SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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Capital Southwest Corporation
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(Name of Registrant as Specified In Its Charter)
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June 6, 2003
To the Shareholders of Capital Southwest Corporation:
The Annual Meeting of Shareholders of our Corporation will be held on
Monday, July 21, 2003, at 10:00 a.m. in the North Dallas Bank Tower Meeting Room
(First Floor), 12900 Preston Road, Dallas, Texas.
A Notice of the Annual Meeting, a proxy and a proxy statement
containing information about matters to be acted upon are enclosed. Holders of
Common Stock are entitled to vote on the basis of one vote for each share held.
If you attend the Annual Meeting, you retain the right to vote in person even
though you previously voted by the enclosed proxy.
It is important that your shares be represented at the meeting whether
or not you are personally in attendance. Please review the proxy statement and
sign, date and return the enclosed proxy at your earliest convenience. I look
forward to meeting with you and, together with our directors and officers,
discussing the Corporation's business. I hope you will be present.
Very truly yours,
/s/ William R. Thomas
---------------------
William R. Thomas
President and Chairman of the Board
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 21, 2003
To the Shareholders of Capital Southwest Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of
Capital Southwest Corporation, a Texas corporation (the "Corporation"), will be
held on Monday, July 21, 2003, at 10:00 a.m., Dallas time, in the Meeting Room
(First Floor) of the North Dallas Bank Tower, 12900 Preston Road, Dallas, Texas,
for the following purposes:
1. To elect five directors to serve until the next Annual Meeting of
Shareholders or until their respective successors shall be elected and
qualified.
2. To ratify the appointment by the Audit Committee of Ernst & Young LLP
as independent auditors for the Corporation.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only holders of Common Stock of the Corporation of record at the close of
business on June 2, 2003 will be entitled to notice of, and to vote at, the
meeting and any adjournment thereof.
If you do not expect to attend in person, please sign, date and return
the proxy in the enclosed envelope. No postage is required for mailing in the
United States.
By Order of the Board of Directors
SUSAN K. HODGSON
Secretary
Dallas, Texas
June 6, 2003
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 21, 2003
This proxy statement is furnished in connection with the solicitation
by the Board of Directors of Capital Southwest Corporation, a Texas corporation,
of proxies to be voted at the annual meeting of shareholders to be held on July
21, 2003 or any adjournment thereof. The date on which this proxy statement and
the enclosed form of proxy are first being sent or given to shareholders of the
Corporation is on or about June 6, 2003.
PURPOSES OF THE MEETING
The Annual Meeting of the Shareholders is to be held for the purposes
of (1) electing five persons to serve as directors of the Corporation until the
next annual meeting of shareholders, or until their respective successors shall
be elected and qualified; (2) ratifying the appointment by the Audit Committee
of Ernst & Young LLP as independent auditors for the Corporation; and (3)
transacting such other business as may properly come before the meeting or any
adjournment thereof.
To be elected a director, each nominee must receive the favorable vote
of the holders of a majority of the shares of common stock entitled to vote and
represented at the annual meeting. In order to ratify the appointment of Ernst &
Young LLP as independent auditors for the Corporation for the year ending March
31, 2004, the ratification proposal must receive the favorable vote of a
majority of the shares of common stock entitled to vote and represented at the
annual meeting.
VOTING AT THE MEETING
The record date for holders of common stock entitled to notice of, and
to vote at, the annual meeting of shareholders is the close of business on June
2, 2003, at which time the Corporation had outstanding and entitled to vote at
the meeting 3,829,051 shares of common stock.
The presence, in person or by proxy, of the holders of a majority of
the shares of common stock outstanding and entitled to vote at the annual
meeting is necessary to constitute a quorum. In deciding all questions, a
shareholder shall be entitled to one vote, in person or by proxy, for each share
of common stock held in its name at the close of business on the record date.
Shareholders who are present, in person or by proxy, but abstain from voting on
any item will be counted as present at the meeting, but not voting on any such
item. Similarly, nominees (such as broker-dealers) who are present, in person or
by proxy, but abstain or refrain from voting on any item, will be counted as
present at the meeting, but not voting on any such item.
1
Each proxy delivered to the Corporation, unless the shareholder
otherwise specifies therein, will be voted FOR the election as directors of the
persons nominated as directors and FOR the ratification of the appointment by
the Audit Committee of the Board of Directors of Ernst & Young LLP as
independent auditors. In each case where the shareholder has appropriately
specified how the proxy is to be voted, it will be voted in accordance with the
specification. As to any other matter or business which may be properly brought
before the meeting, a vote may be cast pursuant to the accompanying proxy in
accordance with the judgment of the person or persons voting the same, but
neither management nor the Board of Directors of the Corporation knows of any
such other matter or business. Any shareholder has the power to revoke its proxy
at any time insofar as it is then not exercised by giving notice of such
revocation, either personally or in writing, to the Secretary of the Corporation
or by the execution and delivery to the Corporation of a new proxy dated
subsequent to the original proxy.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of common stock of the Corporation as of May 1, 2003 by (1)
each person, so far as is known to the management of the Corporation, who is the
beneficial owner (as that term is defined in the rules and regulations of the
Securities and Exchange Commission ("SEC")) of more than 5% of the outstanding
common stock, (2) each executive officer listed in the Summary Compensation
Table, (3) each director of the Corporation, and (4) all directors and executive
officers of the Corporation as a group. Unless otherwise indicated below, each
of the persons named in the table has sole voting and investment power with
respect to the shares indicated to be beneficially owned.
