered to SWS. ASBI does not own or control any Affiliate (as defined in Section 11.10) or Subsidiary (as defined in Section 11.10), other than ASBI Subsidiaries disclosed on Schedule 3.04 hereto. The nature of the business of ASBI and its activities ------------- do not require it to be qualified to do business in any jurisdiction other than the State of Texas. Except as set forth on Schedule 3.04, ASBI has no equity ------------- interest, direct or indirect, in any other bank or corporation or in any partnership, joint venture or other business enterprise or entity, and the business carried on by ASBI has not been conducted through any other direct or indirect Subsidiary or Affiliate of ASBI other than the ASBI Subsidiaries disclosed on Schedule 3.04 hereto. ------------- SECTION 3.02 Execution and Delivery. ASBI has taken all corporate action ---------------------- necessary to authorize the execution, delivery and (provided the required regulatory and shareholder approvals are obtained) performance of this Agreement and the other agreements and documents contemplated hereby to which it is a party, including, but not limited to, the Merger Agreement. This Agreement has been, and the other agreements and documents contemplated hereby, including, but not limited to, the Merger Agreement, have been or at Closing will be, duly executed by ASBI and each constitutes the legal, valid and binding obligation of ASBI, enforceable in accordance with its respective terms and conditions, except as enforceability may be limited by bankruptcy, conservatorship, insolvency, moratorium, reorganization, receivership or similar laws and judicial decisions affecting the rights of creditors generally and by general principles of equity (whether applied in a proceeding at law or in equity). SECTION 3.03 ASBI Capitalization. The authorized capital stock of ASBI ------------------- consists of (i) 1,000,000 shares of ASBI Voting Common Stock, (ii) 100,000,000 shares of ASBI Non-Voting Common Stock, and (iii) 5,000,000 shares of preferred stock, par value $1.00 per share ("ASBI Preferred Stock"), of which 3,500,000 is designated as Series A Preferred Stock. As of the date hereof, 272,064 shares of ASBI Voting Common Stock are issued and outstanding and 26,934,336 shares of ASBI Non-Voting Common Stock are issued and outstanding. All of such issued shares are validly issued, fully paid and nonassessable. As of the date hereof, no shares of ASBI Preferred Stock are issued or outstanding. Except as disclosed on Schedule 3.03, there are no (A) other outstanding equity securities ------------- of any kind or character, or (B) outstanding subscriptions, options, convertible securities, rights, warrants, calls or other agreements or commitments of any kind issued or granted by, or binding upon, ASBI to purchase or otherwise acquire any security of or equity 12 interest in ASBI, obligating ASBI to issue any shares of, restricting the transfer of or otherwise relating to shares of its capital stock of any class. All of the issued and outstanding shares of ASBI Common Stock have been duly authorized, validly issued and are fully paid and nonassessable, and have not been issued in violation of the preemptive rights of any person. Such shares of ASBI Common Stock have been issued in compliance with the securities laws of the United States and other jurisdictions having applicable securities laws. There are no restrictions applicable to the payment of dividends on the shares of ASBI Common Stock except pursuant to applicable laws and regulations, and all dividends declared prior to the date of this Agreement have been paid. SECTION 3.04 ASBI Subsidiaries. ASBI has disclosed in Schedule 3.04 all ----------------- ------------- of the ASBI Subsidiaries as of the date of this Agreement. Except as disclosed on Schedule 3.04, no ASBI Company owns any equity interest in any other ------------- corporation, partnership, limited liability company, or other entity of any kind or nature and ASBI or one of the ASBI Subsidiaries owns all of the issued and outstanding shares of capital stock of each ASBI Subsidiary. No equity securities of any ASBI Subsidiary are or may become required to be issued (other than to another ASBI Company) by reason of any outstanding subscriptions, options, convertible securities, rights, warrants, calls or other agreements or commitments, and there are no contracts or agreement by which any ASBI Subsidiary is bound to issue (other than to another ASBI Company) additional shares of its capital stock or outstanding subscriptions, options, convertible securities, rights, warrants, calls or other agreements or commitments or by which any ASBI Company is or may be bound to transfer any shares of the capital stock of any ASBI Subsidiary (other than to another ASBI Company). There are no contracts or agreements relating to the rights of any ASBI Company to vote or to dispose of any shares of the capital stock of any ASBI Subsidiary. All of the shares of capital stock of each ASBI Subsidiary held by an ASBI Company are duly authorized, validly issued, and fully paid and, except as provided in statutes pursuant to which depository institution Subsidiaries are organized, nonassessable under the applicable corporation law of the jurisdiction in which such Subsidiary is incorporated or organized and are owned by the ASBI Company free and clear of any lien or encumbrance. Each ASBI Subsidiary is either a bank or a corporation, and is duly organized, validly existing, and (as to corporations) in good standing under the laws of the jurisdiction in which it is incorporated or organized, and has the corporate power and authority necessary for it to own, lease, and operate its assets and to carry on its business as now conducted. Each ASBI Subsidiary is duly qualified or licensed to transact business as a foreign corporation in good standing in the States of the United States and foreign jurisdictions where the character of its assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on ASBI. Each ASBI Subsidiary that is a depository institution is an "insured depository institution" as defined in the FDIA and applicable regulations thereunder, and the deposits in which are insured by the Bank Insurance Fund or Savings Association Insurance Fund. SECTION 3.05 Compliance with Laws, Permits and Instruments. Except as --------------------------------------------- disclosed on Schedule 3.05, each of the ASBI Companies has in all material ------------- respects performed and abided by all obligations required to be performed by it to the date hereof, and has complied with, and is in compliance with, and is not in default (or with the giving of notice or the passage of time will be in default) under, or in violation of, (i) any provision of the Articles, Charters, Certificates or Bylaws of the ASBI Companies, (ii) any material provision of any contract, agreement or instrument 13 applicable to the ASBI Companies or their respective assets, operations, properties or businesses now conducted or heretofore conducted or (iii) any material permit, concession, grant, franchise, license, authorization, judgment, writ, injunction, order, decree, award, statute, federal, state or local law, ordinance, rule or regulation of any court, arbitrator or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality applicable to any of the ASBI Companies or their respective assets, operations, properties or businesses now conducted or heretofore conducted. Except as set forth on Schedule 3.05, the execution, delivery and (provided ------------- the required regulatory and shareholder approvals are obtained) performance of this Agreement and the other agreements contemplated hereby, including, but not limited to the Merger Agreement, and the consummation of the transactions contemplated hereby and thereby will not conflict with, or result, by itself or with the giving of notice or the passage of time, in any violation of or default or loss of a benefit under, (i) any provision of the Articles, Charter, Certificate or Bylaws of the ASBI Companies, (ii) any material contract or agreement applicable to the ASBI Companies or their respective assets, operations, properties or businesses or (iii) any material permit, concession, grant, franchise, license, authorization, judgment, writ, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to the ASBI Companies or their respective assets, operations, properties or businesses. SECTION 3.06 ASBI Financial Statements. ASBI has furnished to SWS true ------------------------- and complete copies of the audited consolidated balance sheets for the fiscal year-ended as of September 30, 1996, 1997 and 1998, and the related audited consolidated statements of income, shareholders' equity and cash flows for the fiscal years ended September 30, 1996, 1997 and 1998 and unaudited consolidated balance sheets of ASBI as of March 31, 1999, and the related unaudited consolidated statements of income and cash flows for the six-month period ended March 31, 1999 (such consolidated balance sheets and the related statements of income, shareholders' equity and cash flows are collectively referred to herein as the "ASBI Financial Statements"). Except as described in the notes to the ASBI Financial Statements, the ASBI Financial Statements fairly present, in all material respects, the financial position of ASBI as of the respective dates thereof and the results of operations and changes in financial position of ASBI for the periods then ended, in conformity with generally accepted accounting principles ("GAAP"), applied on a basis consistent with prior periods (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments and the fact that they do not contain all of the footnote disclosures required by GAAP), except as otherwise noted therein, and the accounting records underlying the ASBI Financial Statements accurately and fairly reflect in all material respects the transactions of ASBI. The ASBI Financial Statements do not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein or as set forth on Schedule 3.06. ------------- SECTION 3.07 The Bank. -------- 14 A. The Bank is a federal savings bank, validly existing and in good standing under the laws of the United States, and duly organized and in good standing under all laws, rules, and regulations of the United States. The Bank has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets as now owned, leased or operated and to enter into and to carry on the business and activities now conducted by it. True and complete copies of the Charter and Bylaws of the Bank, as amended to date, have been delivered to SWS. The Bank is an insured savings and loan association as defined in the FDIA . The nature of the business of the Bank does not require it to be qualified to do business in any jurisdiction other than the State of Texas. Except as set forth on Schedule 3.07, the Bank has no equity interest, direct or ------------- indirect, in any other bank or corporation or in any partnership, joint venture or other business enterprise or entity, except as acquired through settlement of indebtedness, foreclosure, the exercise of creditors' remedies or in a fiduciary capacity, and the business carried on by the Bank has not been conducted through any other direct or indirect Subsidiary or Affiliate of the Bank. B. The entire authorized capital stock of the Bank consists solely of 300,000 shares of common stock of the Bank, par value $8.00 per share (the "Bank Stock"), all of which are issued and outstanding. All of the issued and outstanding shares of the Bank Stock have been duly authorized, validly issued and are fully paid and nonassessable, and have not and will not have been issued in violation of the preemptive rights of any person. The securities of the Bank have been issued in compliance with the securities laws of the United States and applicable state securities laws. ASBI Delaware is, and as of the Closing Date will be, the lawful record and beneficial owner of all of the outstanding securities of the Bank, free and clear of any liens, claims, encumbrances, security interests or restrictions of any kind. There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever under which the ASBI Companies are or may become obligated to issue, assign or transfer any securities of the Bank. There are no restrictions applicable to the payment of dividends on the shares of the Bank Stock except pursuant to applicable laws and regulations. C. ASBI has furnished SWS with a true and complete copy of the Thrift Financial Reports as of March 31, 1999 and June 30, 1999 (the "TFRs"), for the Bank. The TFRs fairly presents, in all material respects, the financial position of the Bank and the results of its operations at the date and for the period indicated in conformity with the instructions for the preparation of TFRs as promulgated by applicable regulatory authorities. The TFRs do not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein. The Bank has calculated its allowance for loan losses in accordance with GAAP and, to the extent applicable, regulatory accounting principles ("RAP") as applied to savings and loan institutions and in accordance with all applicable rules and regulations. To the best knowledge of ASBI, the allowance for loan losses account for the Bank is, and as of the Closing Date should be, adequate in all material respects to provide for all losses, net of recoveries relating to loans previously charged off, on all outstanding loans of the Bank. 15 SECTION 3.08 Litigation. Except as set forth on Schedule 3.08, there are ---------- ------------- no actions, claims, suits, investigations, reviews or other legal, quasi- judicial or administrative proceedings of any kind or nature now pending or threatened against or affecting the ASBI Companies at law or in equity, or by or before any federal, state or municipal court or other governmental or administrative department, commission, board, bureau, agency or instrumentality, domestic or foreign, that in any manner involve the ASBI Companies or any of their properties or capital stock that might reasonably be anticipated to result in a Material Adverse Change or have a Material Adverse Effect on the transactions contemplated by this Agreement or the Merger Agreement, and none of the ASBI Companies knows or has any reason to be aware of any basis for the same. No legal action, suit or proceeding or judicial, administrative or governmental investigation is pending or, to the knowledge of ASBI, threatened against the ASBI Companies that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by the ASBI Companies pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. SECTION 3.09 Consents and Approvals. ASBI's board of directors (at a ---------------------- meeting duly called and held) has resolved to recommend to the shareholders of ASBI approval and adoption of the Merger and the Merger Agreement. Except as disclosed in Schedule 3.09, no approval, consent, order or authorization of, or ------------- registration, declaration or filing with, any governmental authority or other third party is required on the part of the ASBI Companies in connection with the execution, delivery or performance of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement or the consummation by the ASBI Companies of the transactions contemplated hereby or thereby. SECTION 3.10 Undisclosed Liabilities. Except as disclosed on Schedule ----------------------- -------- 3.10, none of the ASBI Companies have any material liability or obligation, - ---- accrued, absolute, contingent or otherwise and whether due or to become due (including, without limitation, unfunded obligations under any ASBI Employee Plans (as defined in Section 3.32 of this Agreement) or liabilities for federal, state or local taxes or assessments or liabilities under any tax sharing agreements that are not reflected in or disclosed in the Financial Statements or the TFRs, except those liabilities and expenses incurred in the ordinary course of business and consistent with prudent business practices since the date of ASBI Financial Statements or the TFRs, respectively. SECTION 3.11 Title to Assets. True and complete copies of all existing --------------- deeds, leases and title insurance policies for all real property owned or leased by the ASBI Companies, including all other real estate, and all mortgages, deeds of trust, security agreements and other documents describing encumbrances to which such property is subject have been made available to SWS. Each of the ASBI Companies has good and indefeasible title to all of its assets and properties used or useful in connection with the businesses of the ASBI Companies including, without limitation, all personal and intangible properties reflected in the Financial Statements or the TFRs or acquired subsequent thereto, subject to no liens, mortgages, security interests, encumbrances or charges of any kind except (A) as described in Schedule 3.11, (B) as noted in ------------- the Financial Statements or the TFRs or as set forth in the documents delivered to SWS pursuant to this Section 3.11, (C) statutory liens not yet delinquent, (D) consensual landlord liens, (E) minor defects and irregularities in title and encumbrances that do not materially impair the use thereof for the purpose for which they are 16 held, (F) pledges of assets in the ordinary course of business to secure public funds deposits, and (G) those assets and properties disposed of for fair value in the ordinary course of business since the dates of the ASBI Financial Statements or the TFRs. SECTION 3.12 Absence of Certain Changes or Events. Except as disclosed on ------------------------------------ Schedule 3.12 or as permitted in writing by SWS, since March 31, 1999, each of - ------------- the ASBI Companies has conducted its business only in the ordinary course and has not, other than in the ordinary course of business and consistent with past practices and safe and sound banking practices: A. Incurred any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, except deposits taken and federal funds purchased and current liabilities for trade or business obligations, none of which, individually or in the aggregate, result in a Material Adverse Change; B. Discharged or satisfied any lien, charge or encumbrance or paid any obligation or liability, whether absolute or contingent, due or to become due; C. Declared or made any payment of dividends or other distribution to its shareholders, or purchased, retired or redeemed, or obligated itself to purchase, retire or redeem, any of its shares of capital stock or other securities; D. Issued, reserved for issuance, granted, sold or authorized the issuance of any shares of its capital stock or other securities or subscriptions, options, warrants, calls, rights or commitments of any kind relating to the issuance thereof; E. Acquired any capital stock or other equity securities or acquired any ownership interest in any bank, corporation, partnership or other entity (except (i) through settlement of indebtedness, foreclosure, or the exercise of creditors' remedies or (ii) in a fiduciary capacity, the ownership of which does not expose it to any liability from the business, operations or liabilities of such person); F. Mortgaged, pledged or subjected to lien, charge, security interest or any other encumbrance or restriction any of its property, business or assets, tangible or intangible except (i) as described in Schedule 3.11, (ii) statutory liens not yet delinquent, (iii) consensual ------------- landlord liens, (iv) minor defects and irregularities in title and encumbrances that do not materially impair the use thereof for the purpose for which they are held, (v) pledges of assets to secure public funds deposits, and (vi) those assets and properties disposed of for fair value since the dates of the ASBI Financial Statements or the TFRs; G. Sold, transferred, leased to others or otherwise disposed of any of their assets or canceled or compromised any debt or claim, or waived or released any right or claim, which individually or in the aggregate would constitute a Material Adverse Change; H. Terminated, canceled or surrendered, or received any notice of or threat of termination or cancellation of any contract, lease or other agreement or suffered any damage, 17 destruction or loss which, individually or in the aggregate, would constitute a Material Adverse Change; I. Disposed of, permitted to lapse, transferred or granted any rights under, or entered into any settlement regarding the breach or infringement of, any United States or foreign license or Proprietary Right (as defined in Section 3.17) or modified any existing rights with respect thereto; J. Made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, paid or agreed or orally promised to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or vacation pay, to or for the benefit of any of their shareholders, directors, officers, employees or agents, or entered into any employment or consulting contract or other agreement with any director, officer or employee or adopted, amended in any material respect or terminated any pension, employee welfare, retirement, stock purchase, stock option, stock appreciation rights, termination, severance, income protection, golden parachute, savings or profit-sharing plan (including trust agreements and insurance contracts embodying such plans), any deferred compensation, or collective bargaining agreement, any group insurance contract or any other incentive, welfare or employee benefit plan or agreement maintained by the ASBI Companies for the benefit of their directors, employees or former employees; K. Except for improvements or betterments relating to Properties (as defined in Section 11.10) and the completion of the Bank's new branch facility located at Matlock Road and Stephens Street in Arlington, Texas consistent with the plans and specifications disclosed to SWS, made any capital expenditures or capital additions or betterments in excess of an aggregate of $25,000; L. Instituted, had instituted against them, settled or agreed to settle any litigation, action or proceeding before any court or governmental body relating to their property other than routine collection suits instituted by them to collect amounts owed or suits in which the amount in controversy is less than $25,000; M. Suffered any change, event or condition that, in any case or in the aggregate, has caused or may result in a Material Adverse Change, or any Material Adverse Change in earnings or costs or relations with their employees (provided, however, that the Bank shall continue to have the right to terminate employees in accordance with their existing policies and procedures), agents, depositors, loan customers, correspondent banks or suppliers; N. Except for the transactions contemplated by this Agreement or as otherwise permitted hereunder, entered into any transaction, or entered into, modified or amended any contract or commitment; O. Entered into or given any promise, assurance or guarantee of the payment, discharge or fulfillment of any undertaking or promise made by any person, firm or corporation; 18 P. Sold, or knowingly disposed of, or otherwise divested of the ownership, possession, custody or control, of any corporate books or records of any nature that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period; Q. Made any, or acquiesced with any, change in any accounting methods, principles or material practices except as required by GAAP or RAP; R. Except for transactions made through SWS in the ordinary course of business, sold (provided, however, that payment at maturity is not deemed a sale) or purchased any Investment Securities (as defined in Section 11.10); S. Made, renewed, extended the maturity of, or altered any of the material terms of any loan to any single borrower and his related interests in excess of the