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 4, 1999
To the Shareholders of Capital Southwest Corporation:
The Annual Meeting of Shareholders of our Corporation will be held on
Monday, July 19, 1999, 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. In addition,
the Capital Southwest Corporation Annual Report for the fiscal year ended March
31, 1999 is enclosed to provide information regarding the performance of the
Corporation during the past year. 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 mailed 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,
William R. Thomas
Chairman of the Board
and President
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 19, 1999
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 19, 1999, 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 consider and vote upon the authorization and adoption of the 1999 Stock
Option Plan (a copy of which is attached as Exhibit A to the accompanying
Proxy Statement).
3. To ratify the appointment of KPMG LLP as independent auditors for the
Corporation.
4. To transact such other business as may properly come before the meeting and
any adjournment thereof.
Only holders of Common Stock of the Corporation of record at the close of
business on June 1, 1999 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
at your earliest convenience in the enclosed envelope. No postage is required
for mailing in the United States. A prompt return of your proxy will be
appreciated as it will save the expense of further mailings.
By Order of the Board of Directors
TIM SMITH
Secretary
Dallas, Texas
June 4, 1999
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 19, 1999
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Capital Southwest Corporation, a Texas corporation
(the "Corporation"), of proxies to be voted at the Annual Meeting of
Shareholders to be held on July 19, 1999 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 4, 1999.
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 (see ELECTION OF DIRECTORS); (2) authorizing and
adopting the 1999 Stock Option Plan of the Corporation pursuant to which options
may be granted to officers and employees of the Corporation and certain of its
subsidiaries to purchase up to an aggregate of 140,000 shares of Common Stock of
the Corporation (see AUTHORIZATION AND ADOPTION OF 1999 STOCK OPTION PLAN); (3)
ratifying the appointment by the Board of Directors of KPMG LLP as independent
auditors for the Corporation (see APPROVAL OF APPOINTMENT OF INDEPENDENT
AUDITORS); and (4) 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. The favorable vote of the holders of a
majority of the shares of common stock entitled to vote and represented at the
Annual Meeting is required for the authorization and adoption of the 1999 Stock
Option Plan. In order to ratify the appointment of KPMG LLP as independent
auditors for the Corporation for the year ending March 31, 2000, 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.
The Board of Directors unanimously recommends that the shareholders
vote FOR the election as directors of the persons named under ELECTION OF
DIRECTORS, FOR the authorization and adoption of the 1999 Stock Option Plan, and
FOR the ratification of the appointment of KPMG LLP as independent auditors.
1
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
1, 1999, at which time the Corporation had outstanding and entitled to vote at
the meeting 3,815,051 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 his 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.
Each proxy delivered to the Corporation, unless the shareholder
otherwise specifies therein, will be voted FOR the election as directors of the
persons named under ELECTION OF DIRECTORS (PROPOSAL 1), FOR the authorization
and adoption of the 1999 Stock Option Plan (PROPOSAL 2) and FOR the ratification
of the appointment by the Board of Directors of KPMG LLP as independent auditors
(PROPOSAL 3). In each case where the shareholder has appropriately specified how
the proxy is to be voted, it will be voted in accordance with his specification.
As to any other matter or business which may be 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 his 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, 1999 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) 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.
2
Name and Address Shares Owned Percent
of Beneficial Owner Beneficially of Class
------------------- ------------ --------
William R. Thomas
12900 Preston Rd., Suite 700
Dallas, Texas 75230....................... 997,602 (1)(2) 26.2%
Tim Smith
12900 Preston Rd., Suite 700
Dallas, Texas 75230...................... 436,965 (2)(3) 11.4
First Manhattan Company
437 Madison Avenue
New York, New York 10022................. 274,576 (4) 7.2
U.S. Trust Corporation
114 West 47th Street
New York, New York 10036.................. 249,743 (5) 6.6
Gary L. Martin............................ 151,897 (2)(3) 4.0
Patrick F. Hamner......................... 125,648 (2)(3) 3.3
Graeme W. Henderson....................... 4,700 (6) 0.1
James M. Nolan............................ 4,000 0.1
D. Scott Collier.......................... 2,800 0.1
John H. Wilson............................ 1,000 -
All directors and executive officers
as a group (8 persons).................... 1,176,460 (7) 30.5
(1) Mr. Thomas has sole voting and investment power with respect to
584,437 shares, which include 48,725 shares owned by two of his 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) Messrs. Smith and Thomas constitute a majority of the trustees of
certain trusts pursuant to employee stock ownership plans for employees of the
Corporation and its wholly-owned subsidiaries owning 325,021 shares, with the
power as trustees to vote such shares. Messrs. Smith and Thomas also participate
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
3
wholly-owned subsidiaries of the Corporation. Accordingly, Messrs. Smith and
Thomas have shared voting and investment power with respect to the 413,165
shares, representing 10.8% of the outstanding Common Stock of the Corporation,
owned by the aforementioned trusts. Under the rules and regulations of the
Securities and Exchange Commission, Messrs. Smith and Thomas are both deemed to
be the beneficial owners of such 413,165 shares, which are included in the
shares beneficially owned by Messrs. Smith and Thomas.
Mr. Martin serves as trustee, with Messrs. Smith and Thomas, of one of
the aforementioned trusts owning 46,843 shares. Accordingly, Mr. Martin has
shared voting and investment power with respect to the 46,843 shares. Under the
rules and regulations of the Securities and Exchange Commission, Mr. Martin is
deemed to be the beneficial owner of such 46,843 shares, which are included in
the shares beneficially owned by Mr. Martin.
Of the shares owned by trusts pursuant to the aforementioned employee
stock ownership plans, 942 and 3,764 were allocated to Messrs. Smith and Martin,
respectively, all of which were vested.
Mr. Hamner, with Messrs. Smith and Thomas, 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
subsidiaries of the Corporation. Under the rules and regulations of the
Securities and Exchange Commission, 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 12,785, 11,400 and 12,440 shares subject to immediately
exercisable stock options held by Messrs. Martin, Smith and Hamner,
respectively.
(4) As reported to the Corporation by First Manhattan Co., that
partnership has sole voting and dispositive power with respect to 3,000 shares,
shared voting power with respect to 268,576 shares and shared dispositive power
with respect to 271,576 shares by reasons of advisory and other relationships
with the persons who own the shares.