Name and Address Shares Owned Percent
of Beneficial Owner Beneficially of Class
------------------- ------------ --------
William R. Thomas
12900 Preston Rd., Suite 700
Dallas, Texas 75230....................... 962,022 (1)(2)(3) 25.1%
Third Avenue Management LLC
622 Third Avenue, 32nd Floor
New York, New York 10017.................. 372,897 (4) 9.7
Artisan Partners Limited Partnership
1000 North Water Street #1770
Milwaukee, Wisconsin 53202............... 334,103 (5) 8.7
2
Name and Address Shares Owned Percent
of Beneficial Owner Beneficially of Class
------------------- ------------ --------
Gary L. Martin
12900 Preston Rd., Suite 700
Dallas, Texas 75230...................... 226,124 (2)(3) 5.9
First Manhattan Company
437 Madison Avenue
New York, New York 10022................. 208,212 (6) 5.4
Patrick F. Hamner......................... 132,958 (2)(3) 3.5
Graeme W. Henderson....................... 4,700 (7) 0.1
James M. Nolan............................ 4,000 0.1
William M. Ashbaugh....................... 1,500 (3) -
John H. Wilson............................ 1,000 -
All directors and executive officers
as a group (8 persons)....................1,126,363 (8) 29.1
- -----------
(1) Mr. Thomas has sole voting and investment power with respect to 611,660
shares, which include 75,948 shares owned by his two children and
206,525 shares owned by Thomas Heritage Partners, Ltd., in which Mr.
Thomas has a 50.7% limited partnership interest. Mr. Thomas holds a
majority interest in and is President and sole manager of Thomas
Heritage Company, LLC, the sole general partner of Thomas Heritage
Partners, Ltd.
(2) Mr. Thomas is a trustee of certain trusts pursuant to employee stock
ownership plans for employees of the Corporation and its wholly-owned
portfolio companies owning 256,218 shares, with the power as trustee to
vote such shares. Mr. Thomas also participates in the power to direct
the trustees in the voting of 88,144 shares owned by a trust pursuant
to a pension plan for employees of the Corporation and certain
wholly-owned portfolio companies of the Corporation. Accordingly, Mr.
Thomas has shared voting and investment power with respect to the
344,362 shares, representing 9.0% of the outstanding common stock of
the Corporation, owned by the aforementioned trusts. Under the rules
and regulations of the SEC, Mr. Thomas is deemed to be the beneficial
owner of such 344,362 shares, which are included in the shares
beneficially owned by Mr. Thomas.
Mr. Martin serves as trustee, with Mr. Thomas, of one of the
aforementioned trusts owning 31,711 shares and participates in the
power to direct the trustees in the voting of 88,144 shares owned by
the other aforementioned trust. Accordingly, Mr. Martin has shared
voting and investment power with respect to the 119,855 shares. Under
3
the rules and regulations of the SEC, Mr. Martin is deemed to be the
beneficial owner of such 119,855 shares, which are included in the
shares beneficially owned by Mr. Martin. Of the shares owned by a trust
pursuant to the aforementioned employee stock ownership plans, 4,064
were allocated to Mr. Martin, all of which were vested.
Mr. Hamner, with Messrs. Thomas and Martin, participates in the power
to direct the trustees in the voting of 88,144 shares owned by one of
the aforementioned trusts. Under the rules and regulations of the SEC,
Mr. Hamner is deemed to be the beneficial owner of such 88,144 shares,
which are included in the shares beneficially owned by Mr. Hamner.
(3) Includes 1,500, 19,750, 14,000 and 6,000 shares subject to immediately
exercisable stock options held by Messrs. Ashbaugh, Hamner, Martin and
Thomas, respectively.
(4) As reported to the Corporation by Third Avenue Management LLC, Third
Avenue or Martin J. Whitman, individually, had shared voting and
dispositive power with respect to none of such shares, sole voting
power with respect to 365,427 shares and sole dispositive power with
respect to 372,897 shares by reasons of advisory and other
relationships with the persons who own the shares. Third Avenue and
Martin J. Whitman beneficially own 348,653 and 24,244, respectively, of
such shares.
(5) As reported to the Corporation by Artisan Partners Limited Partnership,
Artisan Partners or Artisan Investment Corporation or Andrew A.
Ziegler, individually, or Carlene Murphy Ziegler, individually, had
sole voting and dispositive power with respect to none of such shares
and shared voting and dispositive power with respect to 334,103 shares
by reasons of advisory and other relationships with the persons who own
the shares. Artisan Partners is an investment adviser; Artisan
Investment is the General Partner of Artisan Partners; and Mr. Ziegler
and Ms. Ziegler are the principal stockholders of Artisan Investment.
(6) As reported to the Corporation by First Manhattan Co., First Manhattan
had sole voting and dispositive power with respect to 1,000 shares,
shared voting power with respect to 196,987 shares and shared
dispositive power with respect to 207,212 shares by reasons of advisory
and other relationships with the persons who own the shares.
(7) Includes 1,500 shares held by a retirement trust for the benefit of Mr.
Henderson.