principal amount of $500,000; or T. Entered into any agreement or made any commitment whether in writing or otherwise to take any of the types of action described in subsections A through S above. SECTION 3.13 Leases, Contracts and Agreements. Schedule 3.13 sets forth -------------------------------- ------------- an accurate and complete description of all leases, subleases, licenses, contracts and agreements to which the ASBI Companies are parties or by which the ASBI Companies are bound that obligate or may obligate the ASBI Companies in the aggregate for an amount in excess of $25,000 over the entire term of any such agreement or related contracts of a similar nature which in the aggregate obligate or may obligate the ASBI Companies for an amount in excess of $25,000 over the entire term of such related contracts (the "ASBI Contracts"). ASBI has delivered true and correct copies of all ASBI Contracts to SWS. For the purposes of this Agreement, the ASBI Contracts shall be deemed not to include loans made by, repurchase agreements made by, spot foreign exchange transactions of, bankers acceptances of or deposits by the Bank, but does include unfunded loan commitments and letters of credit issued by the Bank where the borrowers' total direct and indirect indebtedness to the Bank is in excess of $50,000. Except as set forth in Schedule 3.13, no participations or loans have been sold ------------- that have buy back, recourse or guaranty provisions that create contingent or direct liabilities of the ASBI Companies. To the knowledge of the ASBI Companies, all of the ASBI Contracts are legal, valid and binding obligations of the parties to the ASBI Contracts enforceable in accordance with their terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and to general equitable principles, and are in full force and effect. Except as described in Schedule 3.13, all rent and other payments by the ASBI Companies under the ASBI - ------------- Contracts are current, there are no existing defaults by the ASBI Companies under the ASBI Contracts and no termination, condition or other event has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a default. Each of the ASBI Companies, respectively, has good and indefeasible leasehold interest in each parcel of real property leased by it free and clear of all mortgages, pledges, liens, encumbrances and security interests. SECTION 3.14 Taxes. ----- 19 A. Each of the ASBI Companies has duly and timely filed with the appropriate federal, state and local governmental agencies all tax returns and reports required to be filed, including, without limitation, income, excise, property, sales, use, franchise, value added, unemployment, employees' income withholding and social security taxes, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority, and has paid, or has established adequate reserves for the payment of, all taxes and assessments that are or are claimed to be due, payable or owed by the ASBI Companies, or for which the ASBI Companies may have liability, whether as a result of their own activities or by virtue of their affiliation with other entities and all interest and penalties thereon, whether disputed or not. All such tax returns and reports are accurately prepared and all deposits required by law to be made by the ASBI Companies with respect to employees' withholding taxes have been duly made. No ASBI Company is or has been delinquent in the payment of any foreign or domestic tax, assessment or governmental charge or deposit and has no tax deficiency or claim outstanding, proposed or assessed against it, and there is no basis for any such deficiency or claim. Within the last four (4) years, no ASBI Company's federal income tax return has been audited or examined and no such audit is currently pending or threatened. Except as disclosed in Schedule 3.14, no ASBI ------------- Company has been granted any extension of time with respect to any ASBI Company or the date on which any tax return was or is due to be filed by or with respect to any ASBI Company or any waiver or agreement by any ASBI Company for the extension of time for the assessment or collection of any tax. No ASBI Company has committed any violation of any applicable federal, state, local or foreign tax laws. B. No claim has ever been made by an authority in a jurisdiction where the ASBI Companies do not file tax returns that an ASBI Company is or may be subject to taxation by that jurisdiction. There are no liens for taxes due and payable on, or any liens that have been improperly or erroneously filed against, the assets of the ASBI Companies. ASBI has disclosed on its federal income tax returns all positions taken therein that could give rise to a substantial understatement of federal income tax within the meaning of Section 6662 of the Code. C. The amounts set up as provisions for current or deferred taxes on the ASBI Financial Statements and the TFRs are sufficient for the payment of all unpaid federal, state, county, local, foreign or other taxes (including any interest or penalties) of or on behalf of the ASBI Companies applicable to the periods covered by each entity's financial statements, and all years and periods prior thereto. D. No ASBI Company, nor any director or officer (or employee responsible for tax matters) of any ASBI Company expects any authority to assess any additional taxes for any period for which tax returns have been filed. There is no dispute or claim concerning any tax liability of any ASBI Company either (i) claimed or raised by any authority in writing or (ii) as to which ASBI and the directors and officers (and employees responsible for tax matters) of ASBI has knowledge based upon personal contact with any agent of such authority. ASBI has delivered to SWS correct and complete copies of all federal income tax returns filed with the Internal Revenue Service ("IRS"), examination reports, and statements 20 of deficiencies assessed against or agreed to by any ASBI Company since December 31, 1995. E. No ASBI Company has waived any statute of limitations in respect of taxes or agreed to any extension of time with respect to a tax assessment or deficiency. F. ASBI has been a validly electing Subchapter S corporation within the meaning of Sections 1361 and 1362 of the Code at all times after December 31, 1996 and will be a validly electing Subchapter S corporation up to and including the Closing Date. G. Each ASBI Subsidiary has been a validly electing Qualified Subchapter S Subsidiary ("QSSS") within the meaning of Section 1361(b)(3) of the Code at all times after December 31, 1997, and each will be a validly electing QSSS up to and including the Closing Date. Except as disclosed in Schedule 3.14, the ASBI Subsidiaries have never agreed to ------------- make, nor is any ASBI Subsidiary required to make, any adjustment under Section 481(a) of the Code by reason of a change in method of accounting or otherwise. SECTION 3.15 Insurance. Schedule 3.15 contains an accurate and complete --------- ------------- list and brief description of all policies of insurance, including fidelity and bond insurance, of the ASBI Companies. Except as set forth on Schedule 3.15, ------------- all such policies (A) are sufficient for compliance by the ASBI Companies with all requirements of law and all agreements to which the ASBI Companies are a party, (B) are valid, outstanding and enforceable except as enforceability may be limited by bankruptcy, conservatorship, insolvency, moratorium, reorganization, receivership, or similar laws and judicial decisions affecting the rights of creditors generally and by general principles of equity (whether applied in a proceeding at law or equity), (C) will not in any significant respect be affected by, and will not terminate or lapse by reason of, the transactions contemplated by this Agreement, and (D) are presently in full force and effect, no notice has been received of the cancellation, or threatened or proposed cancellation, of any such policy and there are no unpaid premiums due thereon. To the best of their knowledge, no ASBI Company is in default with respect to the provisions of any such policy and has not failed to give any notice or present any claim thereunder in a due and timely fashion. Each material property of the ASBI Companies is insured for the benefit of the ASBI Companies in amounts deemed adequate by ASBI's management against risks customarily insured against. Except as set forth on Schedule 3.15, there have ------------- been no claims under any fidelity bonds of the ASBI Companies within the last three (3) years, and ASBI is not aware of any facts that would form the basis of a claim under such bonds. SECTION 3.16 No Adverse Change. Except as disclosed in the ----------------- representations and warranties made in this Article III, there has not been any Material Adverse Change since March 31, 1999, nor has any event or condition occurred that has resulted in, or has a reasonable possibility of resulting in the future, in a Material Adverse Change. SECTION 3.17 Proprietary Rights. Except as set forth on Schedule 3.17, no ------------------ ------------- ASBI Company owns or requires the use of any patent, patent application, patent right, invention, process, trademark (whether registered or unregistered), trademark application, trademark right, trade name, service name, service mark, copyright or any trade secret ("Proprietary Rights") for the business or operations of the ASBI Companies. To the best knowledge of ASBI, no ASBI Company is 21 infringing upon or otherwise acting adversely to, and have not in the past three (3) years infringed upon or otherwise acted adversely to, any Proprietary Right owned by any other person or persons. There is no claim or action by any such person pending, or to the knowledge of ASBI threatened, with respect thereto. SECTION 3.18 Transactions with Certain Persons and Entities. Except as ---------------------------------------------- disclosed in Schedule 3.18, no ASBI Company owes any amount to (excluding ------------- deposit liabilities), or has any loan, contract, lease, commitment or other obligation from or to any of the present or former directors or officers (other than compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business) of the ASBI Companies, and none of such persons owes any amount to the ASBI Companies. Except as set forth on Schedule 3.18, there are no agreements, instruments, commitments, ------------- extensions of credit, tax sharing or allocation agreements or other contractual agreements of any kind between or among any ASBI Company, whether on their own behalf or in their capacity as trustee or custodian for the funds of any ASBI Employee Plan (as defined in the Section 3.32 of this Agreement) and any of their Affiliates. SECTION 3.19 Evidences of Indebtedness. All evidences of indebtedness and ------------------------- leases that are reflected as assets of the ASBI Companies are legal, valid and binding obligations of the respective obligors thereof, enforceable in accordance with their respective terms (except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors generally and the availability of injunctive relief, specific performance and other equitable remedies) and are not subject to any known or threatened defenses, offsets or counterclaims that may be asserted against, the ASBI Companies or the present holder thereof, except as disclosed in Schedule -------- 3.19; provided, however, that the foregoing sentence shall not be deemed to be a - ---- representation or warranty of collectibility of any of the assets. The credit files of the Bank contain all material information (excluding general, local or national industry, economic or similar conditions) known to the ASBI Companies that is reasonably required to evaluate in accordance with generally prevailing practices in the banking industry the collectibility of the loan portfolio of the Bank (including loans that will be outstanding if any of them advances funds they are obligated to advance). ASBI has disclosed all of the substandard, doubtful, loss, nonperforming or problem loans on the internal watch list of the Bank, a copy of which as of March 31, 1999, has been provided to SWS. SECTION 3.20 Employee Relationships. Each of the ASBI Companies has ---------------------- complied with all applicable material laws relating to its relationships with its employees, and ASBI believes that the relationships between the ASBI Companies and their respective employees are good. To the best knowledge of ASBI, no key executive officer or manager of any of the operations operated by the ASBI Companies or any group of employees of the ASBI Companies has or have any present plans to terminate their employment with the ASBI Companies. SECTION 3.21 Condition of Assets. Except as set forth on Schedule 3.21, ------------------- ------------- all furniture, fixtures and equipment used by the ASBI Companies are in good operating condition, ordinary wear and tear excepted, and conform with all material ordinances, regulations, zoning and other laws, whether federal, state or local. No ASBI Company's premises or equipment are in need of 22 maintenance or repairs other than ordinary routine maintenance and repairs that are not material in nature or cost. SECTION 3.22 Environmental Compliance. Except as disclosed on Schedule ------------------------ -------- 3.22: - ---- A. The ASBI Companies and all of their respective Properties and the ASBI Companies' operations are in material compliance with all Environmental Laws (as defined in Section 11.10). The ASBI Companies are not aware of, nor has any ASBI Company received notice of, any past, present, or future conditions, events, activities, practices or incidents that may interfere with or prevent the compliance of the ASBI Companies with all Environmental Laws. B. The ASBI Companies have obtained all material permits, licenses and authorizations that are required under all Environmental Laws. C. No Hazardous Materials (as defined in Section 11.10) exist on, about or within any of the Properties, nor have any Hazardous Materials previously existed on, about or within or been used, generated, stored, transported, disposed of, on or released from any of the Properties. The use that the ASBI Companies make and intend to make of the Properties will not result in the use, generation, storage, transportation, accumulation, disposal or release of any Hazardous Material on, in or from any of the Properties. D. Except as disclosed on Schedule 3.22, there is no action, suit, ------------- proceeding, investigation, or inquiry before any court, administrative agency or other governmental authority pending or, to the knowledge of ASBI, threatened against the ASBI Companies relating in any way to any Environmental Law. No ASBI Company has any liability for remedial action under any Environmental Law. No ASBI Company has received any request for information by any governmental authority with respect to the condition, use or operation of any of the Properties nor has any ASBI Company received any notice of any kind from any governmental authority or other person with respect to any violation of or claimed or potential liability of any kind under any Environmental Law (including, without limitation, any letter, notice or inquiry from any person or governmental entity informing the ASBI Companies that they are or may be liable in any way under CERCLA (as defined in Section 11.10) or requesting information to enable such a determination to be made). SECTION 3.23 Regulatory Compliance. Except as set forth on Schedule 3.23, --------------------- ------------- all reports, records, registrations, statements, notices and other documents or information required to be filed by the ASBI Companies with any federal or state regulatory authority, including, without limitation, the OTS, the FDIC and the IRS have been duly and timely filed and all information and data contained in such reports, records or other documents are substantially true, accurate, correct and complete. Except as set forth on Schedule 3.23, no ASBI Company is ------------- now or has been within the last four (4) years subject to any commitment letter, memorandum of understanding, cease and desist order, written agreement or other formal or informal administrative action with any such regulatory bodies. ASBI does not believe any such regulatory bodies have any present intent to place the ASBI Companies under any such administrative action. Except as set forth on Schedule 3.23, there are no actions or proceedings pending or threatened against - ------------- any ASBI Company by or before any such 23 regulatory bodies or any other nation, state or subdivision thereof, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. SECTION 3.24 Absence of Certain Business Practices. To the best knowledge ------------------------------------- of ASBI, none of the ASBI Companies, nor any officer, employee or agent of the ASBI Companies, nor any other person acting on their behalf, has, directly or indirectly, within the past five (5) years, given or agreed to give any gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of the ASBI Companies (or assist the ASBI Companies in connection with any actual or proposed transaction) that (A) might subject the ASBI Companies to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (B) if not given in the past, might have resulted in a Material Adverse Change or (C) if not continued in the future might result in a Material Adverse Change or might subject the ASBI Companies to suit or penalty in any private or governmental litigation or proceeding. SECTION 3.25 Information for Proxy Statements. None of the information -------------------------------- supplied or to be supplied by the ASBI Companies, or any of their directors, officers, employees or agents for inclusion in the SWS Proxy Statement or the ASBI Proxy Statement/PPM, or any amendment thereof or supplement thereto, will be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or at the time of the SWS Shareholders' Meeting or the ASBI Shareholders' Meeting, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the SWS Shareholders' Meeting or the ASBI Shareholders' Meeting. All documents that the ASBI Companies are responsible for filing with any regulatory or governmental agency in connection with the Merger will comply in all material respects with the provisions of applicable law. SECTION 3.26 Dissenting Shareholders. ASBI has no knowledge of any plan ----------------------- or intention on the part of any ASBI shareholders to make written demand for payment of the fair value of their shares of the ASBI Common Stock in the manner provided by applicable law. SECTION 3.27 Books and Records. The minute books, stock certificate books ----------------- and stock transfer ledgers of the ASBI Companies (A) have been kept accurately in the ordinary course of business, (B) are complete and correct in all material respects, (C) the transactions entered therein represent bona fide transactions, and (D) there have been no transactions involving the business of the ASBI Companies that properly should have been set forth therein and that have not been accurately so set forth. SECTION 3.28 Forms of Instruments, Etc. ASBI has made, and will make, ------------------------- available to SWS copies of all standard forms of notes, mortgages, deeds of trust and other routine documents of a like nature used on a regular and recurring basis by the ASBI Companies in the ordinary course of their business. SECTION 3.29 Fiduciary Responsibilities. The ASBI Companies have -------------------------- performed in all material respects all of their respective duties as a trustee, custodian, guardian or as an escrow agent 24 in a manner that complies in all material respects with all applicable laws, regulations, orders, agreements, instruments and common law standards, where the failure to so perform would result in a Material Adverse Change or have a Material Adverse Effect on transactions contemplated by this Agreement, and no ASBI Company has any reason to be aware of any basis for the same. SECTION 3.30 Guaranties. Except for items in the process of collection in ---------- the ordinary course of the Bank's business, none of the obligations or liabilities of the ASBI Companies are guaranteed by any other person, firm or corporation, nor, except in the ordinary course of business, according to prudent business practices and in compliance with applicable law, have the ASBI Companies guaranteed the obligations or liabilities of any other person, firm or corporation. SECTION 3.31 Voting Trust or Buy-Sell Agreements. Except as set forth on ------------------------------------ Schedule 3.31, ASBI is not aware of any agreement between any of its - ------------- shareholders relating to a right of first refusal with respect to the purchase or sale by any such shareholder of capital stock of ASBI or any voting agreement or voting trust with respect to shares of capital stock of ASBI. All of such agreements will be terminated or canceled at or prior to the Effective Time. SECTION 3.32 Employee Benefit Plans. ---------------------- A. Set forth on Schedule 3.32 is a complete and correct list of all ------------- "employee benefit plans" (as defined in the Employee Retirement Income Security Act of 1974, as amended ["ERISA"]), all specified fringe benefit plans as defined in Section 6039D of the Code, and all other bonus, incentive, compensation, deferred compensation, profit sharing, stock option, stock appreciation right, stock bonus, stock purchase, employee stock ownership, savings, severance, supplemental unemployment, layoff, salary continuation, retirement, pension, health, life insurance, disability, group insurance, vacation, holiday, sick leave, fringe benefit or welfare plan, or any other similar plan, agreement, policy or understanding (whether written or oral, qualified or nonqualified, currently effective or terminated), and any trust, escrow or other agreement related thereto, which (a) is currently or has been at any time within the last sixty months, maintained or contributed to by the ASBI Companies, or with respect to which any ASBI Company has any liability, and (b) provides benefits, or describes policies or procedures applicable to any officer, employee, service provider, former officer or former employee of the ASBI Company, or the dependents of any thereof, regardless of whether funded (the "ASBI Employee Plans"). B. No ASBI Employee Plan is a defined benefit plan within the meaning of Section 3(35) of ERISA. ASBI has delivered or made available to SWS true, accurate and complete copies of the documents comprising each ASBI Employee Plan and any related trust agreements, annuity contracts or any other funding instruments ("Funding Arrangements"), any contracts with independent contractors (without limitation, actuaries, investment managers, etc.) that relate to any ASBI Employee Plan, the Form 5500 filed in each of the most recent plan years with respect to each ASBI Employee Plan, and related schedules and opinions, and such other documents, records or other materials related thereto reasonably requested by SWS. There have been no prohibited transactions (described under Section 406 of ERISA or Section 4975(c) of the Code) breaches of fiduciary duty or any other breaches or violations of any law applicable to the ASBI Employee Plans and related 25 Funding Arrangements that would subject SWS or the ASBI Companies to any liabilities in excess of $25,000 in the aggregate. Each ASBI Employee Plan intended to be qualified under Code Section 401(a) has a current favorable determination letter and has been operated in compliance with applicable law, and in accordance with its terms, and all reports and filings required by any government agency with respect to each ASBI Employee Plan have been timely and completely