(5) As reported to the Corporation by U.S. Trust Corporation, that
corporation has shared dispositive power and shared voting power with respect to
249,743 shares via either a trust/fiduciary capacity and/or a portfolio
management/agency relationship with the persons who own the shares.
(6) Includes 1,500 shares held by a retirement trust for the benefit of
Mr. Henderson.
(7) Includes (a) the shares owned by the trusts and partnership
referred to in Notes (1) and (2), respectively, to the above table, (b) 36,625
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) 48,725 shares owned by
immediate family members of Mr. Thomas.
4
ELECTION OF DIRECTORS (PROPOSAL 1)
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. The persons named in the accompanying form of
proxy intend to vote such proxy for the election of the nominees named below as
directors of the Corporation to serve until the next Annual Meeting of
Shareholders or until their respective successors shall be elected and
qualified, unless otherwise properly indicated on such proxy. If any nominee
shall become unavailable for any reason, the persons named in the accompanying
form of proxy are expected to consult with the Board of Directors of the
Corporation in voting the shares represented by them at the Annual Meeting. The
Board of Directors has no reason to doubt the availability of any of the
nominees and no reason to believe that any of the nominees will be unable or
unwilling to serve the entire term for which election is sought.
The names of the nominees, along with certain information concerning
them, are set forth below.
GRAEME W. HENDERSON
Mr. Henderson, age 65, has been a director of the Corporation since
1976 and previously served as a director of the Corporation from 1962 to 1964.
Mr. Henderson has been self-employed as a private investor and consultant for
more than five years. He served as a director of Starwood Hotels and Resorts
Worldwide, Inc. from 1986 to February 1999.
*GARY L. MARTIN
Mr. Martin, age 52, has been a director of the Corporation since July
1988 and has served as Vice President of the Corporation since July 1984. He
previously served as Vice President of the Corporation from 1978 to 1980. Since
1980, Mr. Martin has served as President of The Whitmore Manufacturing Company,
a wholly-owned subsidiary of the Corporation.
JAMES M. NOLAN
Mr. Nolan, age 65, has been a director of the Corporation since July
1980. He has been self-employed as a private investor and consultant to the
telecommunications industry since 1978 and served as a director of DSC
Communications Corporation from 1981 to 1996.
*WILLIAM R. THOMAS
Mr. Thomas, age 70, has served as Chairman of the Board of Directors of
the Corporation since July 1982 and President of the Corporation since 1980. In
addition, he has been a director of the Corporation since 1972 and was
previously Senior Vice President of the Corporation from 1969 to 1980. Mr.
Thomas also serves as a director of Alamo Group Inc., Encore Wire Corporation,
Mail-Well, Inc. and Palm Harbor Homes, Inc.
5
JOHN H. WILSON
Mr. Wilson, age 56, has been a director of the Corporation since July
1988. He has been President of U. S. Equity Corporation, a venture capital
investment firm, since 1983 and President of Whitehall Corporation from 1995 to
1998. Mr. Wilson also serves as a director of Encore Wire Corporation and Palm
Harbor Homes, Inc.
* Messrs. Martin and Thomas are "interested persons" as that term is defined
in Section 2(a)(19) of the Investment Company Act of 1940.
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 ten percent of the Corporation's common stock to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than ten
percent 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 ten percent
beneficial owners complied with all Section 16(a) filing requirements applicable
to them during the year ended March 31, 1999.
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. The Audit Committee monitors the Company's financial reports and
accounting practices to ascertain that they are within acceptable limits of
sound practice; reviews audit reports submitted by the Corporation's independent
auditors; makes recommendations to the Board of Directors regarding the
engagement of the independent auditors for audit and non-audit services;
evaluates the independence of the auditors; and reviews with the independent
auditors the fee, scope and timing of audit and non-audit services. The
Compensation Committee periodically reviews the compensation, employee benefit
plans and other fringe benefits paid to or provided for officers and directors
of the Corporation and approves the annual salaries and bonuses of officers 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, 1999, eight meetings (including
four telephone meetings) of the Board of Directors were held. In addition, two
meetings (including one telephone meeting) of the Compensation Committee and two
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.
6
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
1994 100 100 100
1995 111.254 112.012 101.307
1996 151.062 154.35 171.667
1997 167.833 198.442 200.518
1998 254.43 308.021 285.513
1999 342.441 274.508 223.375
7
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 (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.
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 materially to the success of the Corporation's venture
capital investment activities. The individual judgments made by the Compensation
Committee are subjective and are based largely on the 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 Incentive Stock Option Plan and contributions pursuant to the
Employee Stock Ownership Plan.
Base salaries were determined by the Committee in July 1998 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, surveys of compensation levels for comparable positions and
internal equities among positions. In addition to base salaries, executive
officers received bonus payments in March 1999, the amounts of which were
determined by the Committee on a discretionary basis, taking into consideration
individual performance and the Corporation's overall performance, with
particular emphasis on the achievement of long-term investment objectives.
Under the terms of the Corporation's 1984 Incentive Stock Option Plan,
which expired in 1994, the Committee from time to time granted stock options to
executive officers to reinforce the alignment of their long-term interests with
those of the shareholders. Stock options were granted at exercise prices not
less than the fair market value of the stock on the date of grant and thus have
no value unless the value of the Corporation's stock appreciates. During the ten
8
years of the 1984 Incentive Stock Option Plan, which provided for options on a
maximum of 400,000 shares, the Committee granted options on a total of 294,000
shares, of which 252,000 were exercised and 42,000 are currently unexercised.
The Committee granted no incentive stock options during the fiscal year ended
March 31, 1999. Based on the Committee's recommendation, the Board of Directors
authorized the 1999 Stock Option Plan (described on pages 14 through 18 of this
Proxy Statement), subject to shareholder approval at the annual meeting. No
options have been granted under the 1999 Stock Option Plan, which provides for
the future grant of awards relating to up to 140,000 shares.
An important additional equity incentive is provided by the
Corporation's Employee Stock Ownership Plan, to which the Corporation
contributed 5.475% of each participating employee's covered compensation for the
fiscal year ended March 31, 1999.
The Committee established the base salary of the Corporation's chief
executive officer, William R. Thomas, in July 1998 and his discretionary bonus
in December 1998. Compensation levels for Mr. Thomas were determined on the
basis of the factors cited above, all of which are applicable to him as well as
other executive officers. Other relevant factors considered by the Committee
were the Corporation's performance compared with similar investment companies
and Mr. Thomas' role in defining and accomplishing the Corporation's long-term
investment objectives and administering its investment management activities.