(8) Includes (a) the shares owned by the partnership and trusts referred to
in notes (1) and (2), respectively, to the above table, (b) 43,250
shares subject to immediately exercisable stock options (including
those referred to in note (3) to the above table), (c) 1,500 shares
held in a retirement trust for the benefit of Mr. Henderson and (d)
75,948 shares owned by immediate family members of Mr. Thomas.
PROPOSAL 1: ELECTION OF DIRECTORS
Five directors are proposed to be elected at the meeting to serve until
the next annual meeting of shareholders or until their respective successors
shall be elected and qualified. Each of the named persons currently serves as a
director of the Corporation.
4
Nominees for Director
Other
Term of Principal Directorships
Position(s) Office and Occupation(s) Held by Director
held with Length of During Past or Nominee
Name and Age Fund Time Served 5 Years for Director
- -------------------- ---------- ----------- ------------------- ----------------
Graeme W. Henderson Director One year; Self-employed as
Age 69 director since a private investor
1976 and consultant
James M. Nolan Director One year; Self-employed as
Age 69 director a private investor
since 1980 and consultant to the
telecommunications
industry
John H. Wilson Director One year; President of U.S. Equity Encore Wire
Age 60 director since Corporation, a venture Corporation and
1988 capital investment firm Palm Harbor
Homes, Inc.
The following directors, who are officers of the Corporation, are "interested
persons" as defined in the Investment Company Act.
Gary L. Martin Vice President One year; President of The
Age 56 and Director Vice President Whitmore Manufacturing
since 1984 and Company and Vice
director since President of the
1988 Corporation
William R. Thomas President and One year; President and Alamo Group
Age 74 Chairman of President since Chairman of the Board Inc., Encore Wire
the Board 1980, Chairman Corporation, and
since 1982 and Palm Harbor
director since 1972 Homes, Inc.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Corporation has established an Audit
Committee and a Compensation Committee to assist the Board in carrying out its
duties. As provided in the Amended and Restated Audit Committee Charter attached
hereto as Exhibit A, the Audit Committee represents the Board of Directors in
fulfilling its responsibility to shareholders relating to: the integrity of the
Corporation's financial statements; the financial reporting process; the systems
of internal accounting and financial controls; the performance of the
5
Corporation's independent auditors; the independent auditors' qualifications and
independence; and the Corporation's compliance with ethics policies and legal
and regulatory requirements relating to financial statements and reporting. The
Audit Committee engages the independent auditors, subject to ratification by the
Corporation's shareholders, and approves the fee and scope of audit and
non-audit services. The Compensation Committee periodically reviews and approves
the compensation, employee benefit plans and other fringe benefits paid to or
provided for officers and employees of the Corporation; reviews and approves the
annual salaries and bonuses of the chief executive officer and other officers
and key employees of the Corporation, including any stock options granted to
such officers or key employees; and reviews and recommends to the Board of
Directors the fees for directors of the Corporation. The Compensation Committee
also reviews and approves the compensation of the chief executive officers of
certain wholly-owned portfolio companies of the Corporation. The Corporation
does not have a Nominating Committee.
Messrs. Graeme W. Henderson, James M. Nolan and John H. Wilson are
presently members of both the Audit and Compensation Committees. During the
fiscal year of the Corporation ended March 31, 2003, six meetings of the Board
of Directors were held. In addition, two meetings (including one telephone
meeting) of the Compensation Committee and three meetings of the Audit Committee
were held. Each of the directors attended at least 75% of the aggregate of (1)
the total number of meetings of the Board of Directors and (2) the total number
of meetings held by all committees on which he served.
All three members of both the Audit Committee and the Compensation
Committee are independent as defined by Rule 4200(a)(14) of the National
Association of Securities Dealers, Inc. listing standards and Section 301 of the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley").
REPORT OF THE AUDIT COMMITTEE
The Audit Committee consists of three members of the Corporation's
Board of Directors. Each member is an independent director as required by
Sarbanes-Oxley and Nasdaq. In addition, the Board of Directors has determined
that Graeme W. Henderson is an Audit Committee Financial Expert as defined by
SEC rules. The duties and responsibilities of the Audit Committee are set forth
in the Amended and Restated Audit Committee Charter, which the Board of
Directors adopted on May 27, 2003. A copy of the Amended and Restated Audit
Committee Charter is attached hereto as Exhibit A.
---------
The Audit Committee oversees the Corporation's financial reporting
process on behalf of the Board of Directors. Management has the primary
responsibility for the financial statements and the reporting process, including
the Corporation's system of internal control. In fulfilling its oversight
responsibilities, the Audit Committee reviewed the audited consolidated
financial statements in the Annual Report with management, including a
discussion of the quality, not just the acceptability, of the accounting
principles; the reasonableness of the valuation of restricted securities and
other significant judgments; and the clarity of disclosures in the financial
statements.
6
The Audit Committee reviewed with the independent auditors (KPMG LLP),
who are responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Corporation's
accounting principles and such other matters as are required to be discussed
with the Audit Committee under generally accepted auditing standards. The Audit
Committee discussed with the independent auditors (KPMG LLP) the matters
required to be discussed by Statement on Auditing Standards No. 61, as amended.
In addition, the Audit Committee discussed with the independent auditors (KPMG
LLP) the auditors' independence from management and the Corporation, including
the matters in the written disclosures and letter received from the independent
auditors (KPMG LLP) as required by the Independence Standards Board Standard No.