filed. There are no pending claims, lawsuits or actions relating to any ASBI Employee Plan (other than ordinary course claims for benefits) and, to the best knowledge of ASBI, none are threatened. No written or oral representations have been made to any employee or former employee of the ASBI Companies promising or guaranteeing any employer payment or funding for the continuation of medical, dental, life or disability coverage for any period of time beyond the end of the current plan year, or beyond termination of employment, (except to the extent of coverage required under Code Section 4980B). Compliance with FAS 106 will not create any material change to the ASBI Financial Statements. Except as required in connection with qualified plan amendments required by tax law changes, the consummation of the transactions contemplated by this Agreement will not accelerate the time of payment or vesting, or increase the amount, of compensation due to any employee, officer, former employee or former officer of the ASBI Companies and there are no contracts or arrangements providing for payments that will be subject to excise tax under Code Section 4999. C. With respect to each "employee benefit plan" (as defined in ERISA) maintained or contributed to or required to be contributed to, currently or in the past, by any trade or business with which any ASBI Company is required by any of the rules contained in the Code or ERISA to be treated as a single employer (the "Controlled Group Plans"): (i) All Controlled Group Plans which are "group health plans" (as defined in the Code and ERISA) have been operated to the Closing such that failures to operate such group health plans in full compliance with Part 6 of Subtitle B of Title 1 of ERISA and Section 4980B of the Code would not subject the ASBI Companies to liability in excess of $25,000 in the aggregate; and (ii) There is no Controlled Group Plan that is a defined benefit plan (as defined in Section 3(35) of ERISA), nor has there been in the last five (5) calendar years.) (iii) There is no Controlled Group Plan that is a "multiple employer plan" or "multiemployer plan" (as either such term is defined in ERISA), nor has there been since 1974. D. Each ASBI Company is completely insured for all health insurance claims. No event has occurred or circumstances exist that could result in a material increase in premium costs of ASBI Employee Plans that are insured or a material increase in self-insured costs. SECTION 3.33 Year 2000. --------- 26 A. ASBI has disclosed to SWS a complete and accurate copy of ASBI's plan (the "Year 2000 Plan"), including an estimate of the anticipated associated costs, for implementing modifications to the ASBI Companies' hardware, software, and computer systems, chips, and microprocessors, to ensure proper execution and accurate processing of all date-related data, whether from years in the same century or in different centuries. ASBI represents and warrants to SWS that all ASBI Companies are "Year 2000 Compliant." The term "Year 2000 Compliant" means that all programs, systems, services, or other technology will: (i) accept and process date and time data accurately and without interruption (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the years 1999 and 2000, using the correct century and year, and accurately calculating leap year dates; (ii) when used in combination with other information technology, process date and time data accurately and without interruption if the other information technology properly exchanges date and time data with it; (iii) respond to two-digit-year date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; and (iv) store and provide output of date information in ways that are unambiguous as to century. B. In accordance with those certain guidances and statements issued by the Federal Financial Institutions Examination Council ("FFIEC") in connection with the century date change that will take place on January 1, 2000, dated as of June 1996, May 5, 1997, December 17, 1997, March 17, 1998, April 10, 1998, May 13, 1998, August 31, 1998, September 2, 1998, October 15, 1998, December 11, 1998, February 17, 1999, and May 6, 1999 (together with any subsequent FFIEC issuances on the Year 2000, the "Interagency Statements"), ASBI has: (i) Inventoried and assessed the technologies it uses, particularly its computer hardware and software, to identify potential problems areas related to the Year 2000; (ii) Developed and implemented a Year 2000 Plan, including comprehensive testing plans, to prepare its information technology to: (a) process date/time data accurately and without interruption (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the years 1999 and 2000, and leap year calculations; (b) when used in combination with other information technology, process date/time data accurately and without interruption if the other information technology properly exchanges date/time data with it; (c) respond to two-digit year-date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; and (d) store and provide output of date information in ways that are unambiguous as to century; and (iii) Developed contingency plans to ensure continuity of business in the event of: (a) failure to complete any tasks required by the Year 2000 Plan, such as remediation or validation; or (b) any externally caused business interruption related to the century date change. C. ASBI is in compliance with the Interagency Statements. 27 D. If the Bank has been examined by the OTS for Year 2000 readiness, it has not received a rating that would cause delay or denial of any regulatory approval of this Agreement. E. ASBI's estimate of the costs (on a consolidated basis) to complete its Year 2000 compliance efforts is $10,000. F. Between the date of this Agreement and the Effective Time, ASBI shall endeavor to continue its efforts to implement such Year 2000 Plan. SECTION 3.34 Accounting, Tax, and Regulatory Matters. No ASBI Company or --------------------------------------- any Affiliate thereof has taken or agreed to take any action, and ASBI has no knowledge of any fact or circumstance that is reasonably likely to (i) prevent the transactions contemplated hereby, including the Merger, from qualifying for pooling-of-interests accounting treatment or as a reorganization within the meaning of Section 368(a) of the Code, or (ii) materially impede or delay receipt of any of the consents and approvals referred to on Schedules 3.09 and ------------------ 4.07 of this Agreement. - ---- SECTION 3.35 Nonaccredited Investors. To the best knowledge of ASBI, no ----------------------- more than thirty-five (35) of the ASBI shareholders will not qualify as "Accredited Investors" as such term is defined in Rule 501(a) of Regulation D of the 1933 Act. SECTION 3.36 Information Systems. Each of the ASBI Companies has the ------------------- ability to provide all computer, telecommunications, software and other equipment and technology or resources (collectively, "Systems") necessary to conduct its current and planned business, and the Systems possess the necessary capacity, functionality, and compatibility for such purposes. Qualified maintenance personnel, employed by or on contract with ASBI, are available to keep the Systems in good working order. The Systems and the Bank's transactional web site incorporate security measures that are at least as good as those that are standard in the banking industry, and the Bank's web site is reasonably available and accessible by Internet users. None of the ASBI Companies has received a rating lower than "satisfactory" in its most recent information systems examination by banking regulators. SECTION 3.37 Representations Not Misleading. To the best knowledge of ------------------------------ ASBI, all material facts relating to the business operations, properties, assets, liabilities (contingent or otherwise) and financial condition of the ASBI Companies have been disclosed to SWS in or in connection with this Agreement. No representation or warranty by ASBI contained in this Agreement, nor any statement, exhibit or schedule furnished to SWS by ASBI under and pursuant to, or in anticipation of this Agreement, contains or will contain on the Closing Date any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which it was or will be made, not misleading and such representations and warranties would continue to be true and correct following disclosure to any governmental authority having jurisdiction over ASBI or its properties of the facts and circumstances upon which they were based. Except as disclosed herein, there is no matter that will have a Material Adverse Effect on the ASBI Companies or ASBI's ability to perform the transactions contemplated by this Agreement or the other agreements contemplated hereby, or to the knowledge of ASBI, will in the future result in a Material Adverse Change, other than general 28 economic conditions. No information material to the Merger, and that is necessary to make the representations and warranties herein contained not misleading, has been withheld by ASBI. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SWS SWS hereby makes the representations and warranties set forth in this Article IV to ASBI. SECTION 4.01 Organization and Qualification. SWS is a corporation, duly ------------------------------ organized, validly existing and in good standing under all laws, rules, and regulations applicable to corporations located or organized in the State of Delaware. SWS is duly qualified to transact business as a foreign entity in each jurisdiction in which a failure to be so qualified could have a Material Adverse Effect. SWS has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets as now owned, leased or operated and to enter into and carry out its obligations under this Agreement. SECTION 4.02 Execution and Delivery. SWS has taken all corporate action ---------------------- necessary to authorize the execution, delivery and (provided the required regulatory and shareholder approvals are obtained) performance of this Agreement and the other agreements and documents contemplated hereby to which it is a party, including, but not limited to, the Merger Agreement. This Agreement has been, and the other agreements and documents contemplated hereby, including, but not limited to, the Merger Agreement, have been or at Closing will be, duly executed by SWS and each constitutes the valid and binding obligation of SWS, enforceable in accordance with its respective terms and conditions, except as enforceability may be limited by bankruptcy, conservatorship, insolvency, moratorium, reorganization, receivership or similar laws and judicial decisions affecting the rights of creditors generally and by general principles of equity (whether applied in a proceeding at law or in equity). SECTION 4.03 Authorized and Outstanding Stock of SWS. The authorized --------------------------------------- capital stock of SWS consists of (i) 20,000,000 shares of common stock, par value $0.10 per share (the "SWS Common Stock"), and (ii) 100,000 shares of preferred stock, par value $1.00 per share ("SWS Preferred Stock"). As of the date hereof, 11,813,780 shares of SWS Common Stock are issued and outstanding. All of such issued shares are validly issued, fully paid and nonassessable. As of the date hereof, none of the SWS Preferred Stock is issued or outstanding. Except as set forth on Schedule 4.03, SWS does not have outstanding, and is not ------------- bound by, any subscriptions, options, warrants, calls, commitments or agreements to issue any additional shares of its capital stock, including any right of conversion or exchange under any outstanding security or other instrument, and SWS is not obligated to issue any shares of its capital stock for any purpose. There are no unsatisfied preemptive rights in respect to the capital stock of SWS. SWS has no obligation to repurchase any of its securities, and there are no agreements restricting the transfer of or otherwise relating to shares of its capital stock of any class. SECTION 4.04 Authorized and Outstanding Stock of Newco. The authorized ----------------------------------------- capital stock of Newco will consist of 100,000 shares of common stock, par value $1.00 per share (the "Newco 29 Common Stock") and 1,000 shares of the Newco Common Stock will be issued and outstanding and held by SWS. SECTION 4.05 Compliance with Laws, Permits and Instruments. The --------------------------------------------- execution, delivery and (provided the required regulatory approvals are obtained) performance of this Agreement and the other agreements contemplated hereby, including, but not limited to the Merger Agreement, and the consummation of the transactions contemplated hereby and thereby, will not conflict with, or result, by itself or with the giving of notice or the passage of time, in any violation of or default or loss of a benefit under, (A) any provision of the Certificate of Incorporation or Bylaws of SWS, (B) any material provision of any mortgage, indenture, lease, contract, agreement or other instrument applicable to SWS or its assets, operations, properties or businesses now conducted or heretofore conducted or (C) any statute, law, ordinance, rule or regulation applicable to SWS. SECTION 4.06 Litigation. Except as set forth on Schedule 4.06, there are ---------- ------------- no actions, claims, suits, investigations, reviews or other legal, quasi- judicial or administrative proceedings of any kind or nature now pending or threatened against or affecting any SWS Company at law or in equity, or by or before any federal, state or municipal court or other governmental or administrative department, commission, board, bureau, agency or instrumentality, domestic or foreign, that in any manner involve any SWS Company or any of their properties or capital stock that might reasonably be anticipated to result in a Material Adverse Change or have a material Adverse Effect on the transactions contemplated by this Agreement or the Merger Agreement, and SWS does not know or have any reason to be aware of any basis for the same. No legal action, suit or proceeding or judicial, administrative or governmental investigation is pending or, to the knowledge of SWS, threatened against any SWS Company that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by SWS or its Subsidiaries pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. SECTION 4.07 Consents and Approvals. SWS's board of directors (at a ---------------------- meeting duly called and held) has resolved to recommend to the shareholders of SWS approval for the issuance of the SWS Common Stock and other transactions contemplated pursuant to this Agreement. Except for regulatory approvals as disclosed in Schedule 4.07, no approval, consent, order or authorization of, or ------------- registration, declaration or filing with, any governmental authority or other third party is required on the part of SWS in connection with the execution, delivery or performance of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement or the consummation by SWS of the transactions contemplated hereby or thereby. SECTION 4.08 SEC Filings; SWS Financial Statements. ------------------------------------- A. SWS has timely filed with the SEC all forms, reports and financial statements and documents required to be filed by it since December 31, 1995. SWS has made available to ASBI all forms, reports, financial statements (the "SWS Financial Statements") and documents required to be filed by SWS with the SEC since December 31, 1998 (collectively, the "SWS SEC Reports"). The SWS SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the 1933 Act and the 1934 Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a 30 filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such SWS SEC Reports or necessary in order to make the statements in such SWS SEC Reports, in light of the circumstances under which they were made, not misleading. Except for SWS Subsidiaries that are registered as a broker, dealer, or investment advisor or filings required due to fiduciary holdings of the SWS Subsidiaries, none of SWS Subsidiaries is required to file any forms, reports, or other documents with the SEC. B. Each of the SWS Financial Statements (including, in each case, any related notes) contained in the SWS SEC Reports, including any SWS SEC Reports filed after the date of this Agreement until the Effective Time, complied or will comply as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was or will be prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC), and fairly presented or will fairly present the consolidated financial position of SWS and its Subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount or effect. SECTION 4.09 Proxy Statement. None of the information supplied or to be --------------- supplied by SWS or any of its directors, officers, employees or agents for inclusion in the ASBI Proxy Statement/PPM, or any amendment thereof or supplement thereto, will be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or at the time of the ASBI Shareholders' Meeting, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy or offering of SWS Common Stock for the ASBI Shareholders' Meeting. All documents that SWS is responsible for filing with any regulatory or governmental agency in connection with the Merger will comply in all material respects with the provisions of applicable law. SECTION 4.10 Representations Not Misleading. No representation or ------------------------------ warranty by SWS contained in this Agreement, or any statement, exhibit or schedule furnished to ASBI by SWS under and pursuant to, or in anticipation of this Agreement, contains or will contain on the Closing Date any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which it was or will be made, not misleading and such representations and warranties would continue to be true and correct following disclosure to any governmental authority having jurisdiction over SWS of the facts and circumstances upon which they were based. Except as disclosed herein, there is no matter that will have a Material Adverse Effect on the SWS Companies or SWS's ability to perform the transactions contemplated by this Agreement or the other agreements contemplated hereby, or to the knowledge of SWS, will in the future result in a Material Adverse Change, other than general economic conditions. No information material to the Merger, and that is necessary to make the representations and warranties herein contained not misleading, has been withheld by SWS. 31 ARTICLE V. COVENANTS OF ASBI ASBI hereby makes the covenants set forth in this Article V to SWS. SECTION 5.01 Best Efforts. ASBI will use its best efforts to cause the ------------ consummation of the transactions contemplated hereby in accordance with the terms and conditions of this Agreement. SECTION 5.02 Merger Agreement. ASBI will, as soon as practicable after ---------------- the execution of this Agreement, duly authorize and enter into the Merger Agreement, the form of which is attached hereto as Exhibit A, and perform all of --------- its obligations thereunder. SECTION 5.03 Information for Regulatory Applications and Proxy Statements. ------------------------------------------------------------ ASBI will, and will cause the ASBI Subsidiaries to, promptly furnish to SWS all information concerning the ASBI Companies, including, but not limited to, financial statements required for inclusion in (A) any proxy statement to be used by SWS in connection with the approval of the shareholders of SWS of the transactions contemplated hereby and (B) any application or statement to be made by SWS or filed by SWS with any governmental body in connection with the transactions contemplated by this Agreement, or in connection with any unrelated transactions during the pendency of this Agreement, and ASBI represents and warrants that all information so furnished for such statements and applications shall be true and correct in all material respects and shall not omit any material fact required to be stated therein or necessary to make the statements made, in light of the circumstances under which they were made, not misleading. The ASBI Companies shall otherwise fully cooperate with SWS in the filing of any applications or other documents necessary to consummate the transactions contemplated by this Agreement. SECTION 5.04 Required Acts of the ASBI Companies. Prior to the Closing, ------------------------------------ each of the ASBI Companies shall, unless otherwise permitted in writing by SWS: A. Operate only in the ordinary course of business and consistent with normal banking practices; B. Except as required by normal business practices, use all reasonable efforts to preserve its business organization intact and to retain its present customers, depositors, suppliers, correspondent banks, officers, directors, employees and agents; C. Act in a manner intended to preserve or attempt to preserve its goodwill; D. Perform all of its obligations under contracts, leases and documents relating to or affecting its assets, properties and business except such obligations as ASBI may in good faith reasonably dispute; E. Except as required by normal business practices, maintain all offices, machinery, equipment, materials, supplies, inventories, vehicles and other properties owned, leased or used by it (whether under its control or the control of others), in good operating condition and repair, ordinary wear and tear excepted; 32 F. Maintain in full force and effect all insurance policies now in effect or renewals thereof and, except as required by normal business practices that do not jeopardize insurance coverage, give all notices and present all claims under all insurance policies in due and timely fashion; G. Timely file all reports required to be filed with governmental authorities and observe and conform to all applicable laws, rules, regulations, ordinances, codes, orders, licenses and permits, except those being contested in good faith by appropriate proceedings; H. Timely file all tax returns required to be filed by it and promptly pay all taxes, assessments, governmental charges, duties, penalties, interest and fines that become due and payable, except those being contested in good faith by appropriate proceedings; I. Withhold from each payment made to each of its employees the amount of all taxes (including, but not limited to, federal income taxes, FICA taxes and state and local income and wage taxes) required to be withheld therefrom and pay the same to the proper tax receiving officers; J. Continue to follow and implement policies, procedures and practices regarding the identification, monitoring, classification and treatment of all assets in substantially the same manner as it has in the past; and K. Account for all transactions in accordance with GAAP (unless otherwise instructed by RAP, in which instance account for such transaction in accordance with RAP), and maintain the allowance for loan losses account for the Bank in an adequate amount to provide for all losses, net of recoveries relating to loans previously charged off, on all outstanding loans of the Bank. SECTION 5.05 Prohibited Acts of the ASBI Companies. After the date of ------------------------------------- this Agreement and prior to the Closing, ASBI shall not (and cause the ASBI Subsidiaries to not), without the prior written consent of SWS (which consent shall be deemed to have been given five (5) business days after actual receipt by SWS of notice given pursuant to Section 11.07 with respect to such act, unless SWS sooner objects to such act): A. Introduce any new material method of management or operation; B. Other than actions required by this Agreement, take any action that could reasonably be anticipated to result in a Material Adverse Change; C. Take or fail to take any action that would reasonably cause or