Compensation Committee
James M. Nolan, Chairman
Graeme W. Henderson
John H. Wilson
Summary Compensation Table
The following table sets forth summary information regarding the
compensation earned by or paid to William R. Thomas, Chairman of the Board and
President; Gary L. Martin, Vice President; Patrick F. Hamner, Vice President;
Tim Smith, Vice President and Secretary-Treasurer; and D. Scott Collier, Vice
President, officers of the Corporation whose total compensation earned during
the fiscal year ended March 31, 1999 exceeded $100,000.
Annual Compensation
---------------------------------------
Name and Fiscal Other Annual All Other
Principal Position Year Salary Bonus Compensation(1) Compensation(2)
------------------ ------ ------ ----- --------------- ---------------
William R. Thomas 1999 $250,000 $ 85,417 $12,000 -
Chairman of the 1998 250,000 145,833 24,000 -
Board and President 1997 250,000 145,417 18,000 -
Gary L. Martin 1999 157,000 42,279 - 1,600
Vice President 1998 152,500 1,481 - -
1997 148,000 36,898 - 12,272
9
Annual Compensation
---------------------------------------
Name and Fiscal Other Annual All Other
Principal Position Year Salary Bonus Compensation(1) Compensation(2)
------------------ ------ ------ ----- --------------- ---------------
Patrick F. Hamner 1999 $112,248 $44,792 $3,180 $ 8,598
Vice President 1998 102,500 48,667 8,511 14,164
1997 96,500 44,083 5,469 11,401
Tim Smith 1999 103,750 39,375 2,898 7,836
Vice President and 1998 98,000 43,333 7,957 13,243
Secretary-Treasurer 1997 90,500 38,833 5,031 10,489
D. Scott Collier 1999 95,149 33,958 2,614 7,069
Vice President 1998 87,500 37,500 7,038 11,713
1997 77,500 38,333 4,506 9,394
- -----------
(1) Amounts accrued for each executive officer in lieu of a contribution to his
account in an employee stock ownership plan for employees of the
Corporation and one of its wholly-owned subsidiaries (the "ESOP").
(2) 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, Smith and Collier 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.
Additional Compensation Information
The following table sets forth additional compensation information for the
fiscal year ended March 31, 1999 for each of the three highest-paid executive
officers whose compensation exceeded $60,000 (William R. Thomas and Gary L.
Martin, both of whom are directors of the Corporation, and Patrick F. Hamner)
and for all other directors (Graeme W. Henderson, James M. Nolan and John H.
Wilson), none of whom are 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 (1) $347,417 (3) (4)
Director, Chairman
and President
10
Pension or Retirement
Aggregate Benefits Accrued as Estimated Annual
Compensation from Part of Corporation's Benefits Upon
Name and Position the Corporation Expenses Retirement
- ----------------- ------------------- --------------------- -----------------
Gary L. Martin (1) $200,879 (3) (4)
Director and Vice
President
Patrick F. Hamner (1) 168,818 (3) (4)
Vice President
Graeme W. Henderson (2) 28,000 None None
Director
James M. Nolan (2) 28,000 None None
Director
John H. Wilson (2) 22,000 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, 1999. 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 Statements of
Financial Condition and Consolidated Statements of Operations, the
Retirement Plan was overfunded and therefore generated a benefit for the
year ended March 31, 1999. After deducting the expense of the unfunded
Retirement Restoration Plan, the Corporation's net benefit attributable to
both plans was $311,625 for the year ended March 31, 1999. The
Corporation's net benefit is not allocated to individual plan participants.
(4) Individual retirement benefits are based on formulas relating benefits to
average final compensation and years of credited service. See Retirement
Plans which includes a table of estimated annual retirement benefits.
11
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 1999.
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired on Value Options at 3/31/99 at 3/31/99 (2)
Name Exercise (#) Realized (1) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
- ---- ------------ ------------ -------------- ---------------- ----------- -------------
Gary L. Martin - - 12,785 1,215 $477,839 $45,411
Patrick F. Hamner - - 12,440 1,560 464,945 58,305
Tim Smith - - 11,400 2,600 426,075 97,175
D. Scott Collier 13,100 $655,288 - - - -
- -------------
(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 as the closing market price on
March 31, 1999 ($73.00) 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 subsidiaries as such amounts cannot readily be separately or
individually calculated. Messrs. Collier, Hamner, Martin, Smith and Thomas
participate in the Retirement Plan. 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. Collier, Hamner, Martin, Smith and Thomas had 8, 17, 26, 9 and
37 years, respectively, of credited service under the plan as of May 1, 1999.
All calculations assume retirement in 1999 at age 65 (normal retirement age).
12
Total Covered Estimated Annual Benefits
Compensation Based on Service of:
15 Years 20 Years 25 Years 30 Years 35 Years
-------- -------- -------- -------- --------
$125,000..............$ 32,402 $ 43,202 $ 54,003 $ 64,803 $ 75,604
150,000................39,527 52,702 65,878 79,053 92,229
175,000................46,652 62,202 77,753 93,303 108,854
200,000............... 53,777 71,702 89,628 107,553 125,479
225,000............... 60,902 81,202 101,503 121,803 142,104
250,000............... 68,027 90,702 113,378 136,053 158,729
300,000............... 82,277 109,702 137,128 164,553 191,979
350,000................96,527 128,702 160,878 193,053 225,229
400,000...............110,777 147,702 184,628 221,553 258,479
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 subsidiaries 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 subsidiaries 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 will be 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. Assuming Mr. Thomas had retired on March 31, 1999, the annual
retirement benefit payable to Mr. Thomas under the Retirement Plan and the
Retirement Restoration Plan described above would have been $399,490.
Stock Ownership Plan
The Corporation maintains an employee stock ownership plan ("ESOP") for
employees of the Corporation and one of its wholly-owned subsidiaries in which
Messrs. Collier, Hamner and Smith participate. The Whitmore Manufacturing
Company maintains an employee stock ownership plan 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
13
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.
