SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------------------------
For the Fiscal Year Ended March 31, 2002 Commission File Number: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
12900 Preston Road, Suite 700, Dallas, Texas 75230
(Address of principal executive offices including zip code)
(972) 233-8242
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 1, 2002 was $127,571,235, based on the last sale price of
such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of May 15, 2002 was
3,829,051.
Documents Incorporated by Reference Part of Form 10-K
(1) Annual Report to Shareholders for the Parts I and II; and
Year Ended March 31, 2002 Part IV, Item 14(a)(1) and (2)
(2) Proxy Statement for Annual Meeting of Part III
Shareholders to be held July 15, 2002
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.........................................................1
Item 2. Properties.......................................................1
Item 3. Legal Proceedings................................................1
Item 4. Submission of Matters to a Vote of Security Holders..............1
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................2
Item 6. Selected Financial Data..........................................2
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................2
Item 7A. Quantitative and Qualitative Disclosure About Market Risk........2
Item 8. Financial Statements and Supplementary Data......................2
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...........................................3
PART III
Item 10. Directors and Executive Officers of the Registrant...............3
Item 11. Executive Compensation...........................................4
Item 12. Security Ownership of Certain Beneficial Owners and Management...4
Item 13. Certain Relationships and Related Transactions...................4
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ...................................................4
Signatures ...................................................................5
Exhibit Index ................................................................6
PART I
Item 1. Business
Capital Southwest Corporation (the "Company") was organized as a Texas
corporation on April 19, 1961. Until September 1969, the Company operated as a
licensee under the Small Business Investment Act of 1958. At that time, the
Company transferred to its wholly-owned subsidiary, Capital Southwest Venture
Corporation ("CSVC"), certain of its assets and its license as a small business
investment company ("SBIC"). CSVC is a closed-end, non-diversified investment
company of the management type registered under the Investment Company Act of
1940 (the "1940 Act"). Prior to March 30, 1988, the Company was registered as a
closed-end, non-diversified investment company under the 1940 Act. On that date,
the Company elected to become a business development company subject to the
provisions of Sections 55 through 65 of the 1940 Act, as amended by the Small
Business Incentive Act of 1980.
The Company is a venture capital investment company whose objective is to
achieve capital appreciation through long-term investments in businesses
believed to have favorable growth potential. The Company's investments are
focused on early-stage financings, expansion financings, management buyouts and
recapitalizations in a broad range of industry segments. The portfolio is a
composite of companies in which the Company has major interests as well as a
number of developing companies and marketable securities of established
publicly-owned companies. The Company makes available significant managerial
assistance to the companies in which it invests and believes that providing
material assistance to such investee companies is critical to its business
development activities.
The twelve largest investments of the Company had a combined cost of
$45,316,675 and a value of $309,839,711, representing 89.2% of the value of the
Company's consolidated investment portfolio at March 31, 2002. For a narrative
description of the twelve largest investments, see "Twelve Largest Investments -
March 31, 2002" on pages 7 through 9 of the Company's Annual Report to
Shareholders for the Year Ended March 31, 2002 (the "2002 Annual Report") which
is herein incorporated by reference. Certain of the information presented on the
twelve largest investments has been obtained from the respective companies and,
in certain cases, from public filings of such companies. The financial
information presented on each of the respective companies is from such
companies' financial statements, which in some instances are unaudited.
The Company competes for attractive investment opportunities with venture
capital partnerships and corporations, venture capital affiliates of industrial
and financial companies, SBICs and wealthy individuals.
The number of persons employed by the Company at March 31, 2002 was seven.
Item 2. Properties
The Company maintains its offices at 12900 Preston Road, Suite 700, Dallas,
Texas, 75230, where it rents approximately 3,700 square feet of office space
pursuant to a lease agreement expiring in February 2003. The Company believes
that its offices are adequate to meet its current and expected future needs.
Item 3. Legal Proceedings
The Company has no material pending legal proceedings to which it is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended March 31, 2002.