permit the representations and warranties made in Article III hereof to be inaccurate at the time of the Closing or preclude ASBI from making such representations and warranties at the time of the Closing; 33 D. Mortgage, pledge or subject to lien, charge, security interest or any other encumbrance or restriction any of its property, business or assets, tangible or intangible except in the ordinary course of business and consistent with normal banking practices; E. Cause or allow the loss of insurance coverage, unless replaced with coverage which is substantially similar (in amount and insurer) to that now in effect; F. Incur any obligation or liability, whether absolute or contingent, except in the ordinary course of business and consistent with normal banking practices; G. Discharge or satisfy any lien, charge or encumbrance or pay any obligation or liability, whether absolute or contingent, due or to become due, except in the ordinary course of business consistent with normal banking practices; H. Issue, reserve for issuance, grant, sell or authorize the issuance of any shares of its capital stock or other securities or subscriptions, options, warrants, calls, rights or commitments of any kind relating to the issuance thereto; I. Purchase or redeem any of its stock or options thereon or declare or pay any distribution on its outstanding capital stock, except for dividends by the Bank to and from ASBI and dividends paid in accordance and consistent with past practices of ASBI not to exceed 60% of ASBI's taxable income, on a consolidated basis, calculated in accordance with GAAP; provided, however, that ASBI shall not declare or pay any dividend without the prior written consent of KPMG, LLP, the accountants for SWS, confirming that such dividend payments, if any, will not prevent the transactions contemplated by this Agreement from qualifying for pooling-of- interests accounting treatment; J. Change its Articles, Charter, Certificate or Bylaws or its authorized capital stock; K. Sell, transfer, lease to others or otherwise dispose of any of its assets or cancel or compromise any debt or claim, or waive or release any right or claim, which, individually or in the aggregate, would constitute a Material Adverse Change, except in the ordinary course of business and consistent with past practices and safe and sound banking principles; L. Enter into any transaction other than in the ordinary course of business; M. Except in the ordinary course of the ASBI Companies' business and consistent with past practices, enter into or give any promise, assurance or guarantee of the payment, discharge or fulfillment of any undertaking or promise made by any other person, firm or corporation; N. Sell or knowingly dispose of, or otherwise divest itself of the ownership, possession, custody or control, of any corporate books or records of any nature that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period; 34 O. Make any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or pay or agree or orally promise to pay, conditionally or otherwise, any bonus, extra compensation, extra pension or extra severance or extra vacation pay, to or for the benefit of any of its shareholders, directors, officers, employees or agents, or enter into any employment or consulting contract (other than as contemplated by this Agreement) or other agreement with any director, officer or employee or adopt, amend in any material respect or terminate any pension, employee welfare, retirement, stock purchase, stock option, stock appreciation rights, termination, severance, income protection, golden parachute, savings or profit-sharing plan (including trust agreements and insurance contracts embodying such plans), any deferred compensation, or collective bargaining agreement, any group insurance contract or any other incentive, welfare or employee benefit plan or agreement maintained by it for the benefit of its directors, employees or former employees, except in the ordinary course of business and consistent with past practices and safe and sound banking principles, and except normal periodic increases in the compensation payable to officers or salaried employees, consistent with past practices and made in the ordinary course of business; P. Engage in any transaction with any affiliated person or create any liability of the ASBI Companies owed to such persons other than in the form of loans, deposits, wages, salaries and reimbursement of expenses created in the ordinary course of business and consistent with past practices; Q. Acquire any capital stock or other equity securities or acquire any equity or ownership interest in any bank, corporation, partnership or other entity (except (i) through settlement of indebtedness, foreclosure, or the exercise of creditors' remedies or (ii) in a fiduciary capacity, the ownership of which does not expose it to any liability from the business, operations or liabilities of such person); R. Terminate, cancel or surrender any contract, lease or other agreement or suffer any damage, destruction or loss that, in any case or in the aggregate, would constitute a Material Adverse Change; S. Dispose of, permit to lapse, transfer or grant any rights under, or breach or infringe upon, any United States or foreign license or Proprietary Right or modify any existing rights with respect thereto, except in the ordinary course of business and consistent with past practices and safe and sound banking principles; T. Make any capital expenditures or capital additions or betterments in excess of an aggregate of $20,000, except for expenditures in connection with the construction of the new branch location of the Bank at Matlock Road and Stephens Street in Arlington, Texas consistent with the plans and specifications disclosed to SWS; U. Hire or employ any person with an annual salary equal to or greater than $50,000; 35 V. Make any, or acquiesce with any, change in any accounting methods, principles or material practices; W. Except for transactions through SWS in the ordinary course of business, between the date of the Agreement and the Closing Date, sell any Investment Securities or purchase any Investment Securities in excess of an aggregate amount of $100,000 (other than U.S. Treasuries with a maturity of less than one year); X. Other than loans fully secured by certificates of deposit or liquid, readily marketable collateral, make or alter any of the material terms of any loan to any single borrower and his related interests in excess of the principal amount of $500,000, or renew or extend the maturity of any loan to any single borrower and his related interests in excess of the principal amount of $500,000; or Y. Make, or renew or extend the maturity of, or alter any of the material terms of any classified loan in excess of the principal amount of $100,000. SECTION 5.06 Access; Pre-Closing Investigation. Subject to the ---------------------------------- provisions of Article XI, ASBI shall afford the officers, directors, employees, attorneys, accountants, investment bankers and authorized representatives of SWS full access to the properties, books, contracts and records of the ASBI Companies, permit SWS to make such inspections (including without limitation with regard to such properties physical inspection of the surface and subsurface thereof and any structure thereon) as they may require and furnish to SWS during such period all such information concerning the ASBI Companies and their respective affairs as SWS may reasonably request, in order that SWS may have full opportunity to make such reasonable investigation as it shall desire to make of the affairs of the ASBI Companies, including, without limitation, access sufficient to verify the value of the assets and the liabilities of the ASBI Companies and the satisfaction of the conditions precedent to SWS's obligations described in Article VIII of this Agreement; provided that such investigation shall be conducted in the manner least disruptive to the business and operations of the ASBI Companies. ASBI agrees at any time, and from time to time, to furnish to SWS as soon as practicable, any additional information that SWS may reasonably request. SECTION 5.07 Invitations to and Attendance at Directors' and Committee --------------------------------------------------------- Meetings. ASBI shall give notice, and shall cause the ASBI Subsidiaries to - --------- give notice, to two (2) designees of SWS (which designees shall be reasonably acceptable to ASBI), and shall invite such persons to attend all regular and special meetings of the board of directors of the ASBI Companies and all regular and special meetings of any senior management committee (including but not limited to the executive committee and the loan and discount committee of the Bank) of the ASBI Companies. If the Merger is finally disapproved by any appropriate regulatory authority or if this Agreement is terminated pursuant to its terms, SWS's designees will no longer be entitled to notice of and permission to attend such meetings. SECTION 5.08 Additional Financial Statements. ASBI shall promptly ------------------------------- furnish, when available, SWS with (A) unaudited statements of condition and income of ASBI as of June 30, 1999 and September 30, 1999, and (B) true and complete copies of additional TFRs prepared by the Bank. 36 SECTION 5.09 Untrue Representations. ASBI shall promptly notify SWS in ---------------------- writing if ASBI becomes aware of any fact or condition that makes untrue, or shows to have been untrue, in any material respect, any schedule or any other information furnished to SWS or any representation or warranty made in or pursuant to this Agreement or that results in ASBI's failure to comply with any covenant, condition or agreement contained in this Agreement. SECTION 5.10 Litigation and Claims. ASBI shall promptly notify SWS in --------------------- writing of any litigation, or of any claim, controversy or contingent liability that might be expected to become the subject of litigation, against any ASBI Company or affecting any of their properties, if such litigation or potential litigation might, in the event of an unfavorable outcome, result in a Material Adverse Change, and ASBI shall promptly notify SWS of any legal action, suit or proceeding or judicial, administrative or governmental investigation, pending or, to the knowledge of ASBI, threatened against any ASBI Company that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by the ASBI Companies pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. SECTION 5.11 Notice of Material Adverse Changes. ASBI shall promptly ---------------------------------- notify SWS in writing if any change shall have occurred or been threatened (or any development shall have occurred or been threatened involving a prospective change) in the business, financial condition, operations or prospects of the ASBI Companies that has or may reasonably be expected to have or lead to a Material Adverse Change. SECTION 5.12 No Negotiation with Others. ASBI shall not, directly or -------------------------- indirectly, nor shall it permit the ASBI Subsidiaries or their officers, directors, employees, representatives or agents to, directly or indirectly (A) encourage, solicit or initiate discussions or negotiations with, or (B) except upon advice of counsel to the extent required to fulfill the fiduciary duties owed to the shareholders of ASBI, entertain, discuss or negotiate with, or provide any information to, or cooperate with, any corporation, partnership, person or other entity or group (other than SWS or its Affiliates or associates or officers, partners, employees or other authorized representatives of SWS or such Affiliates or associates) concerning any merger, tender offer or other takeover offer, sale of substantial assets, sale of shares of capital stock or similar transaction involving the ASBI Companies. Immediately upon receipt of any unsolicited offer, ASBI will communicate to SWS the terms of any proposal or request for information and the identity of the parties involved. SECTION 5.13 Consents and Approvals. ASBI shall use its best efforts to ---------------------- obtain all consents and approvals from third parties, including those listed on Schedule 3.09, at the earliest practicable time. - ------------- SECTION 5.14 Environmental Investigation; Right to Terminate Agreement. --------------------------------------------------------- 37 A. SWS and its consultants, agents and representatives, at the sole cost and expense of SWS, shall have the right to the same extent that the ASBI Companies have such right, but not the obligation or responsibility, to inspect any Property, including, without limitation, conducting asbestos surveys and sampling, environmental assessments and investigation, and other environmental surveys and analyses including soil and ground sampling ("Environmental Inspections") at any time on or prior to August 31, 1999. SWS shall notify ASBI prior to any physical inspections of the Property, and ASBI may place reasonable restrictions on the time of such inspections. If, as a result of any such Environmental Inspection, further investigation ("secondary investigation") including, without limitation, test borings, soil, water and other sampling is deemed desirable by SWS, SWS shall (i) notify ASBI of any Property for which it intends to conduct such a secondary investigation and the reasons for such secondary investigation, and (ii) at the sole cost and expense of SWS, commence such secondary investigation, on or prior to September 30, 1999. SWS shall give reasonable notice to ASBI of such secondary investigations, and ASBI may place reasonable time and place restrictions on such secondary investigations. B. ASBI agrees to indemnify and hold harmless SWS for any claims for damage to property, or injury or death to persons, made as a result of any Environmental Inspection or secondary investigation conducted by SWS or its agents, which damage or injury is attributable to the negligent actions of the ASBI Companies or their agents. SWS agrees to indemnify and hold harmless ASBI for any claims for damage to property, or injury or death to persons, attributable to the negligent actions of SWS or its agents in performing any Environmental Inspection or secondary investigation except to the extent caused in whole or in part by the negligence of the ASBI Companies. SWS shall not have any liability or responsibility of any nature whatsoever for the results, conclusions or other findings related to any Environmental Inspection, secondary investigation or other environmental survey. If this Agreement is terminated, then except as otherwise required by law, reports to any governmental authority of the results of any Environmental Inspection, secondary investigation or other environmental survey shall not be made by SWS. SWS shall make no such report prior to Closing unless required to do so by law, and in such case will give ASBI reasonable notice of SWS's intentions. C. SWS shall have the right to terminate this Agreement if (i) the factual substance of any warranty or representation set forth in Section 3.22 is not materially true and accurate; (ii) the results of such Environmental Inspection, secondary investigation or other environmental survey are disapproved by SWS because the environmental inspection, secondary investigation or other environmental survey identifies material violations or potential violations of Environmental Laws; (iii) the ASBI Companies have refused to allow SWS to conduct an Environmental Inspection or secondary investigation in a manner that SWS reasonably considers necessary; (iv) the Environmental Inspection, secondary investigation or other environmental survey identifies any past or present event, condition or circumstance that would or potentially would require remedial or cleanup action or result in a Material Adverse Change; (v) the Environmental Inspection, secondary investigation or other environmental survey identifies the presence of any underground or above ground storage tank in, on or under any Property that is not shown to be in compliance with all Environmental Laws applicable to the tank either now or at a future time certain, or that has 38 had a release of petroleum or some other Hazardous Material that has not been cleaned up to the satisfaction of the relevant governmental authority or any other party with a legal right to compel cleanup; or (vi) the Environmental Inspection, secondary investigation or other environmental survey identifies the presence of any asbestos-containing material in, on or under any Property, the removal of which would result in a Material Adverse Change. On or prior to October 31, 1999, SWS shall advise ASBI in writing as to whether SWS intends to terminate this Agreement because SWS disapproves of the results of the Environmental Inspection, secondary investigation or other environmental survey. ASBI shall have the opportunity to correct any objected to violations or conditions to SWS's reasonable satisfaction prior to November 30, 1999. In the event that ASBI fails to demonstrate its satisfactory correction of the violations or conditions to SWS, SWS may terminate the Agreement on or before December 15, 1999. D. ASBI agrees to make available to SWS and its consultants, agents and representatives all documents and other material relating to environmental conditions of any Property including, without limitation, the results of other environmental inspections and surveys. ASBI also agrees that all engineers and consultants who prepared or furnished such reports may discuss such reports and information with SWS and shall be entitled to certify the same in favor of SWS and its consultants, agents and representatives and make all other data available to SWS and its consultants, agents and representatives. SECTION 5.15 Proxies. Within ten (10) days of the date of the execution ------- of this Agreement, ASBI and each of the persons set forth on Schedule 5.15 shall ------------- execute the Voting Agreement and Irrevocable Proxy in the form of Exhibit B --------- attached hereto, and ASBI acknowledges that such persons have agreed that they will vote the shares of the ASBI Common Stock owned by them in favor of the Merger Agreement and the Merger and the transactions contemplated hereby and thereby, subject to required regulatory approvals. SECTION 5.16 S Corporation Termination. The ASBI Companies shall ------------------------- terminate their respective Subchapter S and Qualified Subchapter S Subsidiary elections under the Code as of the Closing Date. In connection with the foregoing, each of the ASBI Companies agrees to make an election to close the books of ASBI Companies with all federal tax items allocable to the "S short year" and the "C short year" (as those terms are defined in Section 1362(e)(3) of the Code). SECTION 5.17 Conforming Accounting and Reserve Policies; Restructuring --------------------------------------------------------- Expenses. - -------- A. From and after the date of this Agreement to the Effective Time, ASBI and SWS shall consult and cooperate with each other with respect to conforming, as specified in a written notice from SWS to ASBI as provided in Section 5.17D, the loan, accrual and reserve policies of the Bank to those policies of SWS. B. In addition, from and after the date of this Agreement to the Effective Time, ASBI and SWS shall consult and cooperate with each other with respect to determining, as specified in a written notice from SWS to ASBI, as provided in Section 5.17D, appropriate accruals, reserves and charges to establish and take in respect of excess equipment write-off 39 or write-down of various assets and other appropriate charges and accounting adjustments taking into account the parties' business plans following the Merger. C. ASBI and SWS shall consult and cooperate with each other with respect to determining, as specified in a written notice from SWS to ASBI, as provided in Section 5.17D, the amount and the timing for recognizing for financial accounting purposes the expenses of the Merger and the restructuring charges related to or to be incurred in connection with the Merger. D. At the written request of SWS given within ten calendar days of Closing, ASBI shall establish and take such reserves and accruals immediately prior to the Effective Time as SWS shall request to conform the ASBI's loan, accrual and reserve policies to SWS's policies, shall establish and take such accruals, reserves and charges in order to implement such policies in respect of excess facilities and equipment capacity, severance costs, litigation matters, write-off or write-down of various assets and other appropriate accounting adjustments, and to recognize for financial accounting purposes such expenses of the Merger and restructuring charges related to or to be incurred in connection with the Merger, in each case at such times as are mutually agreeable to SWS and ASBI; provided, however, that ASBI shall not be required to take any such action that is not consistent with GAAP; and provided further, however, that any such accrual, reserve or charge made at the request of SWS in accordance with this Section 5.17 shall not constitute a Material Adverse Change or be deemed to have a Material Adverse Effect and shall not be considered for the purposes of calculating the taxable income for purposes of Section 5.05I. SECTION 5.18 Affiliate Agreements. ASBI has disclosed in Schedule 5.18 -------------------- ------------- each person or entity whom it reasonably believes may be deemed an "affiliate" of ASBI for purposes of Rule 145 under the 1933 Act. ASBI shall use its reasonable efforts to cause each such person or entity to deliver to SWS not later than 30 days prior to the Effective Time, a written agreement, in substantially the form of Exhibit G, providing that such person or entity will --------- not sell, pledge, transfer, or otherwise dispose of the shares of ASBI Common Stock held by such person or entity except as contemplated by such agreement or by this Agreement and will not sell, pledge, transfer, or otherwise dispose of the shares of SWS Common Stock to be received by such person or entity upon consummation of the Merger except in compliance with applicable provisions of the 1933 Act and the rules and regulations thereunder and applicable rules and pronouncements relating to pooling-of-interest accounting. SECTION 5.19 Environmental Matters. On or before November 1, 1999, ASBI --------------------- shall use its best efforts to eliminate any Environmental Liability relating to the Environmental Properties. ARTICLE VI. COVENANTS OF SWS SWS hereby makes the covenants set forth in this Article VI to ASBI. 40 SECTION 6.01 Best Efforts. SWS agrees to use its best efforts to cause ------------ the consummation of the transactions contemplated hereby in accordance with the terms and conditions of this Agreement. SECTION 6.02 Incorporation and Organization of Newco. SWS will --------------------------------------- incorporate, charter and organize Newco as a Texas corporation. SECTION 6.03 Merger Agreement. SWS will, as soon as practicable after the ---------------- execution of this Agreement, enter into the Merger Agreement, the form of which is attached hereto as Exhibit A, and shall perform all of its obligations --------- thereunder. SWS will, as soon as practicable after the execution of this Agreement, cause Newco to duly authorize and enter into the Merger Agreement and shall cause Newco to perform all of its obligations thereunder. SWS shall vote all of the stock of Newco in favor of the Merger and the Merger Agreement. SECTION 6.04 Information for Regulatory Applications and Proxy Statements. ------------------------------------------------------------ SWS will promptly furnish to ASBI all information concerning SWS and the SWS Subsidiaries, including, but not limited to, financial statements, required for inclusion in (A) any proxy statement to be used by ASBI in connection with the approval of the shareholders of ASBI of the transactions contemplated hereby and (B) any application or statement to be made by ASBI or filed by ASBI with any governmental body in connection with the transactions contemplated by this Agreement, or in connection with any unrelated transactions during the pendency of this Agreement, and SWS represents and warrants that all information so furnished for such statements and applications shall be true and correct in all material respects and shall not omit any material fact required to be stated therein or necessary to make the statements made, in light of the circumstances under which they were made, not misleading. SWS shall otherwise fully cooperate with the ASBI Companies in the filing of any applications or other documents necessary to consummate the transactions contemplated by this Agreement, including the Merger. SECTION 6.05 Acts of Newco. Prior to the Closing, SWS shall not cause ------------- Newco to take any action or execute any agreement, document or certificate except as contemplated by this Agreement and the other agreements contemplated hereby, including, but not limited to, the Merger Agreement. SECTION 6.06 Untrue Representations. SWS shall promptly notify ASBI in ---------------------- writing if SWS becomes aware of any fact or condition that makes untrue, or shows to have been untrue, in any material respect, any schedule or any other information furnished to ASBI or any representation or warranty made in or pursuant to this Agreement or that results in SWS's failure to comply with any covenant, condition or agreement contained in this Agreement. SECTION 6.07 Litigation and Claims. SWS shall promptly notify ASBI of any --------------------- legal action, suit or proceeding or judicial, administrative or governmental investigation, pending or, to the knowledge of SWS, threatened against any SWS Company that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by the SWS Companies pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. 