AUTHORIZATION AND ADOPTION OF 1999 STOCK OPTION PLAN (PROPOSAL 2)
The Board of Directors has authorized, and recommends that the
shareholders authorize and adopt, the 1999 Stock Option Plan (the "Stock Option
Plan" or the "Plan"). The Board of Directors believes that the Stock Option Plan
is an executive compensation plan which is in the best interests of the
Corporation and its shareholders. The 1940 Act requires that the proposed Stock
Option Plan be authorized and adopted by the shareholders of the Corporation and
that any options or dividend equivalent rights granted under the Stock Option
Plan must be approved by a majority of the Corporation's directors who have no
financial interest in the Stock Option Plan and by a majority of such directors
who are not "interested persons" of the Corporation (as defined in the 1940 Act)
(hereinafter referred to as the "Required Majority").
The Stock Option Plan will not become effective, and no options or
dividend equivalent rights may be granted thereunder, unless the Stock Option
Plan is authorized and adopted by the shareholders of the Corporation.
Objectives of the Plan
The Stock Option Plan is intended to further the established policy of
the Corporation of encouraging ownership of its Common Stock by key employees of
the Corporation and its management company subsidiary, Capital Southwest
Management Corporation, and by its officers who are employees of its
subsidiaries and of providing incentives for them to enhance the value of the
Corporation's stock. By extending to key employees the opportunity to acquire
proprietary interests in the Corporation and to participate in its success, the
Plan may be expected to benefit the Corporation and its shareholders and to be
in their best interests by making it possible for the Corporation to attract and
retain the best available talent.
Summary of the Plan
Set forth below is a summary of the Stock Option Plan and certain
information relating thereto. The full text of the Stock Option Plan is attached
as Exhibit A to this Proxy Statement, reference to which is hereby made for
complete details of the Plan and the following discussion is qualified in its
entirety by such reference.
The Stock Option Plan, which provides for so-called "incentive stock
options" ("Incentive Options") and Non-Qualified stock options ("Non-Qualified
Options"), authorizes the granting of options to purchase up to an aggregate of
140,000 shares of Common Stock of the Corporation, subject to adjustment as
described below. The shares subject to the options are equivalent to
approximately 3.5% of the Corporation's fully-diluted shares and will be made
14
available from either authorized and unissued shares or previously issued
treasury shares. Unless sooner terminated, the Stock Option Plan will expire on
April 19, 2009, and no options may be granted after such date. All regular
salaried employees of the Corporation or officers of the Corporation who are
regular salaried employees of one of its subsidiaries, will be eligible to
receive options. Directors who are not officers or employees of the Corporation
or of a subsidiary thereof will not be eligible.
The Stock Option Plan also authorizes the granting of dividend
equivalent rights. Upon the declaration of any capital gain dividend, the Board
of Directors shall have the authority to grant dividend equivalent rights with
respect to such dividend to eligible employees upon such terms and conditions as
it shall establish, subject to the provisions of the Plan. Each dividend
equivalent right shall entitle a holder to receive a payment (cash or otherwise)
equal to the value on the dividend payment date of any specified capital gain
dividend declared and paid by the Corporation on one share of Common Stock. Each
dividend equivalent right shall be granted independent of any option.
The Stock Option Plan will be administered by the Corporation's Board
of Directors, which will have authority in its discretion, but subject to the
express provisions of the Plan, to determine the employees to whom, and the time
or times at which, options shall be granted, the term of each such option, and
the number of shares to be covered by each option; to determine whether an
option shall be an Incentive Option or a Non-Qualified Option; to determine the
employees to whom, and the time or times at which, dividend equivalent rights
shall be granted, and the terms of such dividend equivalent rights; to determine
the terms (which need not be identical) of option agreements and dividend
equivalent right agreements; and to make all other determinations deemed
necessary or advisable for the administration of the Plan. The Board of
Directors may grant options at any time, or from time to time, during any year
except that no options may be granted after April 19, 2009. No option may be
granted which would result in the aggregate number of shares of Common Stock
issuable upon exercise of all outstanding warrants, options and rights exceeding
20% of the outstanding voting securities of the Corporation or such other limit
as may be imposed by Section 61 of the 1940 Act. The approval of a Required
Majority of the Board of Directors is required to issue options on the basis
that such issuance is in the best interests of the Corporation and its
shareholders, and the Board of Directors shall take into consideration the
present and anticipated benefits under the Plan and the extent of potential
dilution caused by the granting of the option under the Plan.
The exercise price per share of Common Stock covered by an option
granted under the Plan shall in all cases be not less than 100% (110% in the
case of an Incentive Option issued to a shareholder owning more than 10% of the
Corporation's outstanding Common Stock) of the fair market value of the Common
Stock on the date the option is granted. "Fair market value" will be the last
reported sale price of the Common Stock at the close of business on the date of
the grant on a national securities exchange (which includes the Nasdaq Stock
Market) as determined by the Board of Directors. The exercise price must be paid
in full, either in cash at the time of exercise, or, subject to any limitations
15
the Board of Directors may impose, in Common Stock of the Corporation at the
time of exercise. Fractional shares will not be issued.
The Board of Directors may grant options under the Plan (and
accordingly optionees may purchase shares of Common Stock upon exercise of
options granted in accordance with the Plan) at an exercise price per share
which is less than the net asset value per share of Common Stock at the time,
provided that the exercise price per share of Common Stock covered by an option
is not less than 100% (110% in the case of an Incentive Option issued to a
shareholder owning more than 10% of the Corporation's outstanding Common Stock)
of the fair market value of the Common Stock on the date the option is granted.
The Board of Directors has the authority to determine certain terms and
conditions of the option agreements under which options pursuant to the Stock
Option Plan are to be granted. It is anticipated that such option agreements
shall contain the following provisions: (i) unless a different vesting schedule
is established by the Board, options shall be exercisable to the extent of 20%
of the option shares after the expiration of one year following the date the
option is granted, and to the extent of an additional 20% following each
anniversary date of grant thereafter, all to accumulate to the extent not
exercised; and (ii) options shall expire ten years after the date of grant (five
years in the case of an Incentive Option issued to a shareholder owning more
than 10% of the Corporation's Common Stock). These provisions may be changed in
the future, subject to compliance with the Plan.
Options are not transferable, except by will or by the law of descent
and distribution. If employment with the Corporation is terminated for any
reason other than for "cause", options may under certain circumstances be
exercised within specified periods after such termination. Shares subject to
options which expire or are terminated are again available for grant under the
Plan. In the event of termination of employment for any reason, any dividend
equivalent rights under the Plan held by such employee on the date of
termination shall be forfeited, unless otherwise expressly provided by the Board
of Directors.