1
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information set forth under the captions "Shareholder Information -
Shareholders, Market Prices and Dividends" on page 32 of the 2002 Annual Report
is herein incorporated by reference.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 31 of the 2002 Annual Report
is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 28 through 30 of the Company's 2002 Annual Report are herein
incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to financial market risks, including changes in
marketable equity security prices. The Company does not use derivative financial
instruments to mitigate any of these risks. The return on the Company's
investments is not materially affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate
debt securities which totaled $2,880,000 at March 31, 2002, equivalent to 0.83%
of the value of the Company's total investments. Since these debt securities
usually have relatively high fixed rates of interest, minor changes in market
yields of publicly-traded debt securities have little or no effect on the values
of debt securities in the Company's portfolio and no effect on interest income.
The Company's investments in debt securities are generally held to maturity and
their fair values are determined on the basis of the terms of the debt security
and the financial condition of the issuer.
A portion of the Company's investment portfolio consists of debt and equity
securities of private companies. The Company anticipates little or no effect on
the values of these investments from modest changes in public market equity
valuations. Should significant changes in market valuations of comparable
publicly-owned companies occur, there would be a corresponding effect on
valuations of private companies, which would affect the value and the amount and
timing of proceeds eventually realized from these investments. A portion of the
Company's investment portfolio also consists of restricted common stocks and
warrants to purchase common stocks of publicly-owned companies. The fair values
of these restricted securities are influenced by the nature of applicable resale
restrictions, the underlying earnings and financial condition of the issuer, and
the market valuations of comparable publicly-owned companies. A portion of the
Company's investment portfolio also consists of unrestricted, freely marketable
common stocks of publicly-owned companies. These freely marketable investments
are directly exposed to equity price risks, in that a change in an issuer's
public market equity price would result in an identical change in the fair value
of the Company's investment in such security.
Item 8. Financial Statements and Supplementary Data
Pages 10 through 27 of the Company's 2002 Annual Report are herein
incorporated by reference. See also Item 14 of this Form 10-K - "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".
2
Selected Quarterly Financial Data (Unaudited)
---------------------------------
The following presents a summary of the unaudited quarterly consolidated
financial information for the years ended March 31, 2002 and 2001.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
2002
- ----
Net investment income $ 429 $ 383 $ 921 $ 309 $ 2,042
Net realized gain (loss) on investments -- (450) 1,084 (1,172) (538)
Net increase (decrease) in unrealized
appreciation of investments 15,310 (1,139) 7,296 2,707 24,174
Net increase (decrease) in net assets from
operations 15,739 (1,206) 9,301 1,844 25,678
Net increase (decrease) in net assets from
operations per share 4.11 (0.32) 2.43 0.48 6.70
2001
- ----
Net investment income $ 25 $ 987 $ 434 $ 277 $ 1,723
Net realized gain (loss) on investments 1,442 -- (768) (3,905) (3,231)
Net increase (decrease) in unrealized
appreciation of investments (1,463) (2,678) (9,821) 7,492 (6,470)
Net increase (decrease) in net assets from
operations 4 (1,691) (10,155) 3,864 (7,978)
Net increase (decrease) in net assets from
operations per share -- (0.44) (2.66) 1.01 (2.09)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement for Annual Meeting of Shareholders to be
held July 15, 2002, filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, on or about June 7, 2002 (the "2002 Proxy Statement") is
herein incorporated by reference.
Executive Officers of the Registrant
The officers of the Company, together with the offices in the Company
presently held by them, their business experience during the last five years and
their ages are as follows:
William M. Ashbaugh, age 47, has served as Vice President of the Company since
2001. He previously served as Managing Director in the corporate finance
departments of Hoak Breedlove Wesneski & Co. from 1998 to 2001, Principal
Financial Securities from 1997 to 1998 and Southwest Securities from 1995
to 1997.
Patrick F. Hamner, age 46, has served as Vice President of the Company since
1986 and was an investment associate with the Company from 1982 to 1986.
3
Susan K. Hodgson, age 40, has served as Secretary-Treasurer of the Company since
2001 and was the Controller of the Company from 1994.