1, and considered the compatibility of non-audit services with the auditors'
independence.
The Audit Committee discussed with the Corporation's independent
auditors (KPMG LLP) the overall scope and plans for their audit. The Audit
Committee also met with the independent auditors (KPMG LLP), with and without
management present, to discuss the results of their audit, their evaluation of
the Corporation's internal controls and the overall quality of the Corporation's
financial reporting.
Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the board has approved)
that the audited consolidated financial statements be included in the Annual
Report on Form 10-K for the fiscal year ended March 31, 2003 for filing with the
SEC.
On April 24, 2003, the Audit Committee voted unanimously to dismiss
KPMG LLP and, subject to ratification by the Corporation's shareholders, to
appoint Ernst & Young LLP to serve as the Corporation's independent auditors for
the fiscal year ending March 31, 2004.
Audit Committee
Graeme W. Henderson, Chairman
James M. Nolan
John H. Wilson
REPORT OF THE COMPENSATION COMMITTEE
The goals of the Corporation's compensation program are to attract,
retain and motivate competent executive officers who have the experience and
ability to contribute to the success of the Corporation's investment management
activities. The individual judgments made by the Compensation Committee are
subjective and are based largely on the recommendations of the Corporation's
chief executive officer and the Compensation Committee's perception of each
executive's contribution to both the past performance and the long-term growth
potential of the Corporation. The principal elements of compensation for
executive officers are base salary, discretionary bonus payments, stock options
granted under the Stock Option Plan and contributions pursuant to the Employee
Stock Ownership Plan.
7
Base salaries were determined by the Compensation Committee in July
2002 for each of the executive officers on an individual basis, taking into
consideration individual contributions to the Corporation's performance, length
of tenure with the Corporation, compensation levels for comparable positions and
internal equities among positions. In addition to base salaries, certain
executive officers received bonus payments in March 2003, the amounts of which
were determined by the Compensation Committee on a discretionary basis.
In July 2002, the Compensation Committee established the base salary of
the Corporation's chief executive officer, William R. Thomas, at $250,000 per
annum, a continuation of the level established in July 1993. At Mr. Thomas'
request, he was not awarded a year-end bonus in March 2003 or in the two
preceding years.
No stock options were granted during the fiscal year ended March 31,
2003. On that date, options to purchase a total of 82,500 shares were
outstanding, representing a 2.1% fully-diluted equity interest.
An additional equity incentive is provided by the Corporation's
Employee Stock Ownership Plan, to which the Corporation contributed 5.0% of each
participating employee's covered compensation for the fiscal year ended March
31, 2003.
Compensation Committee
James M. Nolan, Chairman
Graeme W. Henderson
John H. Wilson
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation of Directors
In addition to reimbursement of travel expenses for attendance at board
meetings, a director who is not an employee of the Corporation receives an
annual fee of $16,000 for service as a director and $6,000 for service as
chairman of a committee of the Board of Directors. In addition, a director who
is not an employee of the Corporation receives $1,000 for each directors'
meeting attended (excluding telephone meetings) and $500 for each committee
meeting attended, subject to a maximum of $6,000 per year in aggregate meeting
fees. Directors' meetings are normally held on a quarterly basis.
Compensation Committee Interlocks and Insider Participation
None of the Corporation's executive officers served as a member of the
Compensation Committee of the Board of Directors or as a director of any other
entity, one of whose executive officers served as a member of the Compensation
Committee of the Corporation's Board of Directors.
8
Summary Compensation Table
The following table sets forth summary information regarding the
compensation (excluding Mr. Thomas' retirement benefit described on page 13)
earned by or paid to William R. Thomas, President and Chairman of the Board;
Gary L. Martin, Vice President; Patrick F. Hamner, Vice President; and William
M. Ashbaugh, Vice President, all of whom are officers of the Corporation whose
total compensation earned during the fiscal year ended March 31, 2003 exceeded
$100,000.
Long-term
Compensation
---------------------
Annual Compensation Awards
------------------------------------ ---------------------
Name and Fiscal Other Annual Securities Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options (#) Compensation(2)
- ------------------ ---- ------ ----- --------------- --------------------- ---------------
William R. Thomas 2003 $250,000 $ - $10,000 6,000 $ -
Chairman of the 2002 250,000 10,417 8,500 6,000 -
Board and President 2001 250,000 10,417 12,750 6,000 -
Gary L. Martin 2003 183,750 12,135 - 14,000 -
Vice President 2002 178,800 17,077 - 14,000 -
2001 172,500 16,683 - 14,000 -
Patrick F. Hamner 2003 183,750 27,708 - 34,000 10,000
Vice President 2002 172,500 37,500 - 34,000 8,500
2001 145,000 42,250 - 24,000 12,750
William M. Ashbaugh 2003 167,500 27,083 - 15,000 9,729
Vice President 2002 96,410 14,222 - 15,000 -
2001 - - - - -
- ---------------------
(1) Represents amounts accrued for each executive officer in lieu of a
contribution to his account in an ESOP.
(2) Represents amounts contributed to the ESOP accounts of each executive
officer.
The aggregate amount of perquisites and other personal benefits
provided to Messrs. Thomas, Martin, Hamner and Ashbaugh was less than 10% of the
total of annual salary and bonus of such officers.