The Stock Option Plan provides that outstanding options become
immediately exercisable if (i) a person who has not owned 10% or more of the
Common Stock for ten years acquires 25% or more of the outstanding Common Stock,
(ii) there is a change of a majority of the directors of the Corporation if such
new directors have not been approved by the incumbent directors, or (iii) a
meeting of shareholders of the Corporation is called for the purpose of voting
upon the sale, merger or consolidation of the Corporation with or into another
corporation. The potential cost of the benefits afforded option holders could
discourage attempts to acquire the Corporation.
In the event of any change in the shares subject to the Stock Option
Plan or any option granted thereunder (through reorganization, recapitalization,
stock split, stock dividend, merger, consolidation, or similar events), the
Board of Directors shall make such adjustments as it may deem appropriate to
prevent dilution or enlargement of option rights.
16
The Board of Directors may alter, suspend or discontinue the Stock
Option Plan in all respects, except that it may not make any alteration which
(except as set forth in the preceding paragraph) would affect an option
previously granted without the consent of the holder of the option, and it may
not, without shareholder approval, make any alteration which would (a) increase
the total number of shares for which options may be granted under the Plan
(except as set forth in the preceding paragraph), (b) establish the option price
at, or reduce it to, less than 100% (or, as applicable, 110%) of the fair market
value on the date of grant, (c) change in substance the provisions relating to
eligibility of employees, or (d) extend the term of the Plan or the maximum
period during which any option may be exercised.
Federal Income Tax Consequences
The receipt of an Incentive Option under the Plan does not result in
taxable income to an optionee for federal income tax purposes, nor is an
optionee required to recognize income upon exercise of an Incentive Option.
Under certain circumstances, an alternative minimum tax may apply to the
optionee upon exercise of an Incentive Option. If an optionee holds shares
purchased under an Incentive Option for a period of at least two years from the
date of grant and one year from the date of the transfer of the shares to him
upon exercise of the Incentive Option, he should be entitled to treat any profit
realized by him upon the disposition of such shares as long-term capital gain.
If shares acquired pursuant to the exercise of an Incentive Option granted under
the Plan are disposed of within the period referred to above (a disqualifying
disposition), profit realized by the optionee up to an amount equal to the
difference between the option price and the fair market value of the shares on
the date of exercise (or the amount realized on the disposition, if less) is
taxable as compensation income rather than capital gain; the remainder of the
gain, if any, upon such a disposition of the shares should be taxed as long-term
or short-term capital gain, depending on whether the shares had been held for
more than one year. The Corporation is not entitled to a deduction for Federal
income tax purposes with respect to an Incentive Option granted under the Plan,
except to the extent that the optionee must recognize compensation income as
described above.
No income will be recognized by an optionee for federal income tax
purposes upon the grant of a Non-Qualified Option. Upon exercise of a
Non-Qualified Option, the optionee will recognize ordinary income in an amount
equal to the excess of the fair market value of the shares on the date of
exercise over the option price paid for such shares. Income recognized upon the
exercise of Non-Qualified Options will be considered compensation subject to
withholding at the time such income is recognized, and therefore, the
Corporation must make the necessary arrangements with the optionee to ensure
that the amount of the tax required to be withheld is available for payment.
Non-Qualified Options are designed to provide the Corporation with a tax
deduction equal to the amount of ordinary income recognized by the optionee at
the time of such recognition by the optionee.
The tax basis of shares transferred to an optionee pursuant to exercise
of a Non-Qualified Option is the price paid for such shares plus an amount equal
to any income recognized by the optionee as a result of the exercise of such
option. If an optionee thereafter sells shares acquired upon exercise of a
17
Non-Qualified Option, any amount realized over the basis of such shares should
constitute capital gain to such optionee for federal income tax purposes.
An employee holding a dividend equivalent right will recognize taxable
income (which should be ordinary income) equivalent to the amount of any payment
received under such right for the year such amount is paid. The Corporation is
permitted a compensation deduction equal to such amount.
The favorable vote of the holders of a majority of the shares of Common
Stock entitled to vote and represented at the Annual Meeting is required for the
authorization and adoption of the 1999 Stock Option Plan.
The Board of Directors has determined that the Plan and the grant of
options thereunder is in the best interests of the Corporation and the
shareholders and recommends that the shareholders vote FOR the authorization and
adoption of the 1999 Stock Option Plan.
APPROVAL OF APPOINTMENT OF INDEPENDENT AUDITORS (PROPOSAL 3)
The Board of Directors has appointed the firm of KPMG LLP as
independent auditors for the fiscal year ending March 31, 2000, subject to
ratification by the shareholders. A representative of KPMG LLP is expected to be
present at the Annual Meeting with an opportunity to make a statement, and will
be available to respond to appropriate questions.
In order to approve the appointment of KPMG LLP as independent auditors
for the Corporation for the year ending March 31, 2000, the proposal must
receive the favorable vote of a majority of the shares entitled to vote and
represented at the Annual Meeting.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder proposal to be considered by the Corporation for
inclusion in the proxy material for the 2000 Annual Meeting of Shareholders must
be received by the Secretary of the Corporation, 12900 Preston Road, Suite 700,
Dallas, Texas 75230, no later than February 3, 2000. 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 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
18
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, 1999 accompanies this proxy statement, but is not deemed a part of the proxy
soliciting material.
A copy of the fiscal 1999 Form 10-K report to the Securities and
Exchange Commission, excluding exhibits, will be mailed to shareholders without
charge upon written request to Tim Smith, Secretary, Capital Southwest
Corporation, 12900 Preston Road, Suite 700, Dallas, Texas 75230. Such requests
must set forth a good faith representation that the requesting party was either
a holder of record or a beneficial owner of Common Stock of the Corporation on
June 1, 1999. Exhibits to the Form 10-K will be mailed upon similar request and
payment of specified fees.