Gary L. Martin, age 55, has been a director of the Company since July 1988 and
has served as Vice President of the Company since 1984. He previously
served as Vice President of the Company from 1978 to 1980. Since 1980, Mr.
Martin has served as President of The Whitmore Manufacturing Company, a
wholly-owned portfolio company.
William R. Thomas, age 73, has served as Chairman of the Board of Directors of
the Company since 1982 and President of the Company since 1980. In
addition, he has been a director of the Company since 1972 and was
previously Senior Vice President of the Company from 1969 to 1980.
No family relationship exists between any of the above-listed officers, and
there are no arrangements or understandings between any of them and any other
person pursuant to which they were selected as an officer. All officers are
elected to hold office for one year, subject to earlier termination by the
Company's board of directors.
Item 11. Executive Compensation
The information set forth under the caption "Compensation of Directors and
Executive Officers" in the 2002 Proxy Statement is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Stock Ownership of Certain
Beneficial Owners" and "Election of Directors" in the 2002 Proxy Statement is
herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this item
during the fiscal year ended March 31, 2002 or proposed for the fiscal year
ending March 31, 2003.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements included in pages 10 through 27
of the Company's 2002 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 2002
Consolidated Statements of Financial Condition - March 31, 2002
and 2001
Consolidated Statements of Operations - Years Ended March 31,
2002, 2001 and 2000
Consolidated Statements of Changes in Net Assets - Years Ended
March 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years Ended March 31,
2002, 2001 and 2000
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Independent Auditors' Report
(F) Portfolio Changes During the Year
(a)(2) All schedules are omitted because they are not applicable or not
required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index on page 6.
(b) The Company filed no reports on Form 8-K during the three months ended
March 31, 2002.
4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
By: /s/ William R. Thomas
-----------------------------
(William R. Thomas, President
and Chairman of the Board)
Date: June 14, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ William R. Thomas
- --------------------------- President and Chairman June 14, 2002
(William R. Thomas) of the Board and Director
/s/ Gary L. Martin
- --------------------------- Director June 14, 2002
(Gary L. Martin)
/s/ Graeme W. Henderson
- --------------------------- Director June 14, 2002
(Graeme W. Henderson)
/s/ James M. Nolan
- --------------------------- Director June 14, 2002
(James M. Nolan)
/s/ John H. Wilson
- --------------------------- Director June 14, 2002
(John H. Wilson)
/s/ Susan K. Hodgson
- --------------------------- Secretary-Treasurer June 14, 2002
(Susan K. Hodgson) (Financial and Accounting Officer)
5
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with this
report.)
Exhibit No. Description
- ----------- -----------
3.1(a) Articles of Incorporation and Articles of Amendment to
Articles of Incorporation, dated June 25, 1969 (filed as
Exhibit 1(a) and 1(b) to Amendment No. 3 to Form N-2 for the
fiscal year ended March 31, 1979).
3.1(b) Articles of Amendment to Articles of Incorporation, dated July
20, 1987 (filed as an exhibit to Form N-SAR for the six month
period ended September 30, 1987).
3.2 By-Laws of the Company, as amended (filed as Exhibit 2 to
Amendment No. 11 to Form N-2 for the fiscal year ended March
31, 1987).
4.1* Specimen of Common Stock certificate.
4.2 Subordinated debenture of CSVC guaranteed by the Small
Business Administration (filed as Exhibit 4.3 to Form 10-K for
the fiscal year ended March 31, 1993).
10.1* The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock
Ownership Plan as revised and restated effective April 1,
1998.
10.2* Amendment No. I to The RectorSeal Corporation and Jet-Lube,
Inc. Employee Stock Ownership Plan as revised and restated
effective April 1, 1998.
10.3 Retirement Plan for Employees of Capital Southwest Corporation
and Its Affiliates as amended and restated effective April 1,
1989 (filed as Exhibit 10.3 to Form 10-K for the fiscal year
ended March 31, 1995).
10.4 Amendments One and Two to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as amended
and restated effective April 1, 1989.
10.5* Amendment Three to Retirement Plan for Employees of Capital
Southwest Corporation and Its Affiliates as amended and
restated effective April 1, 1989.