In accordance with the Corporation's established policy, its officers
and employees are required to remit to the Corporation all compensation received
for serving as a director of any portfolio company of the Corporation.
9
Additional Compensation Information
The following table sets forth additional compensation information for
the fiscal year ended March 31, 2003 for each of the three highest-paid
executive officers whose compensation exceeded $60,000 and for all other
directors (Graeme W. Henderson, James M. Nolan and John H. Wilson), who are not
employees of the Corporation.
Pension or Retirement
Aggregate Benefits Accrued as Estimated Annual
Compensation from Part of Corporation's Benefits Upon
Name and Position the Corporation Expenses Retirement
- ----------------- ----------------- --------------------- ----------------
William R. Thomas $260,000 (1) (3) (4)
Director, Chairman
and President
Gary L. Martin 195,885 (1) (3) (4)
Director and Vice
President
Patrick F. Hamner 221,458 (1) (3) (4)
Vice President
Graeme W. Henderson 28,000 (2) None None
Director
James M. Nolan 28,000 (2) None None
Director
John H. Wilson 21,000 (2) None None
Director
- -------------------
(1) See "Option Exercises and Fiscal Year End Values" for information
regarding stock options exercised during or held at the end of the
fiscal year ended March 31, 2003. See "Retirement Plans" for
information on the Corporation's Retirement Plan and Retirement
Restoration Plan. See "Stock Ownership Plan" for a description of the
Corporation's Employee Stock Ownership Plan and "Summary Compensation
Table" for amounts contributed to each officer's ESOP account.
(2) Directors who are not employees of the Corporation are compensated as
described under "Compensation of Directors" and are not participants in
the Corporation's Retirement Plan or Employee Stock Ownership Plan.
(3) As described in note 8 to the Corporation's Consolidated Financial
Statements, the Retirement Plan was overfunded and therefore generated
a benefit for the year ended March 31, 2003. After deducting the
expense of the unfunded Retirement Restoration Plan, the Corporation's
net benefit attributable to both plans was $387,923 for the year ended
March 31, 2003. The Corporation's net benefit is not allocated to
individual plan participants.
10
(4) Individual retirement benefits are based on formulas relating benefits
to average final compensation and years of credited service. See
"Retirement Plans" which includes both a table of estimated annual
retirement benefits and a description of the retirement benefits
currently payable to Mr. Thomas.
Option Grants
No common stock options were granted during the fiscal year ended March
31, 2003.
Option Exercises and Fiscal Year End Values
The following table discloses, for the named executive officers,
information regarding stock options exercised during, or held at the end of,
fiscal 2003.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at 3/31/03 at 3/31/03 (2)
Acquired on Value --------------------------------- --------------------------
Name Exercise (#) Realized (1) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
- ---- ------------ ------------ -------------- ----------------- ----------- -------------
William R. Thomas - - 6,000 - $ - $ -
Gary L. Martin - - 14,000 - 175,350 -
Patrick F. Hamner - - 19,750 14,250 175,350 -
William M. Ashbaugh - - 1,500 13,500 - -
- ----------
(1) Value realized is calculated as the fair market value on the date of
exercise, net of the option exercise price, but before any tax
liabilities or transaction costs.
(2) Value of unexercised options is calculated at the closing market price
on March 31, 2003 ($48.15), net of the option exercise price, but
before any tax liabilities or transaction costs.
Retirement Plans
The foregoing Summary Compensation Table does not include any
contribution, payment or accrual under a qualified non-contributory retirement
plan (the "Retirement Plan") maintained by the Corporation and certain of its
wholly-owned portfolio companies, as such amounts cannot readily be separately
or individually calculated. Messrs. Ashbaugh, Hamner and Martin now participate
in the Retirement Plan, and Mr. Thomas is currently receiving retirement benefit
11
payments. An eligible employee or his survivor will be entitled under the
Retirement Plan to receive, upon retirement, death or disability, monthly
payments based upon formulas relating benefits to salary and years of credited
service, which is generally determined by averaging the five consecutive years
of highest compensation prior to retirement. Salaries and bonuses (excluding
other annual compensation) reported in the foregoing Summary Compensation Table
are substantially identical to compensation covered by the Retirement Plan
("Covered Compensation").
The following table sets forth, for purposes of illustration, the
estimated annual retirement benefit payable under the Retirement Plan as a
straight life annuity upon retirement to participants of specified Covered
Compensation and years of credited service who are fully vested (five years of
service). Messrs. Ashbaugh, Hamner and Martin had 1, 21, and 30 years,
respectively, of credited service under the plan as of May 1, 2003. All
calculations assume retirement in 2003 at age 65 (normal retirement age).
Total Covered Estimated Annual Benefits
Compensation Based on Service of
15 Years 20 Years 25 Years 30 Years 35 Years
------------------------------------------------------------
$125,000........... $ 31,338 $ 41,784 $ 52,230 $ 62,676 $ 73,122
150,000........... 38,463 51,284 64,105 76,926 89,747
175,000........... 45,588 60,784 75,980 91,176 106,372
200,000........... 52,713 70,284 87,855 105,426 122,997
225,000.......... 59,838 79,784 99,730 119,676 139,622
250,000.......... 66,963 89,284 111,605 133,926 156,247
300,000.......... 81,213 108,284 135,355 162,426 189,497
350,000........... 95,463 127,284 159,105 190,926 222,747
400,000........... 109,713 146,284 182,855 219,426 255,997
Certain of the amounts in the above table are subject to reduction
because applicable federal regulations limit the amount of annual benefits
payable to certain higher-paid participants under a tax-qualified retirement
plan such as the Retirement Plan. The extent of such reductions will vary in
individual cases according to circumstances existing at the time pension
payments commence. Consequently, the Corporation and certain of its wholly-owned
portfolio companies have adopted an unfunded benefit equalization plan (the
"Retirement Restoration Plan") to compensate employees of the Corporation and
chief executive officers of certain of the Corporation's wholly-owned portfolio
companies for the loss of retirement benefits resulting from such limitations.