19
Exhibit A
CAPITAL SOUTHWEST CORPORATION
1999 STOCK OPTION PLAN
1. Objective of the Plan.
----------------------
The 1999 Stock Option Plan (the "Plan") is intended to further the
established policy of Capital Southwest Corporation (the "Corporation") of
encouraging ownership of its Common Stock, $1.00 par value per share (the
"Common Stock"), by key employees of the Corporation and its management company
subsidiary, Capital Southwest Management Corporation, and by its officers who
are employees of its subsidiaries and of providing incentives for them to
enhance the value of the Corporation's stock. By extending to key employees the
opportunity to acquire proprietary interests in the Corporation and to
participate in its success, the Plan may be expected to benefit the Corporation
and its shareholders and to be in their best interests by making it possible for
the Corporation to attract and retain the best available talent.
2. Stock Reserved for the Plan.
----------------------------
One hundred forty thousand (140,000) shares of the authorized but
unissued Common Stock are reserved for issuance and may be issued upon the
exercise of options granted under the Plan. In lieu of such unissued shares, the
Corporation may, in its discretion, transfer upon the exercise of options,
reacquired shares or shares bought in the market for the purposes of the Plan
provided that (subject to the provisions of Section 14) the total number of
shares which may be sold pursuant to the exercise of options granted under the
Plan shall not exceed one hundred forty thousand (140,000). If any options
granted under the Plan shall for any reason terminate or expire without having
been exercised in full, the Common Stock not purchased under such options shall
again be available for the purposes of the Plan.
3. Administration of the Plan.
---------------------------
The Plan shall be administered by the Board of Directors of the
Corporation through actions approved by the "required majority" as defined in
Section 57(o) of the Investment Company Act of 1940, as amended (the "Investment
Company Act"). The Board of Directors shall have plenary authority in its
discretion, but subject to the express provisions of the Plan, to determine the
employees to whom, and the time or times at which, options shall be granted, the
term of each such option, and the number of shares to be covered by each option;
to determine whether an option shall be an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or a non-qualified stock option; to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine the
employees to whom, and the time or times at which, dividend equivalent rights
shall be granted, and the terms of such dividend equivalent rights; to determine
the terms (which need not be identical) of option agreements and dividend
equivalent right agreements executed and delivered under the Plan; and to make
all other determinations deemed necessary or advisable for the administration of
the Plan.
4. Eligibility Factors to be Considered in Making Grants.
------------------------------------------------------
An option and/or dividend equivalent right may be granted to any person
who, at the time of grant, is either (i) a regular salaried employee of the
Corporation or its management company subsidiary, Capital Southwest Management
Corporation; or (ii) an officer of the Corporation who is a regular salaried
employee of one of its subsidiaries (such person or persons referred to in
A-1
clauses (i) and (ii) above being singularly hereinafter referred to as "Key
Employee," or, if more than one, as "Key Employees"). No incentive stock option
may be granted to an individual who immediately after such option is granted
owns, within the meaning of Section 422(b) of the Code, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Corporation (or its subsidiaries) (hereinafter called a "l0% Holder"), except in
compliance with the provisions of Sections 6 and 7 hereof. In determining the
Key Employees to whom options and/or dividend equivalent rights shall be granted
and the number of shares to be covered by each option, the Board of Directors
shall take into account the duties of the respective Key Employees, their
present and potential contributions to the success of the Corporation (or one of
its subsidiaries), the anticipated number of years of service remaining and such
other factors as they shall deem relevant in connection with accomplishing the
purpose of the Plan. Subject to the provisions of Section 5, a Key Employee who
has been granted an option may be granted an additional option or options if the
Board of Directors shall so determine.
5. Types of Options; Maximum Allotment of Options.
-----------------------------------------------
The Board of Directors may grant either incentive stock options or
non-qualified stock options under the Plan. In addition, the aggregate fair
market value (determined at the time of grant in accordance with Section 6
hereof) of the shares of Common Stock which any Key Employee is first eligible
to purchase in any calendar year by exercise of incentive stock options granted
under the Plan and all incentive stock option plans of the Corporation or its
subsidiaries shall not exceed $100,000. For this purpose, the fair market value
(determined at the respective date of grant of each option) of the stock
purchasable by exercise of an incentive stock option (or an installment thereof)
shall be counted against the $100,000 annual limitation for a Key Employee only
for the calendar year such stock is first purchasable under the terms of the
option.
6. Option Prices.
--------------
The purchase price of Common Stock covered by each option shall be 100%
of the fair market value of the Common Stock at the time the option is granted,
except with respect to incentive stock options granted to any 10% Holder, the
purchase price shall be not less than 110% of the fair market value. The fair
market value shall be (i) if the Common Stock is listed on a national securities
exchange (which term shall include the Nasdaq Stock Market), the last reported
sale price of the Common Stock on such exchange on the date on which the option
is granted (or if there shall be no trading on such date, then on the next
previous date on which there shall have been trading of the Common Stock); (ii)
if the Common Stock is not listed on a national securities exchange, the average
of the highest bid and the lowest ask prices at the close of business in the
over-the-counter market on the date on which the option is granted; or (iii) if
the Common Stock is neither listed on a national securities exchange nor traded
in the over-the-counter market, as determined by the Board of Directors of the
Corporation in good faith on the basis of financial information and information
regarding recent sales of Common Stock available to it, using any reasonable
valuation method. The Board's determination of the fair market value shall be
conclusive and the purchase price of shares of Common Stock under each option
shall be set forth in the minutes of the meeting of the Board of Directors.
7. Term of Option.
---------------
The term of each option shall be for such period as the Board of
Directors shall determine, but not more than ten (10) years from the date of
granting thereof, except that in the case of incentive stock options granted to
A-2
10% Holders, the term of each option shall not exceed five (5) years and each
option shall be subject to earlier termination as hereinafter provided.
8. Exercise of Options and Withholding Taxes.
------------------------------------------
(a) Unless otherwise determined by the Board of Directors, each option
shall be exercisable on and after the first anniversary of the date of grant in
five (5) equal annual installments of 20% of the shares subject to such option
and, except as may be so specified, any annual installment of an option not
exercised shall accumulate and thereafter may be exercised as to all, or from
time to time any part of, the shares then currently exercisable prior to the
expiration of the option. Fractional shares will not be issued. The purchase
price of the shares as to which an option shall be exercised shall be paid in
full in cash in currency of the United States of America at the time of
exercise, except that, subject to the receipt of appropriate orders of the
Securities and Exchange Commission which may be required pursuant to the
Investment Company Act, the Board of Directors may, in its discretion, provide
that payment of the purchase price of such shares may be made with shares of the
Corporation's Common Stock. Except as provided in Sections 11 and 12 hereof, no
option may be exercised at any time unless the holder thereof is then an
employee of the Corporation or one of its subsidiaries. The holder of an option
shall not have any of the rights of a shareholder with respect to the shares
covered by his option until such shares shall be issued to him upon the due
exercise of the option. Proceeds from the sale of stock pursuant to the Plan
shall be used for general corporate purposes.