10.6 Capital Southwest Corporation and Its Affiliates Restoration
of Retirement Income Plan for certain highly-compensated
superseded plan participants effective April 1, 1993 (filed as
Exhibit 10.4 to Form 10-K for the fiscal year ended March 31,
1995).
10.7 Amendment One to Capital Southwest Corporation and Its
Affiliates Restoration of Retirement Income Plan for certain
highly-compensated superceded plan participants effective
April 1, 1993.
6
10.8 Capital Southwest Corporation Retirement Income Restoration
Plan as amended and restated effective April 1, 1989 (filed as
Exhibit 10.5 to Form 10-K for the fiscal year ended March 31,
1995).
10.9 Form of Indemnification Agreement which has been established
with all directors and executive officers of the Company
(filed as Exhibit 10.9 to Form 8-K dated February 10, 1994).
10.10 Capital Southwest Corporation 1984 Incentive Stock Option Plan
as amended and restated as of April 20, 1987 (filed as Exhibit
10.10 to Form 10-K for the fiscal year ended March 31, 1990).
10.11 Capital Southwest Corporation 1999 Stock Option Plan.
Exhibit No. Description
- ----------- -----------
13* Annual Report to Shareholders for the fiscal year ended
March 31, 2002.
21. List of subsidiaries of the Company.
23* Independent Auditors' Consent.
7
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
DB
Capital
COMMON STOCK Southwest
PAR VALUE $1.00 Corporation [CUSIP 140501 10 7]
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF
CAPITAL SOUTHWEST CORPORATION transferable on the books of the corporation by
the holder hereof in person or by attorney upon surrender of this certificate
properly endorsed. This certificate, and the shares represented hereby, are
issued under and shall be subject to all of the provisions of the Articles of
Incorporation of the corporation and any amendments thereto, copies of which are
on file with the corporation and the Transfer Agent, to all of which the holder,
by acceptance hereof, assents. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the said corporation has caused the facsimile
signatures of its duly authorized officers and the facsimile seal of the
corporation to be hereunto affixed.
Dated:
PRESIDENT [CORPORATE SEAL OMITTED]
SECRETARY
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, N.Y.) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
Capital Southwest Corporation
The shares represented by this certificate are subject to all of the terms and
provisions of the Articles of Incorporation of the Corporation, as may be
amended from time to time, which Articles of Incorporation are filed with the
Secretary of State of Texas. Such shares are expressly subject to the provisions
of Article IV of the Articles of Incorporation which denies preemptive rights
and cumulative voting. The Corporation will furnish to the holder of this
certificate, upon request to the Corporation at its principal place of business,
without charge, a copy of the Corporation's Articles of Incorporation, as
amended.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT_______Custodian_______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants, with right
of survivorship and not as under Uniform Gifts to Minors
tenants in common Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED_______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
______________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
______________________________________________________________________________
______________________________________________________________________________
________________________________________________________________________Shares
of the Common Stock represented by the within Certificate and do hereby
irrevocably constitute and appoint____________________ Attorney to transfer
the said stock on the books of the within-named Corporation with full power of
substitution in the premises.