41 SECTION 6.08 Regulatory and Other Approvals. SWS shall promptly, but in ------------------------------ no event later than thirty (30) days after execution of this Agreement, file or cause to be filed applications for all regulatory approvals required to be obtained by SWS in connection with this Agreement and the other agreements contemplated hereby. SWS shall promptly furnish ASBI with copies of all such regulatory filings and all correspondence for which confidential treatment has not been requested. SWS shall use its best efforts to obtain all such regulatory approvals and any other approvals from third parties, including those listed on Schedule 4.07, at the earliest practicable time. ------------- SECTION 6.09 Adverse Change. SWS shall promptly notify ASBI in writing if -------------- any change shall have occurred or been threatened (or any development shall have occurred or been threatened involving a prospective change) that would adversely affect, prevent or delay consummation of the transactions contemplated by this Agreement or the other agreements contemplated hereby. SECTION 6.10 Employee Benefits and Contracts. Following the Effective ------------------------------- Time, SWS shall provide generally to officers and employees of the ASBI Companies, who after the Effective Time remain employees of an ASBI Company, employee benefits under employee benefit plans (other than stock option or other plans involving the potential issuance of SWS Common Stock), on terms and conditions which when taken as a whole are substantially similar to those currently provided by the SWS Companies to their similarly situated officers and employees. For purposes of participation and vesting (but not accrual of benefits) under such employee benefit plans, (i) service under any qualified defined contribution plans of ASBI shall be treated as service under SWS's qualified defined contribution plans, and (ii) service under any other employee benefit plans of ASBI shall be treated as service under any similar employee benefit plans maintained by SWS. SWS also shall cause ASBI and its Subsidiaries to honor all employment, severance, consulting, and other compensation related agreement or contracts disclosed on Schedule 3.32 between any ASBI Company and ------------- any current or former director, officer, or employee thereof, and all provisions for vested benefits or other vested amounts earned or accrued through the Effective Time under the ASBI Employee Plans. ARTICLE VII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ASBI All obligations of ASBI under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by ASBI: SECTION 7.01 Compliance with Representations, Warranties and Agreements. ---------------------------------------------------------- All representations and warranties made by SWS in this Agreement or in any document or schedule delivered to ASBI pursuant hereto shall have been true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing with the same force and effect as if such representations and warranties were made at and as of the Closing, except with respect to those representations and warranties specifically made as of an earlier date (in which case such representations and warranties shall be true as of such earlier date). SWS shall have performed or complied in all material respects with all agreements, terms, covenants and conditions required by this Agreement to be performed or complied with by SWS prior to or at the Closing. 42 SECTION 7.02 Shareholder Approvals. The Merger and other transaction --------------------- contemplated by this Agreement shall have been approved by the shareholders of ASBI and SWS, and the sole shareholder of Newco. SECTION 7.03 Government and Other Approvals. SWS shall have received ------------------------------ approvals, acquiescence or consents of the transactions contemplated by this Agreement and the Merger Agreement, from all necessary governmental agencies and authorities and other third parties, including but not limited to the OTS, and all applicable waiting periods shall have expired, and the approvals and consents of all third parties required to consummate this Agreement and the other agreements contemplated hereby, including, but not limited to, the Merger Agreement and the transactions contemplated hereby and thereby, including all consents described on Schedules 3.09 and 4.07. Such approvals and the ----------------------- transactions contemplated hereby shall not have been contested or threatened to be contested by any federal or state governmental authority or by any other third party (except shareholders asserting statutory dissenters' appraisal rights) by formal proceedings. SECTION 7.04 No Litigation. No action shall have been taken, and no ------------- statute, rule, regulation or order shall have been promulgated, enacted, entered, enforced or deemed applicable to the acquisition by any federal, state or foreign government or governmental authority or by any court, domestic or foreign, including the entry of a preliminary or permanent injunction, that would (A) make the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby illegal, invalid or unenforceable, (B) impose material limits in the ability of any party to this Agreement to consummate the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby, or (C) if the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby are consummated, subject the ASBI Companies or subject any officer, director, shareholder or employee of the ASBI Companies to criminal or civil liability. No action or proceeding before any court or governmental authority, domestic or foreign, by any government or governmental authority or by any other person, domestic or foreign, shall be threatened, instituted or pending that would reasonably be expected to result in any of the consequences referred to in clauses (A) through (C) above. SECTION 7.05 Pooling Letter. ASBI shall have received a letter, dated as -------------- of the Effective Time, in a form reasonably acceptable to ASBI, from Fisk & Robinson, LLP to the effect that ASBI qualifies as an entity that may be a party to a business combination that will qualify for pooling-of-interests accounting treatment and, to the effect that the Merger, as it impacts ASBI, will qualify for pooling-of-interests accounting treatment. In addition, there shall have been no determination by any court, tribunal, regulatory agency or other governmental entity, that the Merger fails or will fail to qualify for pooling- of-interests accounting treatment. SECTION 7.06 SWS Common Stock. The shares of SWS Common Stock to be issued ---------------- in connection herewith shall be duly authorized and validly issued and, fully paid and nonassessable, issued free of preemptive rights and free and clear of all liens and encumbrances created by or through SWS. The SWS Common Stock to be issued pursuant to the Merger shall have been authorized for listing on the New York Stock Exchange. 43 SECTION 7.07 Tax Opinion. ASBI shall have received an opinion of Jenkens & ----------- Gilchrist, P.C. or ASBI's independent public accountants, on or before the Closing Date, to the effect, among others, that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and that no gain or loss will be recognized by the shareholders of ASBI to the extent that they receive SWS Common Stock in exchange for their ASBI Common Stock in the Merger. SECTION 7.08 Opinion of Counsel. ASBI shall have received an opinion of ------------------ counsel from Gardere & Wynne or other counsel to SWS acceptable to ASBI in substantially the form set forth in Exhibit E hereof. --------- SECTION 7.09 Registration Rights Agreement. ASBI and such Shareholders of ----------------------------- ASBI shall have received a duly executed Registration Rights Agreement in the form attached as Exhibit H hereof. --------- SECTION 7.10 No Material Adverse Change. There shall have been no -------------------------- Material Adverse Change in SWS since March 31, 1999. ARTICLE VIII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SWS All obligations of SWS under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by SWS. SECTION 8.01 Compliance with Representations, Warranties and Agreements. ---------------------------------------------------------- All representations and warranties made by ASBI in this Agreement or in any schedule delivered to SWS pursuant hereto shall have been true and correct when made and shall be true and correct as of the Closing with the same force and effect as if such representations and warranties were made at and as of the Closing, except with respect to those representations and warranties specifically made as of an earlier date (in which case such representations and warranties shall be true as of such earlier date). ASBI shall have performed or complied in all material respects with all agreements, terms, covenants and conditions required by this Agreement to be performed or complied with by ASBI prior to or at the Closing. SECTION 8.02 Shareholder Approvals. The Merger and other transactions --------------------- contemplated by this Agreement shall have been approved by the shareholders of ASBI and SWS, and the sole shareholder of Newco in the manner prescribed by applicable law and the Board of Directors of SWS and/or the Special Committee of the Board of Directors ("SWS Special Committee") established for the purposes of evaluating the terms of the Merger. All shares of SWS Common Stock owned by Mr. Don Buchholz, Buchholz Arlington Bancshares, a limited partnership, and Buchholz Investments, a partnership, will be voted proportionately at such SWS Shareholder Meeting in the same manner as the other shareholders of SWS Common Stock vote on the Merger. 44 SECTION 8.03 Government and Other Approvals. SWS shall have received ------------------------------ approvals, acquiescence or consents, all on terms and conditions acceptable to SWS in its sole discretion, of the transactions contemplated by this Agreement and the Merger Agreement from all necessary governmental agencies and authorities, including but not limited to the OTS, and all applicable waiting periods shall have expired, and the approvals and consents of all third parties required to consummate this Agreement and the other agreements contemplated hereby, including, but not limited to, the Merger Agreement and the transactions contemplated hereby and thereby, including all consents described on Schedules --------- 3.09 and 4.07. Such approvals and consents shall not have imposed, in the - ------------- judgment of SWS, any material requirement upon SWS or the SWS Subsidiaries, including, without limitation, any requirement that SWS sell or dispose of any significant amount of its assets or any SWS Subsidiary. Such approvals and the transactions contemplated hereby shall not have been contested or threatened to be contested by any federal or state governmental authority or by any other third party (except shareholders asserting statutory dissenters' appraisal rights) by formal proceedings. It is understood that, if such contest is brought by formal proceedings, the SWS may, but shall not be obligated to, answer and defend such contest or otherwise pursue this transaction over such objection. SECTION 8.04 No Litigation. No action shall have been taken, and no ------------- statute, rule, regulation or order shall have been promulgated, enacted, entered, enforced or deemed applicable to this Agreement, the Merger, or the transactions contemplated hereby or thereby by any federal, state or foreign government or governmental authority or by any court, domestic or foreign, including the entry of a preliminary or permanent injunction, that would (A) make this Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby illegal, invalid or unenforceable, (B) require the divestiture of a material portion of the assets of any ASBI Company, (C) impose material limits in the ability of any party to this Agreement to consummate the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby, (D) otherwise result in a Material Adverse Change or (E) if this Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby are consummated, subject the SWS Companies or subject any officer, director, shareholder or employee of the SWS Companies to criminal or civil liability. No action or proceeding before any court or governmental authority, domestic or foreign, by any government or governmental authority or by any other person, domestic or foreign, shall be threatened, instituted or pending that would reasonably be expected to result in any of the consequences referred to in clauses (A) through (E) above. SECTION 8.05 Accounting Treatment. All accounting and tax treatment, -------------------- entries and adjustments in connection with the transactions contemplated by this Agreement and the other agreements contemplated hereby shall be satisfactory to SWS. SWS shall not have received notification from any proper regulatory authority that SWS's accounting and tax treatment, entries and adjustments used in connection with the Merger are improper, and SWS shall not have been required by any such regulatory authority to make any accounting or tax adjustments that would constitute a Material Adverse Change. SECTION 8.06 No Material Adverse Change. There shall have been no -------------------------- Material Adverse Change in ASBI since March 31, 1999. 45 SECTION 8.07 Dissenters. The holders of not more than a certain percentage ---------- (not to exceed 9.9%) of the issued and outstanding shares of ASBI Common Stock shall have elected to exercise their right to dissent from the Merger and demand payment in cash for the fair or appraised value of their shares under the applicable provision of the TBCA such that their receipt of cash pursuant to the exercise of their appraisal rights, when combined with all other cash transactions required to be considered under GAAP, would result in the Merger not qualifying for pooling-of-interests accounting treatment under GAAP. SECTION 8.08 Tax Opinion. SWS shall have received an opinion of Jenkens & ----------- Gilchrist, P.C. or ASBI's independent public accountants, on or before the Closing Date, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and that no gain or loss will be recognized by any SWS Company or ASBI Company as a result of the Merger. SECTION 8.09 Pooling Letter. SWS shall have received a letter, dated as -------------- of the Effective Time, in a form reasonably acceptable to SWS, from Fisk & Robinson, LLP, independent public accountant to ASBI, to the effect that ASBI qualifies as an entity that may be a party to a business combination that will qualify for pooling-of-interests accounting treatment. SWS shall have received a letter, dated as of the Effective Time, in a form reasonably acceptable to SWS, from KPMG, LLP to the effect that the Merger, as it impacts SWS, will qualify for pooling-of-interests accounting treatment. In addition, there shall have been no determination by any court, tribunal, regulatory agency or other governmental entity, that the Merger fails or will fail to qualify for pooling- of-interests accounting treatment. SECTION 8.10 Fairness Opinion. SWS shall have received an opinion from ---------------- Friedman, Billings, Ramsey & Co., Inc. dated as of the date of this Agreement to the effect that in the opinion of such firm, the Exchange Ratio contemplated by this Agreement is fair to all the shareholders of SWS from a financial point of view. SECTION 8.11 Releases of Directors and Officers of ASBI Companies. SWS ---------------------------------------------------- shall have received from each of the directors of the ASBI Companies an instrument dated the Closing Date releasing the ASBI Companies from any and all claims of such directors (except to certain matters described therein), the form of which is attached as Exhibit C. SWS shall have received from each officer --------- with a title of senior vice president or higher of the ASBI Companies an instrument dated the Closing Date releasing the ASBI Companies from any and all claims of such officers (except as to certain matters described therein), the form of which is attached as Exhibit D. --------- SECTION 8.12 Non Compete and Employment Agreements. SWS shall have reached ------------------------------------- satisfactory non compete agreements with respect to those individuals listed on Schedule 8.12 of this Agreement in form and substance as Exhibit I attached - ------------- --------- hereto. Within thirty (30) days from the date of this Agreement, SWS and Richard J. Driscoll shall have agreed to the terms and conditions of a mutually agreeable employment and noncompete agreement. SECTION 8.13 Affiliate Agreements. SWS shall have received from each -------------------- affiliate of ASBI the affiliates agreement referred to in Section 5.18 of this Agreement in the form attached as Exhibit ------- 46 G to this Agreement, to the extent necessary to assure in the reasonable - - judgment of SWS that the transactions contemplated hereby will qualify for pooling-of-interests accounting treatment. SECTION 8.14 Opinion of Counsel. SWS shall have received an opinion of ------------------ counsel from Haynie, Rake & Repass, P.C. or other counsel to ASBI acceptable to SWS in substantially the form set forth in Exhibit F hereof. --------- SECTION 8.15 Compliance with the 1933 Act. SWS shall have received ---------------------------- satisfactory evidence that the offering of the SWS Common Stock pursuant to this Agreement shall have qualified for an exemption from registration under the 1933 Act and any applicable state securities laws. SECTION 8.16 Termination of Shareholder Agreement and Voting Agreement. --------------------------------------------------------- SWS shall have received satisfactory evidence that each agreement listed on Schedule 3.31 of this Agreement has been duly terminated in accordance with the - ------------- provisions thereof. SECTION 8.17 Escrow Agreement; Environmental Liabilities. ASBI shall have ------------------------------------------- taken all steps required under Section 5.19 of this Agreement and SWS shall have determined, in its sole discretion, that upon consummation of the transactions contemplated by this Agreement, none of the SWS Companies or the ASBI Companies shall have any Environmental Liability of any kind or nature relating to the Environmental Properties; or SWS shall have received an executed Escrow Agreement referred to in Section 1.13 of this Agreement in the form attached as Exhibit J to this Agreement. - --------- ARTICLE IX. TERMINATION AND ABANDONMENT SECTION 9.01 Right of Termination. This Agreement and the transactions -------------------- contemplated hereby may be terminated and abandoned at any time prior to or at the Closing (notwithstanding approval thereof by the shareholders of ASBI or SWS), as follows, and in no other manner: A. By the mutual consent of ASBI and SWS, duly authorized by the board of directors of each of ASBI and SWS. B. By either ASBI or SWS if the conditions precedent to such parties' obligations to close specified in Articles VII and VIII, respectively, hereof have not been met or waived by June 6, 2000, or such later date as has been approved by ASBI and SWS. C. By either ASBI or SWS if any of the transactions contemplated by this Agreement or the Merger Agreement are disapproved by any regulatory authority whose approval is required to consummate such transactions or if any court of competent jurisdiction in the United States or other United States (federal or state) governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining, invalidating or otherwise prohibiting the Agreement or the transactions contemplated hereby and such order, decree, ruling or other action shall have been final and nonappealable. 