This Retirement Restoration Plan provides for the payment, upon retirement, of
the difference between the maximum annual payment permissible under the
Retirement Plan pursuant to federal limitations and the amount which would
otherwise have been payable.
Mr. Thomas is entitled to a substantially increased annual retirement
benefit as a result of his service beyond the normal retirement age and to an
additional annual retirement benefit as a result of his credited service prior
to April 1972 under a retirement benefit formula of the Corporation's Retirement
Plan which was modified for credited service subsequent to April 1972. Although
12
Mr. Thomas is a full-time employee of the Corporation, Section 401(a)(9) of the
Internal Revenue Code required that he begin receiving monthly retirement
benefit payments on April 1, 2000 because of his age and ownership of more than
5% of the Corporation's common stock. Retirement benefits payable (for life
only) to Mr. Thomas under the Retirement Plan and Retirement Restoration Plan
total $440,342 per annum.
Stock Ownership Plan
The Corporation maintains an Employee Stock Ownership Plan ("ESOP") for
its employees and one of its wholly-owned portfolio companies in which Mssrs.
Ashbaugh and Hamner participate. The Whitmore Manufacturing Company maintains an
ESOP for its employees, in which Mr. Martin participates. Employees who have
completed one year of credited service, as defined in the plan, are eligible to
participate in the ESOP. Contributions to the ESOP are discretionary, within
limits established by the Internal Revenue Code. Funds contributed to the trust
established under the ESOP are applied by the trustees to the purchase, in the
open market at prevailing market prices, of common stock of the Corporation. A
participant's interest in contributions to the ESOP fully vests after five years
of credited service, and such vested interest is distributed to a participant at
retirement, death or total disability, or after a one year break in service
resulting from termination of employment for any other reason. See note (2) to
the table under "Stock Ownership of Certain Beneficial Owners".
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires officers and directors of the Corporation and persons who beneficially
own more than 10% of the Corporation's common stock to file reports of
securities ownership and changes in such ownership with the SEC. Officers,
directors and greater than 10% beneficial owners also are required by rules
promulgated by the SEC to furnish the Corporation with copies of all Section
16(a) forms they file. Based solely upon a review of the copies of such forms
furnished to the Corporation, or written representations that no Form 5 filings
were required, the Corporation believes that each of its officers, directors and
greater than 10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them during the year ended March 31, 2003.
AUDIT AND OTHER FEES
The following table presents fees for professional audit services
rendered by KPMG LLP for the audit of the Corporation's annual financial
statements for the fiscal years ended March 31, 2003 and 2002, and fees billed
for other services rendered by KPMG LLP.
13
2003 2002
---------- ----------
Audit Fees $ 53,000 $ 40,500
Audit-Related Fees -0- -0-
---------- ----------
Audit and Audit-Related Fees $ 53,000 $ 40,500
Tax Fees(1) 4,000 3,900
All Other Fees -0- -0-
---------- ----------
Total Fees $ 57,000 $ 44,400
========== ==========
- ----------
(1) Tax fees consisted of fees for tax compliance, tax advice and tax
planning.
The Audit Committee considered the services rendered by KPMG LLP and
the fees paid to them and concluded that the services were compatible with
maintaining KPMG's independence.
14
PERFORMANCE GRAPH
The following graph compares the Corporation's cumulative total
stockholder return during the last five years (based on the market price of the
common stock and assuming reinvestment of all dividends and tax credits on
retained long-term capital gains) with the Total Return Index for the Nasdaq
Stock Market (U.S. Companies) and with the Total Return Index for Nasdaq
Financial Stocks, both of which indices have been prepared by the Center for
Research in Security Prices at the University of Chicago.
Comparison of Five Year Cumulative Total Returns
[Graph omitted]
Nasdaq Total Return (U.S.) Nasdaq Financial Stocks Capital Southwest Corporation
1998 100.000 100.000 100.000
1999 135.079 90.111 78.234
2000 250.991 85.390 60.219
2001 100.601 94.442 72.295
2002 101.323 117.516 77.197
2003 74.374 108.966 54.609
15
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee has appointed the firm of Ernst & Young LLP as
independent auditors for the fiscal year ending March 31, 2004. In order to
ratify the appointment of Ernst & Young LLP as independent auditors for the
Corporation for the year ending March 31, 2004, the proposal must receive the
favorable vote of a majority of the shares entitled to vote and represented at
the annual meeting.
A representative of KPMG LLP, independent auditors for the fiscal year
ended March 31, 2003, is expected to be present at the annual meeting. He will
have the opportunity to make a statement, and will be available to respond to
appropriate questions.