Dated______________________________________
X___________________________
(SIGNATURE)
NOTICE:
THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
X___________________________
(SIGNATURE)
____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
____________________________________________
SIGNATURE(S) GUARANTEED BY:
____________________________________________
EXHIBIT 10.1
THE RECTORSEAL CORPORATION AND JET-LUBE, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Revised and Restated Effective April 1, 1998)
THE RECTORSEAL CORPORATION AND JET-LUBE, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Revised and Restated Effective April 1, 1998)
TABLE OF CONTENTS
-----------------
Page
ARTICLE I DEFINITIONS............................................3
Sec. 1.1 Administrator.......................................3
Sec. 1.2 Affiliated Company..................................3
Sec. 1.3 Allocation Date.....................................3
Sec. 1.4 Anniversary Date....................................3
Sec. 1.5 Alternate Payee.....................................3
Sec. 1.6 Annual Compensation.................................3
Sec. 1.7 Beneficiary.........................................4
Sec. 1.8 Code................................................6
Sec. 1.9 Committee...........................................6
Sec. 1.10 Company.............................................6
Sec. 1.11 Disability..........................................6
Sec. 1.12 Early Retirement Date...............................6
Sec. 1.13 Employee............................................6
Sec. 1.14 Employer............................................7
Sec. 1.15 Entry Date..........................................7
Sec. 1.16 ERISA...............................................7
Sec. 1.17 Five-Year Break in Service..........................7
Sec. 1.18 Former Participant..................................7
Sec. 1.19 Hours of Service....................................7
Sec. 1.20 Individual Account.................................10
Sec. 1.21 Leased Employee....................................10
Sec. 1.22 Named Fiduciary....................................10
Sec. 1.23 Normal Retirement Date.............................11
Sec. 1.24 Notice.............................................11
Sec. 1.25 One-Year Break in Service..........................12
Sec. 1.26 Other Investments Account..........................12
Sec. 1.27 Parent Company Stock...............................12
Sec. 1.28 Parent Company Stock Account.......................12
Sec. 1.29 Participant........................................12
Sec. 1.30 Plan...............................................12
Sec. 1.31 Qualified Domestic Relations Order.................12
Sec. 1.32 Recordkeeper.......................................13
Sec. 1.33 Trust Agreement....................................13
Sec. 1.34 Trust Fund.........................................13
Sec. 1.35 Trustee............................................13
Sec. 1.36 Year...............................................13
i
Sec. 1.37 Year of Service (Participation)....................13
Sec. 1.38 Year of Service (Vesting)..........................13
Sec. 1.39 Gender and Number..................................14
ARTICLE II ELIGIBILITY OF EMPLOYEES..............................14
Sec. 2.1 Eligibility........................................14
Sec. 2.2 Election Not to Participate........................14
Sec. 2.3 Eligibility upon Reemployment......................15
Sec. 2.4 Reemployment of Participant........................15
Sec. 2.5 Exclusion of Employees Covered by
Collective Bargaining..............................15
Sec. 2.6 Eligibility Upon Entry or Reentry
into Eligible Class of Employees...................15
ARTICLE III CONTRIBUTIONS.........................................16
Sec. 3.1 Contributions of the Employer......................16
Sec. 3.2 Form of Employer Contributions.....................16
Sec. 3.3 Time of Contributions..............................16
Sec. 3.4 Limit on Employer Contributions....................16
Sec. 3.5 Manner of Making Contributions.....................17
Sec. 3.6 Contributions with Respect to
Military Leave.....................................17
ARTICLE IV ACCOUNTS AND VALUATION OF TRUST FUND..................17
Sec. 4.1 Participants' Individual Accounts..................17
Sec. 4.2 Valuation of the Trust Fund and of
the Interest of Each Participant...................17
Sec. 4.3 Allocations to Individual Accounts.................18
Sec. 4.4 Included Individual Accounts.......................21
Sec. 4.5 Time When Contributions are Allocated..............22
ARTICLE V LIMITATION ON ALLOCATIONS.............................22
Sec. 5.1 Limitation on Allocations..........................22
Sec. 5.2 Definitions........................................23
Sec. 5.3 Excess Annual Additions............................28