47 D. By SWS if it reasonably determines, in good faith and after consulting with counsel, there is substantial likelihood that any necessary regulatory approval will not be obtained or will be obtained only upon a condition or conditions that make it inadvisable to proceed with the transactions contemplated by this Agreement. E. By SWS if there shall have been any Material Adverse Change with respect to ASBI, or by ASBI if there shall have been any Material Adverse Change with respect to SWS. F. By SWS if the board of directors of SWS or the SWS Special Committee has determined, in good faith and following consultation with and after considering the advice of outside counsel, that in order to comply with its fiduciary duties to shareholders under applicable law, it is advisable for the SWS Special Committee or the full board of directors of SWS to withdraw or modify, in a manner materially adverse to ASBI, its approval or recommendation of the Merger; provided that such a determination shall not constitute a breach of Section 4.07 of this Agreement. G. By SWS if ASBI shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement or in any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, and such failure shall not have been cured within a period of thirty (30) calendar days after notice from SWS, or if any of the representations or warranties of ASBI contained herein or therein shall be inaccurate in any material respect. H. By ASBI if SWS shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement or in any other agreement contemplated hereby and such failure shall not have been cured within a period of thirty (30) calendar days after notice from ASBI, or if any of the representations or warranties of SWS contained herein or therein shall be inaccurate in any material respect. I. By SWS, if the holders of more than a certain percentage (not to exceed 9.9%) of the issued and outstanding shares of ASBI Common Stock shall have elected to exercise their right to dissent from the Merger and demand payment in cash for the fair or appraised value of their shares under the applicable provision of the TBCA such that their receipt of cash pursuant to the exercise of their appraisal rights, when combined with all other cash transactions required to be considered under GAAP, would result in the Merger not qualifying for pooling-of-interests accounting treatment under GAAP. SECTION 9.02 Notice of Termination. The power of termination provided for --------------------- by Section 9.01 hereof may be exercised only by a notice given in writing, as provided in Section 11.07 of this Agreement. SECTION 9.03 Effect of Termination. Without limiting any other relief to --------------------- which either party hereto may be entitled for breach of this Agreement, in the event of the termination and abandonment of this Agreement pursuant to the provisions of Section 9.01 hereof, no party to this 48 Agreement shall have any further liability or obligation in respect of this Agreement, except for (A) liability of a party for expenses pursuant to Section 11.02 hereof, and (B) the provisions of Article X hereof shall remain applicable. SECTION 9.04 Break-Up Fee. Nothing contained in this Agreement shall be ------------ deemed to prohibit any director or officer of ASBI or SWS from fulfilling his or her fiduciary duties to the ASBI or SWS shareholders or from taking any action required by law. Except for a breach of the covenant in Section 5.12, in lieu of any payment required by Section 9.03 of this Agreement and as the sole and exclusive remedy for any actual damages resulting from wrongful termination, misrepresentation or other breach of this Agreement, in the event that this Agreement is terminated by: (i) SWS pursuant to (a) Sections 9.01G, 9.01I or (b) pursuant 9.01B as a result of the failure of conditions set forth in 8.01, 8.07, 8.11, 8.12, 8.13, 8.14, 8.15, 8.16, and 8.17 to be satisfied, ASBI shall immediately, upon receipt of such written notice of termination from SWS, pay to SWS, by wire transfer, $2,500,000; or (ii) ASBI pursuant to (a) Sections 9.01H or (b) pursuant 9.01B as a result of the failure of conditions set forth in Sections 7.01, 7.06, 7.08, and 7.09 to be satisfied, SWS shall immediately, upon receipt of such written notice of termination from ASBI, pay to ASBI, by wire transfer, $2,500,000; or (iii) SWS pursuant to Section 9.01F, SWS shall immediately, upon delivery of such written notice of termination to ASBI, pay to ASBI, by wire transfer, $2,500,000. Notwithstanding the foregoing, no break-up fee shall be payable by either SWS or ASBI under this Section 9.04 in the event that the Agreement is terminated as a result of a breach of the representations or warranties made by either party, if such representation or warranty was true and correct as of the date of this Agreement and became untrue or inaccurate after the date of this Agreement, except for breaches and misrepresentations caused by the intentional acts or omissions of a party. 49 ARTICLE X. CONFIDENTIAL INFORMATION SECTION 10.01 Definition of "Recipient," "Disclosing Party" and ------------------------------------------------- "Representative". For purposes of this Article X, the term "Recipient" shall -------------- mean the party receiving the Subject Information (as defined in Section 10.02) and the term "Disclosing Party" shall mean the party furnishing the Subject Information. The terms "Recipient" or "Disclosing Party", as used herein, include: (A) all persons and entities related to or affiliated in any way with the Recipient or the Disclosing Party, as the case may be, and (B) any person or entity controlling, controlled by or under common control with the Recipient or the Disclosing Party, as the case may be. The term "Representative" as used herein, shall include all directors, officers, shareholders, employees, representatives, advisors, attorneys, accountants and agents of any of the foregoing. The term "person" as used in this Article X shall be broadly interpreted to include, without limitation, any corporation, company, group, partnership, governmental agency or individual. SECTION 10.02 Definition of "Subject Information". For purposes of this ----------------------------------- Article X, the term "Subject Information" shall mean all information furnished to the Recipient or its Representatives (whether prepared by the Disclosing Party, its Representatives or otherwise and whether or not identified as being non public, confidential or proprietary) by or on behalf of the Disclosing Party or its Representatives relating to or involving the business, operations or affairs of the Disclosing Party or otherwise in possession of the Disclosing Party. The term "Subject Information" shall not include information that (A) was already in the Recipient's possession at the time it was first furnished to Recipient by or on behalf of Disclosing Party, provided that such information is not known by the Recipient to be subject to another confidentiality agreement with or other obligation of secrecy to the Disclosing Party, its Subsidiaries or another party, or (B) becomes generally available to the public other than as a result of a disclosure by the Recipient or its Representatives, or (C) becomes available to the Recipient on a non-confidential basis from a source other than the Disclosing Party, its Representative or otherwise, provided that such source is not known by the Recipient to be bound by a confidentiality agreement with or other obligation of secrecy to the Disclosing Party, its Representative or another party. SECTION 10.03 Confidentiality. Each Recipient hereby agrees that the --------------- Subject Information will be used solely for the purpose of reviewing and evaluating the transactions contemplated by this Agreement and the other agreements contemplated hereby, including the Merger Agreement, and that the Subject Information will be kept confidential by the Recipient and the Recipient's Representatives; provided, however, that (A) any of such Subject Information may be disclosed to the Recipient's Representatives (including, but not limited to, the Recipient's accountants, attorneys and investment bankers) who need to know such information for the purpose of evaluating any such possible transaction between the Disclosing Party and the Recipient (it being understood that such Representatives shall be informed by the Recipient of the confidential nature of such information and that the Recipient shall direct and cause such persons to treat such information confidentially); and (B) any disclosure of such Subject Information may be made to which the Disclosing Party consents in writing prior to any such disclosure by Recipient. SECTION 10.04 Securities Law Concerns. Each Recipient hereby acknowledges ----------------------- that the Recipient is aware, and the Recipient will advise the Recipient's Representatives who are informed 50 as to the matters that are the subject of this Agreement, that the United States securities laws prohibit any person who has received material, non-public information from an issuer of securities from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. SECTION 10.05 Return of Subject Information. In the event of termination ----------------------------- of this Agreement or the Merger Agreement, for any reason, the Recipient shall promptly return to the Disclosing Party all written material containing or reflecting any of the Subject Information other than information contained in any application, notice or other document filed with any governmental agency and not returned to the Recipient by such governmental agency. In making any such filing, the Recipient will request confidential treatment of such Subject Information included in any application, notice or other document filed with any governmental agency. SECTION 10.06 Specific Performance/Injunctive Relief. Each Recipient -------------------------------------- acknowledges that the Subject Information constitutes valuable, special and unique property of the Disclosing Party critical to its business and that any breach of Article X of this Agreement by it will give rise to irreparable injury to the Disclosing Party that is not compensable in damages. Accordingly, each Recipient agrees that the Disclosing Party shall be entitled to obtain specific performance and/or injunctive relief against the breach or threatened breach of Article X of this Agreement by the Recipient or its Representatives. Each Recipient further agrees to waive, and use its reasonable efforts to cause its Representatives to waive, any requirement for the securing or posting of any bond in connection with such remedies. Such remedies shall not be deemed the exclusive remedies for a breach of Article X of this Agreement, but shall be in addition to all other remedies available at law or in equity to the Disclosing Party. ARTICLE XI. MISCELLANEOUS SECTION 11.01 Survival of Representations and Warranties. The parties ------------------------------------------ hereto agree that all of their respective representations and warranties contained in this Agreement shall not survive the Closing Date. SECTION 11.02 Expenses. SWS shall pay all of its expenses and costs -------- (including, without limitation, all counsel fees and expenses), and ASBI shall pay all of its expenses and costs (including, without limitation, all counsel fees and expenses), incurred in connection with this Agreement and the consummation of the transactions contemplated hereby. SECTION 11.03 Brokerage Fees and Commissions. SWS hereby represents to ------------------------------ ASBI that no agent, representative or broker has represented SWS in connection with the transactions described in this Agreement. ASBI shall not have any responsibility or liability for any fees, expenses or commissions payable to any agent, representative or broker of SWS, and SWS hereby agrees to indemnify and hold ASBI harmless for any amounts owed to any agent, representative or broker of SWS. ASBI hereby represents to SWS that, no agent, representative or broker has represented any of the ASBI Companies or any or all of the shareholders in connection with the transactions 51 described in this Agreement and provided, however, that ASBI's previous agreement with Keefe, Bruyette and Woods, Inc. ("KBW") has been terminated and no fee or commission is payable to KBW as a result of the transactions contemplated by the Agreement. SWS shall have no responsibility or liability for any fees, expenses or commissions payable to any agent, representative or broker of the ASBI Companies or any shareholder of ASBI, and ASBI hereby agrees to indemnify and hold SWS harmless for any amounts owed to any agent, representative or broker of the ASBI Companies or any shareholder of ASBI. SECTION 11.04 Entire Agreement. This Agreement and the other agreements, ---------------- documents, schedules and instruments executed and delivered by the parties to each other at the Closing constitute the full understanding of the parties, a complete allocation of risks between them and a complete and exclusive statement of the terms and conditions of their agreement relating to the subject matter hereof and supersede any and all prior agreements, whether written or oral, that may exist between the parties with respect thereto. Except as otherwise specifically provided in this Agreement, no conditions, usage of trade, course of dealing or performance, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this Agreement shall be binding unless hereafter or contemporaneously herewith made in writing and signed by the party to be bound, and no modification shall be effected by the acknowledgment or acceptance of documents containing terms or conditions at variance with or in addition to those set forth in this Agreement. SECTION 11.05 Further Cooperation. The parties agree that they will, at ------------------- any time and from time to time after the Closing, upon request by the other and without further consideration, do, perform, execute, acknowledge and deliver all such further acts, deeds, assignments, assumptions, transfers, conveyances, powers of attorney, certificates and assurances as may be reasonably required in order to fully consummate the transactions contemplated hereby in accordance with this Agreement or to carry out and perform any undertaking made by the parties hereunder. SECTION 11.06 Severability. In the event that any provision of this ------------ Agreement is held to be illegal, invalid or unenforceable under present or future laws, then (A) such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision were not a part hereof; (B) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid or unenforceable provision or by its severance from this Agreement; and (C) there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and still be legal, valid and enforceable. SECTION 11.07 Notices. Any and all payments (other than payments at the ------- Closing), notices, requests, instructions and other communications required or permitted to be given under this Agreement after the date hereof by any party hereto to any other party may be delivered personally or by nationally recognized overnight courier service or sent by mail or (except in the case of payments) by telex or facsimile transmission, at the respective addresses or transmission numbers set forth below and shall be effective (A) in the case of personal delivery, telex or facsimile transmission, when received; (B) in the case of mail, upon the earlier of actual receipt or five (5) business days after deposit in the United States Postal Service, first class certified or registered mail, postage prepaid, return receipt requested; and (C) in the case of nationally-recognized overnight courier service, one (1) business day after delivery to such courier service together with all 52 appropriate fees or charges and instructions for such overnight delivery. The parties may change their respective addresses and transmission numbers by written notice to all other parties, sent as provided in this Section 11.07. All communications must be in writing and addressed as follows: IF TO ASBI: Mr. Don Buchholz Chairman of the Board ASBI Holdings, Inc. 301 S. Center P.O. Box 1959 Arlington, Texas 76004-1959 Telecopy: (214)859-9309 WITH A COPY TO: Mr. Mark Haynie Haynie, Rake & Repass, P.C. 14651 Dallas Parkway, Suite 136 Dallas, Texas 75240 Telecopy: (972) 716-1850 IF TO SWS: Mr. David Glatstein President and Chief Executive Officer Southwest Securities Group, Inc. Suite 3500 1201 Elm Street Dallas, Texas 75270 Telecopy: (214)859-9309 WITH A COPY TO: Mr. Kenneth R. Hanks Southwest Securities Group, Inc. Suite 3500 1201 Elm Street Dallas, Texas 75270 Telecopy: (214)859-6020 53 Mr. Chris Knox Southwest Securities Group, Inc. Suite 3500 1201 Elm Street Dallas, Texas 75270 Telecopy: (214)859-9441 Ms. Dianne Capps Saslaw Southwest Securities Group, Inc. Suite 3500 1201 Elm Street Dallas, Texas 75270 Telecopy: (214)859-6020 Mr. Charles E. Greef Jenkens & Gilchrist, a Professional Corporation 1445 Ross Avenue, Suite 3200 Dallas, Texas 75202-2799 Telecopy: (214) 855-4300 SECTION 11.08 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLYING TO CONTRACTS ENTERED INTO AND TO BE PERFORMED WITHIN THE STATE OF TEXAS, WITHOUT REGARD FOR THE PROVISIONS THEREOF REGARDING CHOICE OF LAW. SECTION 11.09 Multiple Counterparts. For the convenience of the parties --------------------- hereto, this Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all counterparts hereof so executed by the parties hereto, whether or not such counterpart shall bear the execution of each of the parties hereto, shall be deemed to be, and shall be construed as, one and the same Agreement. A telecopy or facsimile transmission of a signed counterpart of this Agreement shall be sufficient to bind the party or parties whose signature(s) appear thereon. SECTION 11.10 Certain Definitions. ------------------- A. "Affiliate" means, with respect to any person, any person that, directly or indirectly, controls, is controlled by, or is under common control with, such person in question. For the purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with") as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. B. "ASBI Companies" shall mean, collectively, ASBI and all ASBI Subsidiaries. 54 C. "ASBI Subsidiaries" shall mean the Subsidiaries of ASBI, which shall include the ASBI Subsidiaries described in Section 3.04 of this Agreement and any corporation, bank, savings association, or other organization acquired as a Subsidiary of ASBI in the future and owned by ASBI at the Effective Time. D. "Average Closing Price" shall mean the average of the daily last sales prices of SWS Common Stock as reported on the New York Stock Exchange (as reported by The Wall Street Journal or, if not reported thereby, another authoritative source as chosen by SWS) for the ten (10) consecutive full trading days in which such shares are traded on the New York Stock Exchange. E. "Environmental Laws" mean all federal, state and local laws, regulations, statutes, ordinances, codes, rules, decisions, orders or decrees relating or pertaining to the public health and safety or the environment, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, removal, discharge or disposal of Hazardous Materials, including, without limitation, (i) the Solid Waste Disposal Act, 42 U.S.C. 6901 et seq., as ------- amended ("SWDA," also known as "RCRA" for a subsequent amending act), (ii) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)9601 et seq., as amended ("CERCLA"), (iii) the Clean Water ------- Act, 33 U.S.C. (S)1251 et seq., as amended ("CWA"), (iv) the Clean Air Act, ------- 42 U.S.C. (S)7401 et seq., as amended ("CAA"), (v) the Toxic Substances ------- Control Act, 15 U.S.C. (S)2601 et seq., as amended ("TSCA"), (vi) the ------- Emergency Planning and Community Right to Know Act, 15 U.S.C. (S)2601 et -- seq., as amended ("EPCRKA"), and (vii) the Occupational Safety and Health ---- Act, 29 U.S.C. (S) 651 et seq., as amended. ------ F. "Environmental Liabilities" mean any and all damages, costs, losses (including without limitation, diminution in value), liabilities, judgments, penalties, fines, lawsuits, obligations, deficiencies, demands and expenses (whether or not arising out of third-party claims) including, without limitation, interest, penalties, cost of mitigation, clean-up or remedial action, damages to the environment, attorneys' fees and related expenses, expert fees and all amounts paid in investigation, defense, audit or settlement of any of the foregoing relating to relating to or associated with the Environmental Properties or to any Hazardous Materials that exist or have previously existed on, about or within such properties or have been used, generated, stored, transported, disposed of on, or released from, such properties. G. "Hazardous Material" means, without limitation, (i) any "hazardous wastes" as defined under RCRA, (ii) any "hazardous substances as defined under CERCLA, (iii) any toxic pollutants as defined under CWA, (iv) any hazardous air pollutants as defined under CAA, (v) any hazardous chemicals as defined under TSCA, (vi) any hazardous substances or extremely hazardous substances as defined under EPCRKA, (vii) asbestos, (viii) polychlorinated biphenyls, (ix) underground storage tanks, whether empty, filled or partially filled with any substance, (x) any substance the presence of which on the property in question is prohibited under any Environmental Law, and (xi) any other substance which under any Environmental Law requires special handling or notification of or reporting to any federal, state or local governmental entity in its generation, use, handling, collection, 55 treatment, storage, re-cycling, treatment, transportation, recovery, removal, discharge or disposal. H. "Investment Securities" means all securities held by the Bank and reflected as an asset of the Bank in accordance with RAP. I. "Material Adverse Change" means, with respect to a particular party, any material adverse change in the financial condition, assets, properties, key employees, liabilities (absolute, accrued, contingent or otherwise), reserves, business or results of operations or prospects of the ASBI Companies or the SWS Companies, as applicable, and specifically includes any change that reduces the shareholders' equity of SWS (on a consolidated basis) by an amount equaling or exceeding $10,000,000 in the case of SWS (excluding any changes or fluctuations in the market price of SWS Common Stock or the valuation of the Knight/Trimark Group, Inc. Class A Common Stock held by SWS) or in the case of ASBI any change that reduces the shareholders' equity of ASBI (on a consolidated basis) by an amount equaling or exceeding $2,500,000 and/or the resignation of Richard J. Driscoll as an officer of ASBI or the Bank. Further an event or change affecting the banking industry or securities industry as a whole shall not be considered a Material Adverse Change unless it affects the ASBI Companies or the SWS Companies, as the case may be, to a greater degree than other similar size companies or banks. J. "Material Adverse Effect" on a party shall mean an event, change, or occurrence which, individually or together with any other event, change, or occurrence, has a material adverse impact on (i) the financial condition, results of operations, or business of such party and its Subsidiaries, taken as a whole, or (ii) the ability of such party to perform its obligations under this Agreement or to consummate the Merger or the other transactions contemplated by this Agreement. K. The term "Property" or "Properties" shall include all real property owned or leased by the ASBI Companies, including, but not limited to properties that the Bank has foreclosed on as well as their respective premises and all improvements and fixtures thereon. L. "Subsidiary" means, when used with reference to an entity, any corporation, partnership or limited liability company, twenty percent (20%) of the outstanding voting securities of which are owned directly or indirectly by such entity or any partnership, joint venture or other enterprise in which any entity has, directly or indirectly, any equity interest. M. "SWS Companies" shall mean, collectively, SWS and all SWS Subsidiaries. N. "SWS Subsidiaries" shall mean the Subsidiaries of SWS and any corporation, bank, savings association, or other organization acquired as a Subsidiary of SWS in the future and owned by SWS at the Effective Time. SECTION 11.11 Specific Performance. Each of the parties hereto -------------------- acknowledges that the other party would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the covenants contained in this Agreement were not performed in 56 accordance with its terms or otherwise were materially breached. Each of the parties hereto therefore agrees that, without the necessity of proving actual damages or posting bond or other security, the other party shall be entitled to temporary and/or permanent injunction or injunctions to prevent breaches of such performance and to specific enforcement of such covenants in addition to any other remedy to which they may be entitled, at law or in equity. SECTION 11.12 Attorneys' Fees and Costs. In the event attorneys' fees or -------------------------- other costs are incurred to secure performance of any of the obligations herein provided for, or to establish damages for the breach thereof, or to obtain any other appropriate relief, whether by way of prosecution or defense, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred therein. SECTION 11.13 Rules of Construction. Each use herein of the masculine, --------------------- neuter or feminine gender shall be deemed to include the other genders. Each use herein of the