(b) At the time of exercise of a non-qualified stock option or a
disqualifying disposition of shares issued under an incentive stock option, the
employee shall remit to the Corporation in cash all applicable federal and state
withholding taxes.
9. Non-Transferability.
--------------------
An option granted under the Plan shall not be transferable otherwise
than by a will or the laws of descent and distribution, and an option may be
exercised during the lifetime of the holder only by him. A dividend equivalent
right granted under the Plan shall not be transferable unless otherwise
expressly provided by the Board of Directors.
10. Dividend Equivalent Rights.
---------------------------
Upon the declaration of any capital gain dividend, the Board shall have
the authority to grant dividend equivalent rights with respect to such dividend
to eligible employees upon such terms and conditions as it shall establish,
subject in all events to the following limitations and provisions of general
application set forth in the Plan. Each dividend equivalent right shall entitle
a holder to receive a payment (cash or otherwise) equal to the market value on
the dividend payment date of any specified capital gain dividend declared and
paid by the Corporation on one share of Common Stock. The Corporation shall make
payments pursuant to each right within five (5) business days after the payment
of the specified capital gain dividend to holders of Common Stock.
Each dividend equivalent right shall be granted independent of any
option.
In the event of termination of employment for any reason, any dividend
equivalent right held by such employee on the date of termination shall be
forfeited, unless otherwise expressly provided by the Board of Directors.
A-3
11. Termination of Employment.
--------------------------
In the event that the employment of any employee of the Corporation or
one of its subsidiaries to whom an option has been granted under the Plan shall
be terminated (otherwise than by reason of death or for "cause" as defined
below) such option may be exercised, to the extent that the holder of the option
was entitled to do so at the termination of his employment, at any time within
one (1) month after such termination (six (6) months in the case of termination
of employment at a time when the employee is "disabled" within the meaning of
Section 105 (d)(4) of the Code) but in no event after the expiration of the term
of the option. As used herein, "cause" shall mean gross negligence, dishonesty
or breach of fiduciary obligations to the Corporation or its subsidiaries. In
the event of termination of the employment of any option holder for cause, all
outstanding options held by such terminated employee shall terminate effective
as of the date of notice of termination. Options granted under the Plan shall
not be affected by any change of duties or position so long as the holder
continues to be an employee of the Corporation or one of its subsidiaries or is
employed by a corporation (or a related corporation of such corporation) issuing
or assuming an option in a transaction to which Section 424(a) of the Code
applies. Retirement pursuant to any pension plan provided by the Corporation and
its subsidiaries shall be deemed to be a termination of employment for the
purposes of this Section 11. Nothing in the Plan or in any option or dividend
equivalent right granted pursuant to the Plan shall confer upon any employee any
right to continue in the employ of the Corporation or of the subsidiary by which
he is employed.
12. Death of Employee.
------------------
If an employee of the Corporation or one of its subsidiaries to whom an
option has been granted under the Plan shall die while he is employed by the
Corporation or one of its subsidiaries or within one (1) month after termination
of his employment, such option may be exercised to the extent that the employee
was entitled to do so at the date of his death by his executor or administrator
or other person at the time entitled by law to the employee's rights under the
option, at any time within such period not exceeding six (6) months after the
date of the termination of his employment by death or otherwise, as shall be
prescribed in the option agreement, but in no event after the expiration of the
term of the option.
13. Definitions.
------------
For purposes of the Plan, a "subsidiary" of the Corporation shall mean
a corporation, whether domestic or foreign, in which the Corporation shall own,
directly or indirectly, 50% or more of the issued and outstanding capital stock
thereof, and "Corporation" shall mean Capital Southwest Corporation and any
division thereof.
For purposes of the Plan, employment with the Corporation or one of its
subsidiaries shall mean continuous regular employment as an employee, or an
uninterrupted chain of continuous regular employment as an employee or by a
corporation (or a related corporation of such corporation) issuing or assuming
an option in a transaction to which Section 424(a) of the Code applies.
Military, sick leave, or other bona fide leave of absence, such as
temporary employment by the government, shall not be considered a termination of
employment nor an interruption of employment with the Corporation or one of its
subsidiaries hereunder if the period of such leave does not exceed 90 days, or,
if longer, so long as the employee's right to re-employment is guaranteed either
by statute or by contract.
A-4
14. Change in Control; Antidilution.
--------------------------------
(a) Notwithstanding any provision of the Plan to the contrary, each
outstanding option granted hereunder shall become and remain
exercisable in full and each dividend equivalent right granted
hereunder shall immediately vest and remain in full force and
effect for its term,
(i) on the date 10 days prior to the record date for a meeting
of shareholders of the Corporation called for the purpose of
voting upon any transaction or series of transactions (other
than a transaction to which only the Corporation and one or
more of its subsidiaries are parties) pursuant to which the
Corporation would become a subsidiary of another corporation
or would be merged or consolidated with or into another
corporation, or would engage in an exchange of shares with
another corporation, or substantially all of the assets of
the Corporation would be sold to or acquired by another
person, corporation or group of associated persons acting in
concert; or
(ii) on the date upon which any person, corporation or group of
associated persons acting in concert, excluding any persons
who have then been owners of 10% or more of the Common Stock
of the Corporation for a continuous period of at least ten
(10) years, becomes a direct or indirect beneficial owner of
shares of stock of the Corporation representing an aggregate
of more than 25% of the votes then entitled to be cast at a
meeting for the purpose of electing Directors of the
Corporation; or
(iii)on the date upon which the persons who were members of the
Board of Directors of the Corporation as of March 31, 1999
(the "Original Directors"), cease to constitute a majority
of the Board of Directors, provided, however, that any new
Director whose nomination or selection has been approved by
the affirmative vote of at least three of the Original
Directors then in office shall also be deemed an Original
Director for all purposes of this Section 14(a)(iv).
The Corporation shall use its best efforts to notify each holder
of an option and/or dividend equivalent right of his rights under
this Section 14(a) within a reasonable period of time prior to
the date or effective date of any transaction or event described
above.