Sec. 5.4 Combined Plan Limits for Limitation
Years Beginning Prior to April 1,
2000...............................................29
Sec. 5.5 Special Rules......................................31
ARTICLE VI INDIVIDUAL ACCOUNTS...................................33
Sec. 6.1 Participant Interest in Individual
Accounts...........................................33
ii
Sec. 6.2 Annual Statement to Participant....................33
ARTICLE VII RETIREMENT............................................33
Sec. 7.1 Normal Retirement..................................33
Sec. 7.2 Early Retirement...................................33
Sec. 7.3 Other Retirement...................................33
Sec. 7.4 Benefits on Retirement.............................33
Sec. 7.5 Commencement of Benefits...........................34
Sec. 7.6 Final Contribution After Distribution
of Benefits........................................34
ARTICLE VIII DEATH.................................................34
Sec. 8.1 Benefits on Death..................................34
Sec. 8.2 Final Contribution After Payment of
Benefits...........................................34
ARTICLE IX DISABILITY............................................35
Sec. 9.1 Benefits on Disability.............................35
Sec. 9.2 Final Contribution After Payment of
Benefits...........................................35
ARTICLE X TERMINATION BENEFITS..................................36
Sec. 10.1 Termination of Employment Other than
by Reason of Death, Disability or
Retirement.........................................36
Sec. 10.2 Vested Interest....................................36
Sec. 10.3 Time of Distribution...............................36
Sec. 10.4 Forfeiture and Return to Employment
Prior to Complete Distribution.....................37
Sec. 10.5 Application of Forfeitures.........................38
ARTICLE XI DISTRIBUTIONS AND WITHDRAWALS.........................38
Sec. 11.1 Form of Payment....................................38
Sec. 11.2 Consent to Distribution............................39
Sec. 11.3 Minority or Disability of Distributee..............39
Sec. 11.4 Additional Requirements Relating to
Benefit Payments and Death
Distributions......................................40
Sec. 11.5 Withdrawals........................................43
Sec. 11.6 Claims Procedure...................................43
Sec. 11.7 Administrator's Duty to Trustee....................45
Sec. 11.8 Duty to Keep Administrator Informed
of Distributee's Current Address...................45
iii
Sec. 11.9 Failure to Claim Benefits..........................45
Sec. 11.10 Distribution Pursuant to Qualified
Domestic Relations Orders..........................46
Sec. 11.11 Tax Withholding and Participant's
Direct Rollover....................................47
ARTICLE XII NOTICES...............................................48
Sec. 12.1 Notice.............................................48
Sec. 12.2 Modification of Notice.............................49
Sec. 12.3 Reliance on Notice.................................49
ARTICLE XIII AMENDMENT OR TERMINATION OF PLAN......................49
Sec. 13.1 Amendment or Termination by Company................49
Sec. 13.2 Effect of Amendment................................49
Sec. 13.3 Distribution on Termination or
Discontinuance of Contributions....................50
Sec. 13.4 Reversion of Contributions to
Employer...........................................51
Sec. 13.5 Amendment of Vesting Schedule......................51
Sec. 13.6 Merger or Consolidation of Plan....................51
Sec. 13.7 Withdrawal of Employer.............................52
ARTICLE XIV COMMITTEE.............................................52
Sec. 14.1 Committee Composition..............................52
Sec. 14.2 Committee Actions..................................53
Sec. 14.3 Committee Procedure................................53
Sec. 14.4 Delegation to Committee and Company's
Duty to Furnish Information........................53
Sec. 14.5 Construction of Plan and Trustee's
and Recordkeeper's Reliance........................55
Sec. 14.6 Committee Member's Abstention in
Cases Involving Own Rights.........................55
Sec. 14.7 Counsel to Committee...............................55
Sec. 14.8 Indemnification of Employees and
Directors..........................................55
Sec. 14.9 Action Taken in Good Faith.........................56
ARTICLE XV MISCELLANEOUS.........................................56
Sec. 15.1 No Employment or Compensation Agreement............56
Sec. 15.2 Spendthrift Provision..............................56
Sec. 15.3 Construction.......................................57
Sec. 15.4 Titles.............................................57
Sec. 15.5 Texas Law Applicable...............................57
iv
Sec. 15.6 Successors and Assigns.............................57