plural shall include the singular and vice versa, in each case as the context requires or as it is otherwise appropriate. The word "or" is used in the inclusive sense. All articles and sections referred to herein are articles and sections, respectively, of this Agreement and all exhibits and schedules referred to herein are exhibits and schedules, respectively, attached to this Agreement. Descriptive headings as to the contents of particular sections are for convenience only and shall not control or affect the meaning, construction or interpretation of any provision of this Agreement. Any and all schedules, exhibits, annexes, statements, reports, certificates or other documents or instruments referred to herein or attached hereto are and shall be incorporated herein by reference hereto as though fully set forth herein verbatim. SECTION 11.14 Binding Effect; Assignment. All of the terms, covenants, -------------------------- representations, warranties and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto and their respective successors, representatives and permitted assigns. Nothing expressed or referred to herein is intended or shall be construed to give any person other than the parties hereto any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provision herein contained, it being the intention of the parties hereto that this Agreement, the assumption of obligations and statements of responsibilities hereunder, and all other conditions and provisions hereof are for the sole benefit of the parties to this Agreement and for the benefit of no other person, except the Shareholders of ASBI. Nothing in this Agreement shall act to relieve or discharge the obligation or liability of any third party to any party to this Agreement, nor shall any provision give any third party any right of subrogation or action over or against any party to this Agreement. No party to this Agreement shall assign this Agreement, by operation of law or otherwise, in whole or in part, without the prior written consent of the other parties. Any assignment made or attempted in violation of this Section 11.14 shall be void and of no effect. SECTION 11.15 Public Disclosure. Neither ASBI nor SWS will make, issue or ----------------- release any announcement, statement, press release, acknowledgment or other public disclosure of the existence of, or reveal the terms, conditions or the status of, this Agreement or the transactions contemplated hereby without the prior written consent of the other party to this Agreement; provided, however, that notwithstanding the foregoing, ASBI and SWS will be permitted to make any public disclosures or governmental filings as legal counsel may deem necessary to maintain compliance with or to 57 prevent violations of applicable federal or state laws or regulations or that may be necessary to obtain regulatory approval for the transactions contemplated hereby. SECTION 11.16 Extension; Waiver. At any time prior to the Closing Date, ----------------- the parties may (A) extend the time for the performance of any of the obligations or other acts of the other party hereto, (B) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto, or (C) waive compliance with any of the agreements or conditions contained herein. Such action shall be evidenced by a signed written notice given in the manner provided in Section 11.07 hereof. No party to this Agreement shall by any act (except by a written instrument given pursuant to Section 11.07 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising any right, power or privilege hereunder by any party hereto shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver of any party of any right or remedy on any one occasion shall not be construed as a bar to any right or remedy that such party would otherwise have on any future occasion or to any right or remedy that any other party may have hereunder. SECTION 11.17 Amendments. To the extent permitted by applicable law, this ---------- Agreement may be amended by action taken by or on behalf of the board of directors of SWS and ASBI at any time before or after adoption of this Agreement by the shareholders of ASBI and SWS, but, after any submission of this Agreement to such shareholders for approval, no amendment shall be made that decreases the consideration to be paid for the ASBI Common Stock as set forth in Section 1.05 or that materially and adversely affects the rights of the shareholders of either ASBI or SWS hereunder without the requisite approval of such shareholders. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by the party against which enforcement of the amendment, modification or supplement is sought. SECTION 11.18 Binding Arbitration Relating to Environmental Escrow. Any ---------------------------------------------------- dispute submitted to arbitration pursuant to Section 1.13 shall be determined by the decision of a board of arbitration consisting of three members ("Board of Arbitration") selected as hereinafter provided. ASBI shall select an arbitrator and SWS shall select an arbitrator, each of whom shall be a member of the Board of Arbitration, and each of whom shall be independent of the parties and shall be experienced in arbitrating complex commercial transactions. A third Board of Arbitration member, independent of the parties, shall be selected by mutual agreement of the other two Board of Arbitration members. If the other two Board of Arbitration members fail to reach agreement on such third member within 10 days after their selection, such third member shall thereafter be selected by the American Arbitration Association upon application made to it for such purpose by any party to the arbitration. The Board of Arbitration shall meet in Dallas, Texas or such other place as a majority of the members of the Board of Arbitration determines more appropriate, and shall reach and render a decision in writing with respect to items in dispute. The decision shall state the facts on which it is based, be approved by at least a majority of the members of the Board of Arbitration, and shall be based on the law governing the Agreement. In connection with rendering its decisions, the Board of Arbitration shall adopt and follow the Commercial Rules of Arbitration of the American Arbitration Association in effect as of the date of the arbitration. To the extent practical, decisions of the Board of Arbitration shall be rendered and delivered to ASBI and SWS no more than 58 30 calendar days following commencement of proceedings with respect thereto, but in any event no later than December 30, 1999. The arbitrators shall limit their award to a determination of the Environmental Escrow Amount and the appropriate Escrow Period to adequately protect the SWS Companies and ASBI Companies (after the Closing Date) from any Environmental Liabilities relating to the Environmental Properties. Any decision made by the Board of Arbitration shall be final, binding and conclusive on ASBI and SWS. Each party to this Agreement shall be responsible for its own legal, expert and consultant fees and expenses incurred in connection with the arbitration proceedings. The fees and expenses of the Board of Arbitration shall be shared equally between SWS and ASBI. [Signature Page Follows] 59 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the date first above written. SWS: SOUTHWEST SECURITIES GROUP, INC. By: /s/ David Glatstein ------------------------------------- David Glatstein President and Chief Executive Officer ASBI: ASBI HOLDINGS, INC. By: /s/ Don Buchholz ------------------------------------- Don Buchholz Chairman of the Board 60 EX-10.1 3 DEFERRED COMPENSATION PLAN EXHIBIT 10.1 [LOGO OF SOUTHWEST SECURITIES APPEARS HERE] SOUTHWEST SECURITIES DEFERRED COMPENSATION PLAN Effective July 1, 1999 Table of Contents I. Establishment and Purpose 1.1 Establishment 1 1.2 Purpose........................................... 1 1.3 Effective Date of Plan............................ 1 II Definitions 2.1 Account........................................... 2 2.2 Affiliate......................................... 2 2.3 Beneficiary....................................... 2 2.4 Committee......................................... 2 2.5 Commissions....................................... 3 2.6 Company........................................... 3 2.7 Credited Interest................................. 3 2.8 Deferral Amount................................... 3 2.9 Deferral Period................................... 3 2.10 Disability or Disabled............................ 3 2.11 Discretionary Contribution........................ 3 2.12 Eligible Employee................................. 3 2.13 Employee.......................................... 3 2.14 ERISA............................................. 3 2.15 Incentive Award................................... 4 2.16 Investment Alternative............................ 4 2.17 Matching Contribution............................. 4 2.18 Participant....................................... 4 2.19 Plan.............................................. 4 2.20 Plan Year......................................... 4 2.21 Retirement Date................................... 4 2.22 Service........................................... 4 2.23 Stock............................................. 4 2.24 Vested Account.................................... 4 III. Eligibility and Participation 3.1 Eligibility....................................... 5 3.2 Participation and Classification of Participants.. 5
i IV. Determination of Contribution Amounts 4.1 Deferrals......................................... 6 4.2 Election of Deferred Amount....................... 6 4.3 Deferral Amount Election Forms.................... 7 4.4 Matching Contribution............................. 7 4.5 Discretionary Contribution........................ 7 V. Payment of Benefits 5.1 Time of Payment................................... 8 5.2 Method of Payment................................. 8 5.3 Death Benefit..................................... 9 5.4 Disability Benefit................................ 10 5.5 Beneficiary Designations.......................... 10 VI. Investment Alternatives 6.1 Participant Accounts.............................. 11 6.2 Adjustment of Accounts............................ 11 6.3 Investment Alternatives........................... 11 6.4 Credited Interest................................. 12 6.5 Vesting........................................... 12 6.6 Account Statements................................ 13 VII. Administration of Plan 7.1 Administration.................................... 14 7.2 Compensation and Expense.......................... 14 7.3 Claim Review Procedures........................... 14 7.4 Finality of Determinations........................ 16 7.5 Indemnification................................... 16 7.6 Voting of Securities.............................. 16 VIII. Provisions for Benefits 8.1 Provisions for Benefits........................... 17 IX. Amendment, Termination or Merger 9.1 Amendment and Termination......................... 18 9.2 Merger, Consolidation or Acquisition.............. 18
ii X. General Provisions 10.1 Effect on Other Plans............................. 19 10.2 Nonalienation..................................... 19 10.3 Incompetency...................................... 19 10.4 Effect of Mistake................................. 20 10.5 Plan Not an Employment Contract................... 20 10.6 Tax Withholding................................... 20 10.7 Severability...................................... 20 10.8 Applicable Law.................................... 21 10.9 Binding Effect.................................... 21
iii SOUTHWEST SECURITIES DEFERRED COMPENSATION PLAN Effective July 1, 1999 Article I Establishment and Purpose ------------------------- 1.1 Establishment. Southwest Securities Group, Inc., a corporation ------------- organized under the laws of the state of Delaware ("Company"), hereby establishes a deferred compensation plan for Eligible Employees to be known as the Southwest Securities Deferred Compensation Plan ("Plan"). 1.2 Purpose. The Plan shall provide Eligible Employees the ability to ------- defer payment of Incentive Awards and Commissions paid by the Company. In addition, the Plan shall provide a Company Matching Contribution and allow for Discretionary Contributions for selected Eligible Employees. 1.3 Effective Date of Plan. The plan is effective July 1, 1999. ---------------------- 1 Article II Definitions ----------- Pronouns and other similar words used herein in the masculine or neuter gender shall be read in the appropriate gender. The singular form of words shall be read as plural where appropriate. Where capitalized words or phrases appear in the Plan, they shall have the meaning set forth below. 2.1 "Account" means the recordkeeping account maintained in the name of a ------- Participant to which Deferral Amounts, Matching Contributions, Discretionary Contributions, and Credited Interest are recorded pursuant to the provisions of Article VI. 2.2 "Affiliate" means: --------- (a) Any corporation other than the Company (i.e., either a subsidiary corporation or an affiliate or associated corporation of the Company), which together with the Company is a member of a "controlled group of corporations" within the meaning of Section 414(b) of the Internal Revenue Code. (b) Any organization that is under "common control" with the Company determined under Section 414(c) of the Internal Revenue Code. (c) Any organization which together with the Company is a member of an "affiliated service group" within the meaning of Section 414(m) of the Internal Revenue Code. 2.3 "Beneficiary" means the person, persons, trust, or other entity ----------- designated by a Participant to receive benefit, if any, under this Plan at such Participant's death pursuant to Section 5.5. 2.4 "Committee" means the Executive Committee or such other Committee as --------- may be appointed by the Board of Directors of Southwest Securities from time to time to oversee the administration of the plan. 2 2.5 "Commissions" means any commissions paid to an Eligible Employee under ----------- the Company's Commission payment schedule, as identified on the Employer payroll system. 2.6 "Company" means Southwest Securities Group, Inc. and its Affiliates ------- and any successor thereto. 2.7 "Credited Interest" means the amount credited to a Participant's ----------------- Account pursuant to Section 6.4. 2.8 "Deferral Amount" means the portion of the Eligible Employee's --------------- Incentive Award or Commissions, which he elects to defer pursuant to Article IV. 2.9 "Deferral Period" means the period established under Section 4.1 to --------------- which a Deferral Amount election shall apply. 2.10 "Disability or Disabled" means a mental or physical condition which ---------------------- qualifies the Participant as being disabled for purposes of the Southwest Securities Long Term Disability Plan. If a participant is not covered by such plan, disability means a mental or physical condition, which in the opinion of the Committee will cause the Participant to be unable to perform usual duties of the employer for a period of at least six months. 2.11 "Discretionary Contribution" means a supplemental amount credited to a -------------------------- Participant's Account as allocated by the Committee from time to time. 2.12 "Eligible Employee" means an Employee who is designated by the ----------------- Committee as belonging to a "select group of management or highly compensated employees", as such phrase is defined under ERISA and who meets such other criteria as determined by the Committee. 2.13 "Employee" means an individual who is an employee of the Company or -------- Affiliate. 2.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. 3 2.15 "Incentive Award" means any award to an Eligible Employee under the --------------- Company's Annual Incentive Compensation Plan as it may be amended or modified from time to time or any successor plan. 2.16 "Investment Alternative" means the investment selected by the ---------------------- Participant pursuant to Section 6.3. 2.17 "Matching Contribution" means the amount credited to a Participant's --------------------- Account by the Company, as defined in Section IV. 2.18 "Participant" means an Eligible Employee who has been designated a ----------- Participant under the Plan pursuant to Section 3.2. 2.19 "Plan" means this Southwest Securities Deferred Compensation Plan, as ---- amended from time to time. 2.20 "Plan Year" means the 12-month period beginning each July 1 and ending --------- the succeeding June. 2.21 "Retirement Date" means the first day of any month after a Participant --------------- separates from service, attains age 55 and completes 10 years of Service. 2.22 "Service" means the most recent period of whole year of uninterrupted ------- service with the Employer. 2.23 "Stock" means Southwest Securities Common Stock. ----- 2.24 "Vested Account" means the vested portion of a Participant's Account -------------- as defined in Section 6.5. 4 Article III Eligibility and Participation ----------------------------- 3.1 Eligibility. Only those eligible employees selected by the Committee ----------- shall be eligible to participate in the Plan. All determinations as to an Employee's status as an Eligible Employee shall be made by the Committee. The Committee may also determine that an Employee that was previously eligible under the Plan is no longer eligible. The determinations of the Committee shall be final and binding on all Employees. The Committee shall provide each Eligible Employee with notice of the Employee's status as an Eligible Employee under this Plan and permit such Eligible Employee the opportunity to make the Deferral Amount election pursuant to Article IV. Such notice may be given at such time and in such manner as the Committee may determine. 3.2 Participation and Classification of Participants. Each Eligible ------------------------------------------------ Employee who has a Deferral Amount credited to an Account under this Plan shall be a Participant. An Eligible Employee shall continue as a Participant as long as there is a balance credited to the Participant's Account. 5 Article IV Determination of Contribution Amounts ------------------------------------- 4.1 Deferral. The Company and each affiliate which has Eligible Employees -------- shall establish a Deferral Period to which any Deferral Amount election made by such employees shall apply. Such Deferral Period shall be at least twelve months in length except for the Participant's initial Deferral Period. Only Commissions and Incentive Awards which become payable within such Deferral Period may be covered by a Deferral Amount election. For any Deferral Period, a Participant may elect to defer (up to the percentages shown below) any Incentive Award or Commission that may be payable by the Company. The amount deferred shall be specified as a percentage (deferrals made in 1% increments). (a) Incentive Awards. A Participant may elect to defer up to 50% of ---------------- an Incentive Award for the Deferral Period. (b) Commissions. A Participant may elect to defer up to 100% of ----------- Commissions received for any Deferral Period. 4.2 Election of Deferral Amount. An Eligible Employee must file a Deferral --------------------------- Amount election form for each Deferral Period for which a Deferral will be made. Such election must be made not less than 45 days prior to the commencement of the Deferral Period to which it is to apply, except that an Eligible Employee's initial election may be made within 30 days of his selection as a Participant provided no Commission or Incentive Award payable to the Participant at the date of such election shall be considered part of such Deferral Amount. For any Deferral Amount election to be effective July 1, 1999, such election must be made on or before June 30, 1999. If an Eligible Employee does not file a Deferral Amount election form within the foregoing period prior to any Deferral Period, such Eligible Employee will be deemed to have elected not to defer receipt of any Incentive Awards or Commissions which otherwise become payable during such Deferral Period. 6 Once made, an election will be in force for the entire Deferral Period. If a severe and unforeseeable financial hardship (as determined under Section 5.1) occurs during the Deferral Period, a Participant may revoke the Deferral Amount election with the consent of the Committee. Following such a revocation, a Participant may resume Deferrals only during the above-described period for the following Deferral Period by executing a new Deferral Amount election and delivering it to the Committee. 4.3 Deferral Amount Election Forms. All Deferral Amount elections shall be ------------------------------ made on a Deferral Amount election form. A Deferral Amount election form shall specify the Deferral Amount, Investment Alternative pursuant to Subsection 6.3, and the Eligible Employee's designated Beneficiary to receive any death benefit applicable to such Deferral Amounts. 4.4 Matching Contribution. The Company shall match 25% of a Participant's --------------------- annual Deferral Amount up to a maximum matching amount of $10,000 per Plan Year. Matching Contributions shall be made in Stock unless otherwise determined by the Company. Such contributions may be made at such times as determined by the Committee but shall be deemed to have been made, and number of shares to be contributed shall be determined, as of the next business day following the date on which the Deferral Amount to which the Matching Contribution relates is applied to purchase a mutual fund or Stock under Section 6.3. 4.5 Discretionary Contribution. From time to time, the Company may make -------------------------- additional contributions to selected Participants' Discretionary Account, as the Committee deems appropriate. Discretionary Contributions shall be made in Stock, unless otherwise determined by the Company. 