(b) In the event that the Common Stock of the Corporation subject to
options granted hereunder is hereafter changed into or exchanged
for a different number or kind of shares or other securities of
the Corporation or of another corporation by reason of merger,
consolidation, exchange of shares, other reorganization,
recapitalization, reclassification, combination of shares, stock
split-ups or stock dividends,
(i) the aggregate number and kind of shares subject to
outstanding options and dividend equivalent rights granted
hereunder shall be adjusted appropriately;
(ii) rights under outstanding options and dividend equivalent
rights granted hereunder, both as to the number of subject
shares, and with respect to options, the option price, shall
be adjusted appropriately;
A-5
(iii)where dissolution or liquidation of the Corporation is
involved, each dividend equivalent right and outstanding
option granted hereunder shall terminate, but the holder of
an option shall have the right, immediately prior to such
dissolution or liquidation to exercise his option in full,
notwithstanding the provisions of Section 8 (but subject to
the other terms and conditions of this Plan) and the
Corporation shall notify each holder of an option of such
right within a reasonable period of time prior to any such
dissolution or liquidation; and
(iv) where any merger, consolidation or exchange of shares is
involved from and after the effective time of such merger,
consolidation or exchange of shares, each dividend
equivalent right shall remain in full force and effect and
become the obligation of any successor entity and each
holder of an option shall be entitled, upon exercise of his
option in accordance with all of the terms and conditions of
this Plan, to receive in lieu of Common Stock of the
Corporation, shares of such stock or other securities or
consideration as the holders of Common Stock of the
Corporation received pursuant to the terms of the merger,
consolidation or exchange of shares.
The adjustments contained in clauses (i), (ii), (iii) and (iv) of
this subsection (b) and the manner of application of such
provisions shall be determined solely by the Board of Directors
and any such adjustment may provide for the elimination of
fractional share interests.
15. Time of Grant.
--------------
Nothing contained in the Plan or in any resolution to be adopted by the
Board of Directors or the holders of Common Stock of the Corporation shall
constitute the granting of any option or dividend equivalent right hereunder. An
option or dividend equivalent right pursuant to the Plan shall be deemed to have
been granted on the date on which the name of the recipient and the terms of the
option or dividend equivalent right, as applicable, are determined by the Board
of Directors in accordance with Section 3.
16. Termination and Amendment of the Plan.
--------------------------------------
Unless the Plan shall theretofore have been terminated as hereinafter
provided in this Section 16, no option or dividend equivalent right shall be
granted hereunder after April 19, 2009. The Board of Directors of the
Corporation may at any time prior to that date terminate the Plan or make such
modification or amendment of the Plan as it shall deem advisable; provided
however, that no amendment may be made which will disqualify an incentive stock
option granted hereunder as an "incentive stock option" within the meaning of
Section 422 of the Code, and provided that the Board of Directors may not,
without further approval by the holders of Common Stock, except as provided in
Section 14 hereof, increase the maximum number of shares for which options may
be granted under the Plan, either in the aggregate or to any individual, or
change the manner of determining the minimum option prices or extend the period
during which an option may be granted or exercised or amend the requirements as
to the class of employees eligible to receive options. No termination,
modification or amendment of the Plan may adversely affect the rights of an
option holder under an option previously granted to such option holder without
the consent of such option holder.
A-6
17. Government Regulations.
-----------------------
The Plan, the granting of dividend equivalent rights, the granting and
exercise of options thereunder, and the obligation of the Corporation to sell
and deliver shares under such options shall be subject to all applicable laws,
rules and regulations.
18. Shareholder Approval.
---------------------
The Plan shall be submitted to the shareholders for approval at the
next annual meeting of shareholders or a special meeting of shareholders called
for the purpose of such approval, but in no event more than one (1) year after
the date of its adoption by the Board of Directors. No grants will be made under
the Plan until it is approved by the shareholders of the Corporation.
19. Severability.
-------------
If any provision of the Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining portions of
the Plan, but such provision shall be fully severable and the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan. Such an illegal or invalid provision shall be replaced by
a revised provision that most nearly comports to the substance of the illegal or
invalid provision. If any of the terms or provisions of the Plan or any
agreement conflict with the requirements of Rule 16b-3 (as those terms or
provisions are applied to eligible persons who are subject to Section 16(b) of
the Securities Exchange Act of 1934, as amended, or Section 422 of the Code
(with respect to incentive stock options)), those conflicting terms or
provisions shall be deemed inoperative to the extent they conflict with those
requirements. With respect to incentive stock options, if the Plan does not
contain any provision required to be included in a plan under Section 422 of the
Code, that provision shall be deemed to be incorporated into the Plan with the
same force and effect as if it had been expressly set out in the Plan; provided,
however, that, to the extent any option that is intended to qualify as an
incentive stock option cannot so qualify, that option (to that extent) shall be
deemed to be a non-qualified option for all purposes of the Plan.
A-7
Appendix A
Capital Southwest Corporation
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- JULY 19, 1999
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 19, 1999, 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:
IMPORTANT: SIGN ON OTHER SIDE
FOR all nominees WITHHOLD AUTHORITY
listed at right to vote for
(except as marked all nominees
to the contrary below) listed at right Nominees: Graeme W. Henderson
1. Election of Gary L. Martin
Directors James M. Nolan
------------- ------------- William R. Thomas
(INSTRUCTION: To withhold authority to vote for John H. Wilson
any individual nominee, write that nominee's name
in the space provided below.)
- -------------------------------------
FOR AGAINST ABSTAIN
2. Proposal to authorize and adopt the 1999
Stock Option Plan of the Corporation. ------ ------ ------
FOR AGAINST ABSTAIN
3. Proposal to ratify the appointment of
KPMG LLP as independent auditors
for the Corporation. ------ ------ ------
4. 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
proposals described in (2) and (3) 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.
- ------------------------ ------------------------ ------------------------ Date: , 1999
Signature of Shareholder Signature of Shareholder Title, if applicable
NOTE: Please date this proxy and sign your name exactly as it appears hereon.
Where there is more than one owner, each should sign. When signing as
an attorney, administrator, executor, guardian or trustee, please add
your title as such. If executed by a corporation, the proxy should be
signed by a duly authorized officer. EACH JOINT TENANT SHOULD SIGN.