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Any shareholder proposal to be considered by the Corporation for
inclusion in the proxy material for the 2004 annual meeting of shareholders must
be received by the Secretary of the Corporation at 12900 Preston Road, Suite
700, Dallas, Texas 75230, no later than February 2, 2004. Mere submission of a
proposal for consideration does not guarantee its inclusion in the proxy
material or presentation at the meeting. All shareholder proposals are subject
to the rules promulgated under the federal securities laws.
EXPENSES OF SOLICITATION OF PROXIES
In addition to the use of the mails, proxies may be solicited by
personal interview and telephone by directors, officers and other employees of
the Corporation, who will not receive additional compensation for such services.
The Corporation will also request brokerage houses, nominees, custodians and
fiduciaries to forward soliciting materials to the beneficial owners of stock
held of record by them and will reimburse such persons for forwarding materials.
The cost of soliciting proxies will be borne by the Corporation.
ANNUAL REPORT
The Annual Report to Shareholders covering the fiscal year ended March
31, 2003 accompanies this proxy statement, but is not deemed a part of the proxy
soliciting material.
A copy of the fiscal 2003 Form 10-K report filed with the SEC will be
mailed to shareholders without charge upon written request to Susan K. Hodgson,
Secretary, Capital Southwest Corporation, 12900 Preston Road, Suite 700, Dallas,
Texas 75230.
A copy of the Form 10-K will be available via the Internet at our world
wide website (www.capitalsouthwest.com) and the EDGAR version of such report
will be available at the SEC's world wide website (www.sec.gov).
Any complaint regarding accounting, internal accounting controls or
auditing matters should be mailed to John H. Wilson, Audit Committee member, at
1500 Three Lincoln Centre, 5430 LBJ Freeway, Dallas, TX 75240. Written
complaints may be submitted anonymously.
16
EXHIBIT A
---------
CAPITAL SOUTHWEST CORPORATION
AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter ("Charter") governs the operations of the Audit Committee
("Committee"), which shall review and reassess the Charter at least annually and
obtain the approval of the board of directors ("Board") of the Charter and any
changes thereto. The Committee shall be members of, and appointed by, the Board
and shall comprise at least three directors, each of whom are independent of
management and the Corporation. Members of the Committee shall be considered
independent as long as they accept no consulting, advisory or other compensatory
fees from the Corporation (other than directors' fees from the Corporation and
its portfolio companies), are not affiliated persons of the Corporation or its
subsidiaries, and meet the independence requirements of the Sarbanes-Oxley Act
of 2002 and The Nasdaq Stock Market listing standards. All committee members
shall be financially literate, and at least one member shall be an "audit
committee financial expert," as defined by SEC regulations.
PURPOSE
The Committee shall provide assistance to the Board in fulfilling its oversight
responsibility to the shareholders relating to: the integrity of the
Corporation's financial statements; the financial reporting process; the systems
of internal accounting and financial controls; the performance of the
Corporation's independent auditors; the independent auditors' qualifications and
independence; and the Corporation's compliance with ethics policies and legal
and regulatory requirements relating to financial statements and reporting.
In discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities and personnel of the Corporation and the authority to engage
independent counsel and other advisers as it determines necessary to carry out
its duties.
DUTIES AND RESPONSIBILITIES
The primary responsibility of the Committee is to oversee the Corporation's
financial reporting process on behalf of the Board and report the results of its
activities to the Board. While the Committee has the responsibilities and powers
set forth in this Charter, it is not the duty of the Committee to plan or
conduct audits or to determine that the Corporation's financial statements are
complete and accurate and are in accordance with generally accepted accounting
principles. Management is responsible for the preparation, presentation and
integrity of the Corporation's financial statements and for the appropriateness
of the accounting principles and reporting policies that are used by the
Corporation. The independent auditors are responsible for auditing the
Corporation's financial statements and for reviewing the Corporation's unaudited
interim financial statements.
The Committee, in carrying out its responsibilities, believes its policies and
procedures should remain flexible, in order to best react to changing conditions
A-1
and circumstances. The Committee should take appropriate actions to set the
overall corporate "tone" for quality financial reporting, sound business risk
practices and ethical behavior. The following shall be the principal duties and
responsibilities of the Committee. These are set forth as a guide with the
understanding that the Board may supplement the duties and responsibilities as
appropriate.
Subject to shareholder ratification, the Committee shall be directly responsible
for appointment of the independent auditors. If circumstances warrant, the
Committee may terminate such appointment. The Committee is responsible for
determining the independent auditors' compensation and for oversight of their
work, including resolution of disagreements between management and the auditors
regarding financial reporting. The Committee shall pre-approve all audit and
non-audit services provided by the independent auditors and shall not engage the
independent auditors to perform the specific non-audit services proscribed by
law or regulation. The Committee may delegate pre-approval authority to a member
of the Committee. The decisions of any committee member to whom pre-approval is
delegated must be presented to the Committee at its next scheduled meeting.
At least annually, the Committee shall obtain and review a report by the
independent auditors describing:
o The firm's internal quality control procedures.
o Any material issues raised by the most recent internal quality
control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities,
within the preceding five years, respecting one or more
independent audits carried out by the firm, and any steps
taken to deal with any such issues.
o All relationships between the independent auditors and the
Corporation.
The Committee shall pre-approve the Corporation's hiring of any employees or
former employees of the independent auditors in full compliance with applicable
SEC regulations and The Nasdaq Stock Market listing standards.