7 Article V Payments of Benefits -------------------- 5.1 Time of Payment. Payment of the Vested Account will commence within 90 --------------- days of the earliest to occur of 1) termination prior to Retirement Date, 2) retirement after a Retirement Date, 3) death, or 4) disability. A Participant may defer commencement of payment under the Plan beyond his Retirement or termination date with the consent of the Committee, provided his request to do so is received by the Committee not less than one year prior to the date that payment would otherwise be made or commence and the Participant agrees to defer payment or commencement to a definite future date not less than two years from the date payment would otherwise be made or commence. The election must be made at least one year prior to Retirement Date. All or a portion of the Account may be paid during active employment of a Participant if he makes an election to receive such distribution two years prior to the date such distribution is to be paid or is granted approval by the Committee due to an unforeseen financial hardship withdrawal. Only one such election shall be permitted and any such election shall be irrevocable except in the case of the Participant's subsequent death or Disability. Subject to Section 5.2, all or a portion of the Participant's Account may be paid during active employment of a Participant if he makes an election to receive such distribution a least two years prior to the date such distribution is to be paid. The Committee may also permit a Participant to receive payment of all or a portion of his Vested Account to the extent he incurs a severe and unforeseeable financial hardship. An unforeseeable financial emergency will not be deemed to exist if the hardship may be relieved through other sources or cessation of Deferrals under Section 4.2 of the Plan. 5.2 Method of Payment. When a Participant becomes entitled to a ----------------- distribution, the Plan shall, except as provided below, pay the balance of the Participant's Vested Account in 10 annual installments. The first installment shall be due on the first day of the month following the Participant's Retirement or termination. Each subsequent annual installment shall be paid on the first business day in July following the initial payment and shall continue on each subsequent July 1 until all 8 installment payments have been made. The amount of the first installment shall equal one-tenth of the Vested Account on the valuation date established under Section 6.2 which coincides or immediately precedes the Participant's Retirement or termination. The amount of the second installment shall be one-ninth of the Vested Account on the valuation date coincident with or next preceding the second installment date and so forth until all installment payments have been made; provided that if any installment payment would be less than $50,000, the Plan may distribute the entire remaining Vested Account Balance. After commencement of installment payments, a Participant's Account shall continue to be adjusted in the same manner as set forth in Section 6.4. A Participant may request the Committee to authorize payment of his Vested Account balance in a lump sum. The Committee shall have the discretion to agree to such payment upon such terms and conditions, as it shall establish from time to time. Without limiting the generality of the foregoing, the Committee may require a Participant to enter into a noncompetition agreement or to execute one or more releases of claims against the Company and its Affiliates and their officers, employees and agents as a condition to such lump sum payment. The Committee may, with or without the request or consent of the Participant, require the Participant to accept a distribution of his Vested Account in a single lump sum payment. The portion of the Account invested in mutual funds shall be distributed in cash. The remaining portion, if any, invested in Stock shall be distributed in shares of Southwest Securities Common Stock. 5.3 Death Benefit. If a Participant dies with a balance credited to the ------------- Employee's Account, such balance shall be paid to the Employee's Beneficiary designated on the applicable Deferral Amount election form. The then current balance of the Vested Account payable to a designated Beneficiary shall be paid in a single lump sum payment. 9 5.4 Disability Benefit. If a Participant becomes Disabled with a balance ------------------ credited to the Employee's Account, such balance shall be paid to the Employee. The then current balance of the Vested Account shall be paid in a single lump sum payment. 5.5 Beneficiary Designations. A Participant shall designate a Beneficiary ------------------------ who, upon the Employee's death, shall receive payments that otherwise would have been paid to him under the Plan. All Beneficiary designations shall be in writing. Any such designation shall be effective only if and when delivered to the Committee during the lifetime of the Participant. If a designated Beneficiary of a Participant predeceases the Participant, the designation of such Beneficiary shall be void. If a Participant fails to designate a Beneficiary with respect to any death benefit payments or if such designation is ineffective, in whole or in part, any payment that otherwise would have been paid to such Participant shall be paid to the Employee's surviving spouse or, if none, to the Employee's estate. 10 Article VI Accounts and Credited Interest ------------------------------ 6.1 Participant Accounts. The Committee shall maintain, or cause to be -------------------- maintained, a bookkeeping Account for each Participant for the purpose of accounting for the Participant's interest under the Plan. The Committee shall maintain within each Participant's Account such Deferral Amount, Matching Contributions, and Discretionary Contribution subaccounts as may be necessary as well as Credited Interest allowable. In addition to the foregoing bookkeeping subaccounts maintained for each Participant, the Committee shall maintain, or cause to be maintained, such other accounts, subaccounts, records or books as it deems necessary to properly provide for the maintenance of Accounts and to carry out the intent and purpose of the Plan. 6.2 Adjustment of Accounts. Each Participant's Account shall be adjusted ---------------------- to reflect all Deferral Amounts, Matching Contributions, and Discretionary Contributions credited to the Employee's Account, all Credited Interest and other positive or negative earnings credited or debited to the Employee's Account as provided by Section 6.4, and all benefit payments charged to the Employee's Account. A Participant's Deferral Amount shall be credited to such Participant's Account as soon as possible on or after the date on which the amount being deferred would have become payable to the Participant absent the deferral election. Credited Interest and other earnings shall be credited to the Participant Accounts pursuant to Section 6.4. Changes to a Participant's Account to reflect benefit payments shall be made as of the date of any such payment. As of any relevant date, the balance standing to the credit of a Participant's Account, and each separate subaccount comprising such Account, shall be the respective balance in such Account and the component subaccounts as of the close of business on such date after all applicable credits, debits and charges have been posted. 6.3 Investment Alternatives. Participants may elect or modify an ----------------------- Investment Alternative for Deferral Amounts from the following in accordance with such procedures and limitations as approved by the Committee: (a) Mutual Funds. A Participant may request that all or a portion of ------------ his Deferral Amount be invested in selected mutual fund(s) 11 approved by the Committee from time to time. The purchase price used for any shares or units of mutual funds held in Participant Accounts shall be based on the price of such shares or units on the date such shares or units are actually purchased with such Deferral Amount. (b) Company Stock. A Participant may request that all or a portion of ------------- his Deferral Amount be invested in Stock. The purchase price used for Stock units held in Participant Accounts shall be based on the Stock price on the date such Stock is actually purchased with such Deferral Amount. 6.4 Credited Interest. Credited Interest shall be based on the returns on ----------------- mutual fund(s) and Company Stock weighted in accordance with the Participant's investment allocation. Each Participant's Account shall be credited, or debited as the case may be, with Credited Interest on the balance in such Account. Credited Interest shall be allocated to the appropriate subaccount balances within such Account. Credited Interest shall be credited to Accounts on a quarterly basis at the end of each calendar quarter. Not withstanding anything to the contrary above, Credited Interest on Matching Contributions and Discretionary Contributions shall be based solely on Stock returns. 6.5 Vesting. Subject to the conditions and limitations on payment of ------- benefits under the Plan, a Participant's Deferral Amount subaccount shall be 100% vested as of any relevant date. Company Matching Contributions and Discretionary Contributions shall be vested 25% per year on a class year basis. The entire balance of the Account shall be 100% vested upon death, Disability, or retirement after Retirement Date. Notwithstanding the foregoing, if a Participant is terminated due to theft or other dishonesty or if the Participant violates any obligation to which he is subject to refrain from competition or disclosure of confidential information, the Committee may require the Participant to forfeit any portion of his Vested Account derived from 12 Matching or Discretionary Contributions and any earnings or appreciation of his Deferral Amounts. 6.6 Account Statements. The Committee shall provide each Participant with ------------------ a statement of the status of the Employee's Account under the Plan. The Committee shall provide such statement annually or at such other times as the Committee may determine. Such statement shall be in the format prescribed by the Committee. 13 Article VII Administration of the Plan -------------------------- 7.1 Administration. The Plan shall be administered by the Committee. A -------------- majority of the members of the Committee shall constitute a quorum. The acts of a majority of a quorum of the Committee at a meeting or acts approved in writing by a majority of the Committee without a meeting shall be the acts of the Committee. The Committee shall have the discretionary authority to make such rules as it deems necessary to administer the Plan, to interpret the Plan, to decide questions arising under the Plan, and to take such other action as may be appropriate to carry out the purpose of the Plan. The Committee is authorized to employ attorneys, accountants or any other agents or delegate specified duties to employees of the Company as it shall deem proper in the discharge of its duties. The Committee shall be the "plan administrator" and the Company shall be the "named fiduciary" as such terms are defined by ERISA. 7.2 Compensation and Expenses. Any member of the Committee may receive ------------------------- reimbursement by the Company for expenses properly and actually incurred. All expenses of the Committee shall be paid by the Company. Such expenses shall include any expenses incident to the functioning of the Committee or the Plan, including, but not limited to, fees of actuaries, accountants, legal counsel and other specialists, and other costs of administering the Plan. 7.3 Claims Review Procedures. ------------------------ (a) Denial of Claim. If a claim for benefits is wholly or partially denied, the claimant shall be given notice in writing of the denial within a reasonable time after the receipt of the claim, but not later than 90 days after the receipt of the claim. However, if special circumstances require an extension, written notice of the extension shall be furnished to the claimant before the termination of the 90-day period. In no event shall the extension exceed a period of 90 days after the expiration of the initial 90-day period. The notice of the denial shall contain the following information written in a manner that may be understood by the claimant: 14 (1) The specific reasons for the denial. (2) Specific reference to pertinent Plan provisions on which the denial is based. (3) A description of any additional material or information necessary for the claimant to make a claim and an explanation of why such material or information is necessary. (4) An explanation that a full and fair review by the Committee of the denial may be requested by the claimant or authorized representative by filing a written request for a review with the Committee within 60 days after the notice of the denial is received; and (5) If a request for a review is filed, the claimant or an authorized representative may review pertinent documents and submit issues and comments in writing within the 60-day period described in Section 7.3(a)(4). (b) Decision After Review. The decision of the Committee with respect --------------------- to the review of the denial shall be made promptly, but not later than 60-days after the Committee receives the request for the review. However, if special circumstances require an extension of time, a decision shall be rendered not later than 120 days after the receipt of the request for review. A written notice of the extension shall be furnished to the claimant prior to the expiration of the initial 60-day period. The claimant shall be given a copy of the decision, which shall state, in a manner calculated to be understood by the claimant, the specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 15 7.4 Finality of Determinations. All determinations of the Committee as to -------------------------- any matter arising under the Plan, including questions of construction and interpretation shall be final, binding and conclusive upon all interested parties. 7.5 Indemnification. To the extent permitted by law and the Company's --------------- bylaws, the members of the Committee, its agents, and the officers, directors and employees of the Company shall be indemnified and held harmless by the Company from and against any and all loss, cost, liability or expense that may be imposed upon or may be reasonably incurred by them in connection with or resulting with any claim, action, suit or proceeding to which they be a party or which they may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by them in settlement with the Company's written approval or paid by them in satisfaction of a judgement in any such action, suit or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability or expense is due to such person's gross negligence or willful misconduct. 7.6 Voting of Securities. The Committee shall direct the Trustee as to the -------------------- manner in which voting, dissenter's rights or other stockholder's rights of any securities held by the trust created by Article VIII shall be exercised. 16 Article VIII Provisions For Benefits ----------------------- 8.1 Provisions For Benefits. Amounts payable under the Plan to or on ----------------------- account of an Eligible Employee shall be paid, directly or indirectly, from assets of the trust established by the Company for such payment, the assets of which shall be subject to the claims of creditors of the Company in the event of the Company's insolvency. The Company shall make contributions to the trust in amounts that are reasonably estimated to be sufficient to satisfy the Company's obligations to make benefit payments under the Plan. To the extent that the assets of the trust are not sufficient to make benefit payments hereunder, amounts payable under the Plan shall be paid directly by the Company from its general assets. No assets of the Company shall be used solely for the purpose of providing benefits hereunder (except as to the amounts paid or payable to the trust established for this Plan), and the Company's obligation to pay such benefits is not limited to any particular assets of the Company. The Company's obligation to make credits to the Accounts of each Eligible Employee is merely a contractual obligation, and an Eligible Employee shall be treated as a general creditor of the Company with respect to any amounts credited to his Account. 17 Article IX Amendment, Termination, or Merger --------------------------------- 9.1 Amendment and Termination. The Board of Directors of the Company may ------------------------- amend, modify or terminate the Plan at any time and in any manner. In the event of a termination of the Plan, no further Deferral Amount elections shall be made under the Plan. Amounts which are then payable or which become payable under the terms of the Plan shall be paid as scheduled under the provisions of the Plan, unless the Committee directs the payments be accelerated. 9.2 Merger, Consolidation or Acquisition. In the event of a merger, ------------------------------------ consolidation, or acquisition or other reorganization in which the Company is not the surviving or resulting corporation, the Plan shall terminate on the effective date of such reorganization unless the Committee determines the Plan should continue and the surviving or resulting corporation elects to continue and carry on the Plan. In such an event, the surviving or resulting corporation shall have the same rights with respect to the Plan as the Company. If the Plan is terminated as part of a reorganization, all Accounts shall be considered fully vested at such date and participants shall receive payment of their Accounts pursuant to Section 5.2. 18 Article X General Provisions ------------------ 10.1 Effect on Other Plans. Deferred Amounts shall not be considered as --------------------- part of a Participant's compensation for the purpose of any qualified employee pension plans maintained by the Company. However, such amounts may be taken into account under all other employee benefit plans maintained by the Company in the year in which such amounts would have been payable absent the deferral election; provided, such amounts shall not be taken into account if their inclusion would jeopardize the tax-qualified status of the plan to which they relate. 10.2 Nonalienation. Except as otherwise required by law, no benefit ------------- payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge, or otherwise encumber any such benefit, whether presently or hereafter payable, shall be void. No benefit payable under the Plan shall in any manner be liable for or subject to the debts or liabilities of any Participant or Beneficiary entitled to any benefit. Without limiting the generality of the foregoing, no benefit payable or in pay status under the Plan shall be subject to division in connection with any divorce or separation proceeding involving a Participant. 10.3 Incompetency. Any person receiving or claiming benefits under the ------------ Plan shall be conclusively presumed to be mentally competent until the date on which the Committee receives written notice, in an acceptable form and manner, that such person is incompetent and a guardian or other person legally vested with the care of the Employee's estate has been appointed. If the Committee finds that any person to whom a benefit is payable under the Plan is unable to care for the Employee's affairs because of any disability or infirmity and no legal guardian of such person's estate has been appointed, any payment due may be paid to the spouse, a child, a parent, a sibling, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment. Any such payment so made shall be a complete discharge of any liability therefor under the Plan. If a guardian of the estate of any person receiving or claiming benefits under the Plan shall be appointed by a court of competent jurisdiction, benefit payments shall be made to such guardian, provided 19 proper proof of appointment and continuing qualification is furnished in the form and manner acceptable to the Committee. Any such payment so made shall be a complete discharge of any liability therefor under the Plan. 10.4 Effect of Mistake. If, in the sole opinion of the Committee, a ----------------- material mistake or misstatement occurs with respect to the eligibility of a Participant, the amount of benefit payments made or to be made to or with respect to a Participant, the Investment Alternative selected by a Participant or other matters related to the administration of the Plan, the Committee may make such adjustments as it deems appropriate to correct such mistake or misstatement. To the extent that the Committee determines that such mistake or misstatement results from an act or failure to act of a Participant, the Committee may require the Participant to hold the Plan harmless from any loss or expense incurred by it. 10.5 Plan Not an Employment Contract. This Plan is not an employment ------------------------------- contract and does not confer on any person the right to be continued in employment. All Employees remain subject to change of salary, transfer, change of job, discipline, layoff, discharge or any other change of employment status. 10.6 Tax Withholding. The Company or other payor may withhold from a --------------- benefit payment or Deferral Amount any federal, state or local taxes required by law to be withheld with respect to such payment or Deferral Amount. All contributions will be subject to FICA tax as required by federal law. In the event the Deferred Amount is invested in Stock the Participant's Account does not contain sufficient cash for the required withholding, the Company or other payor may sell shares of Stock to supply sufficient cash to fund the required withholding. 10.7 Severability. If any provision of the plan is held invalid or illegal ------------ for any reason, any illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had never been contained therein. The Company shall have the privilege and opportunity to correct and remedy such questions of illegality or invalidity by amendment. 20 10.8 Applicable Law. The Plan shall be governed and construed in -------------- accordance with the laws of the State of Texas, except to the extent such laws are preempted by any applicable federal law. No reference to ERISA in the Plan shall be construed to mean that the Plan is subject to any particular provisions of ERISA. 10.9 Binding Effect. This Plan shall be binding upon the Company, its -------------- Affiliates and their respective successors and assigns and upon the Participant and each Participant's Beneficiary, heirs, executors, administrators, representatives, successors and assigns. IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officers, effective as of July 1, 1999. ATTEST: SOUTHWEST SECURITIES By: /s/ Jim Zimcosky By: /s/ Stacy Hodges --------------------------------- --------------------------------- Jim Zimcosky Stacy Hodges Southwest Securities, Inc. Southwest Securities Group, Inc. Director of Human Resources Executive Vice President, Chief Financial Officer and Treasurer 21 EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Southwest Securities Group, Inc. and Subsidiaries Statement Re Computation of Ratio of Earnings to Fixed Charges (In thousands, except ratio)
Fiscal Years Ended June 25, June 26, June 27, June 28, June 30, 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------- Income before income taxes $ 40,520 $ 31,898 $ 25,743 $ 21,757 $ 8,755 Add fixed charges: Interest expense 99,951 100,704 83,238 69,092 42,308 Interest factor in rents /(1)/ 1,776 1,611 1,057 848 697 ----------------------------------------------------------------------------- Total fixed charges 101,727 102,315 84,295 69,940 43,005 ----------------------------------------------------------------------------- Earnings before fixed charges and income taxes $ 142,247 $ 134,213 $ 110,038 $ 91,697 $ 51,760 ============================================================================= Ratio of earnings to fixed charges 1.4 1.3 1.3 1.3 1.2 =============================================================================
/(1)/ The Company estimates that one-third of rental expense is representative of the interest factor. EX-23 5 CONSENT OF KPMG LLP Exhibit 23 - Consent of Independent Auditors The Board of Directors Southwest Securities Group, Inc.: We consent to incorporation by reference in the registration statement (No. 33- 86234) on Form S-8 of Southwest Securities Group, Inc. of our report dated July 27, 1999, except as to the second paragraph of Note 19 which is as of August 6, 1999 and Note 18 which is as of August 10, 1999, relating to the consolidated statements of financial condition of Southwest Securities Group, Inc. and subsidiaries as of June 25, 1999 and June 26, 1998, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended June 25, 1999, and related schedule, which report appears in the June 25, 1999, annual report on Form 10-K of Southwest Securities Group, Inc. KPMG LLP Dallas, Texas September 23, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
BD YEAR JUN-25-1999 JUN-27-1998 JUN-25-1999 11,334 3,767,657 197,271 2,987,910 74,486 11,189 4,293,274 0 3,812,655 0 2,954,007 24,350 50,000 0 0 1,180 261,104 4,293,274 41,689 147,006 65,048 29,100 40,118 99,951 124,691 40,520 40,520 0 0 26,219 2.23 2.21 A 10% stock dividend was declared by the Board of Directors on May 6, 1999, payable August 2, 1999 to shareholders of record on July 15, 1999. Prior Financial Data Schedules have not been restated for this stock dividend.
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