The Committee shall discuss with the independent auditors the overall scope and
plans for their audit, including the adequacy of staffing. Also, the Committee
shall discuss with management and the independent auditors the adequacy and
effectiveness of the accounting and financial controls, including the
Corporation's policies and procedures to assess, monitor and manage business
risk, and ethical compliance programs.
Periodically, the Committee shall meet separately with management and the
independent auditors to discuss issues and concerns warranting Committee
attention. The Committee shall provide sufficient opportunity for the
independent auditors to meet privately with the members of the Committee, and
shall review with the independent auditors any audit problems or difficulties
and management's response.
The Committee shall receive regular reports from the independent auditors on the
critical policies and practices of the Corporation, and all alternative
treatments of financial information within generally accepted accounting
principles that have been discussed with management.
A-2
The Committee shall review management's assertion on its assessment of the
effectiveness of internal controls as of the end of the most recent fiscal year
and the independent auditors' report on management's assertion.
The Committee, or its designated member, shall review the interim financial
statements and disclosures under Management's Discussion and Analysis of
Financial Condition and Results of Operations with management and the
independent auditors prior to the filing of the Corporation's Quarterly Report
on Form 10-Q. Also, the Committee, or its designated member, shall discuss the
results of the quarterly review and any other matters required to be
communicated to the Committee by the independent auditors under generally
accepted auditing standards. The Committee, or its designated member, shall
review and discuss net asset value press releases.
The Committee shall review with management and the independent auditors the
financial statements and disclosures under Management's Discussion and Analysis
of Financial Condition and Results of Operations to be included in the
Corporation's Annual Report on Form 10-K (or the annual report to shareholders
if distributed prior to the filing of Form 10-K), including their judgment about
the quality, not just the acceptability, of accounting principles, the
reasonableness of the valuation of restricted securities and other significant
judgments and the clarity of the disclosures in the financial statements. Also,
the Committee shall discuss the results of the annual audit and any other
matters required to be communicated to the Committee by the independent auditors
under generally accepted auditing standards.
The Committee shall establish procedures for the receipt, retention and
treatment of complaints received by the Corporation regarding accounting,
internal accounting controls or auditing matters; and the confidential,
anonymous submission by employees of the Corporation of concerns regarding
questionable accounting or auditing matters and unethical, irregular or illegal
business conduct.
The Committee shall receive corporate attorneys' reports of evidence of any
material violation of securities laws or breaches of fiduciary duty.
The Committee shall submit its report to be included in the Corporation's annual
proxy statement, as required by SEC regulations.
The Committee shall report regularly to the Board and maintain minutes of its
meetings.
The Committee shall perform an evaluation of its performance at least annually
to determine whether it is functioning effectively.
A-3
APPENDIX A
Capital Southwest Corporation
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JULY 21, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF THE CORPORATION.
The undersigned (1) acknowledges receipt of the Notice of Annual
Meeting of Shareholders of Capital Southwest Corporation, a Texas corporation,
(the "Corporation") to be held on Monday, July 21, 2003, at 10:00 a.m., Dallas
time, in the Meeting Room (1st floor) of the North Dallas Bank Tower, 12900
Preston Road, Dallas, Texas, and the Proxy Statement in connection therewith;
and (2) appoints James M. Nolan, William R. Thomas and John H. Wilson, and each
of them, his proxies with full power of substitution, for and in the name, place
and stead of the undersigned, to vote upon and act with respect to all of the
shares of Common Stock of the Corporation standing in the name of the
undersigned, or with respect to which the undersigned is entitled to vote and
act at the meeting and at any adjournment thereof, and the undersigned directs
that this proxy be voted:
(Continued and to be signed on the reverse side)
- --------------------------------------------------------------------------------
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE __
- --------------------------------------------------------------------------------
1. Election of Directors: NOMINEES:
___ FOR ALL NOMINEES ( ) Graeme W. Henderson
( ) Gary L. Martin
___ WITHOLD AUTHORITY ( ) James M. Nolan
FOR ALL NOMINEES ( ) William R. Thomas
( ) John H. Wilson
___ FOR ALL EXCEPT
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here:( )
2. Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the Corporation.
3. In the discretion of the proxies, on any other matter that may properly
come before the meeting or, subject to the conditions in the Proxy
Statement, any adjournment thereof.
This proxy when properly executed will be voted in the manner directed.
Unless otherwise marked, this proxy will be voted for the election of the
persons named at the left hereof and for the proposal described in (2) above.
If more than one of the proxies named herein shall be present in person or
by substitute at the meeting or at any adjournment thereof, the majority of the
proxies so present and voting, either in person or by substitute, shall exercise
all of the powers hereby given.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to such stock and hereby ratifies and confirms all
that the proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
NO POSTAGE IS REQUIRED.
________________________________________________________________________________
To change the address on your account, please check the box
at right and indicate your new address in the address space ____
above. Please note that changes to the registered name(s) on
the account may not be submitted via this method.
Signature of Shareholder:______________________________ Date: ________________
Signature of Shareholder: ______________________________ Date: ________________
NOTE:Please sign exactly as your name or names appear on this Proxy. When shares
are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give title as such. If
the signer is a duly authorized officer of a corporation, please give full
title. If signer is a partnership, please sign by authorized person.