Sec. 15.7 Allocation of Fiduciary
Responsibility by Named Fiduciary..................57
Sec. 15.8 Expenses of Administration.........................58
Sec. 15.9 Plan Controls......................................58
Sec. 15.10 Effect of Mistakes.................................58
Sec. 15.11 Operation of the Plan; Permitted
Corrections........................................58
ARTICLE XVI ADOPTION BY AFFILIATED COMPANIES......................59
Sec. 16.1 Transfer of Employment to Another
Employer...........................................59
Sec. 16.2 Contributions and Forfeitures......................59
Sec. 16.3 Transfers of Employment Between
Affiliated Companies...............................60
Sec. 16.4 Action by Company..................................60
Sec. 16.5 Termination of Employer's Status as
Affiliated Company.................................60
ARTICLE XVII THE TRUSTEE...........................................61
Sec. 17.1 Trust Fund.........................................61
Sec. 17.2 Trustee's Duties...................................61
Sec. 17.3 Benefits Only from Trust Fund......................61
Sec. 17.4 Trust Fund Applicable Only to Payment
of Benefits........................................61
Sec. 17.5 Texas Trust Code...................................61
Sec. 17.6 Voting Rights......................................62
ARTICLE XVIII INVESTMENTS...........................................62
Sec. 18.1 Investment of Contributions and Trust
Assets.............................................62
ARTICLE XIX TOP HEAVY PROVISIONS..................................63
Sec. 19.1 Minimum Allocation Requirements....................63
Sec. 19.2 Adjustment to Limitation on
Allocations for Years Beginning Prior
to April 1, 2000...................................63
Sec. 19.3 Vesting Schedule...................................64
Sec. 19.4 Definitions........................................64
THE RECTORSEAL CORPORATION AND JET-LUBE, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Revised and Restated Effective April 1, 1998)
THIS AGREEMENT, executed this ____ day of March, 2002, and effective the
first day of April, 1998 unless specifically provided elsewhere in this
Agreement, by The RectorSeal Corporation, a Delaware corporation, having its
principal office in Houston, Texas (hereinafter referred to as the "Company").
W I T N E S S E T H:
WHEREAS, effective June 1, 1976, the Company established The RectorSeal
Corporation Employee Stock Ownership Plan (hereinafter referred to as the
"Plan") in the form of a stock bonus plan designed to constitute a "qualified
plan" within the meaning of the applicable sections of the Internal Revenue
Code, as amended (the "Code") for the benefit of eligible employees and their
beneficiaries; and
WHEREAS, the Plan was subsequently amended from time to time and was then
amended and restated effective April 1, 1985, except for specific provisions
which were effective April 1, 1984, to bring the Plan into compliance with the
Tax Equity and Fiscal Responsibility Act of 1982, the Tax Reform Act of 1984 and
the Retirement Equity Act of 1984; and
WHEREAS, the Plan was subsequently amended by Amendment No. 1 effective,
with respect to specific provisions, on April 1, 1984 and April 1, 1985; and
WHEREAS, Jet-Lube, Inc., a Delaware corporation ("Jet Lube"), and an
Affiliated Company (herein defined), established the Jet-Lube, Inc. Employee
Stock Ownership Plan (the "Jet Lube Plan") effective June 1, 1976; and
WHEREAS, the Jet Lube Plan was subsequently amended from time to time prior
to April 1, 1984, was amended and restated effective April 1, 1985, except for
specific provisions which were effective April 1, 1984, to bring the Jet Lube
Plan into compliance with the Tax Equity and Fiscal Responsibility Act of 1982,
the Tax Reform Act of 1984 and the Retirement Equity Act of 1984, and, due to
the merger of the Jet Lube Plan with and into the Plan, was amended to comply
with (i) those provisions of the Tax Reform Act of 1986 that were technical
corrections to the Retirement Equity Act of 1984 and (ii) the temporary Treasury
regulations issued with respect to those provisions in the Code enacted by the
Retirement Equity Act of 1984 or the subsequent technical correction provisions
thereto; and
WHEREAS, Jet Lube approved (i) the merger of the Jet Lube Plan, effective
as of April 1, 1989, with and into the Plan and (ii) the transfer of assets from
the Jet Lube Plan to the Plan as soon as practicable after the valuation of
accounts in the Jet Lube Plan at March 31, 1990; and
WHEREAS, the Company subsequently amended and restated the Plan (i)
effective April 1, 1989, to bring the Plan into compliance with the Tax Reform
Act of 1986 as well as all other applicable laws, rules and regulations enacted
or promulgated since the prior plan restatement and (ii) effective April 1,
1994, to change the name of the Plan to "The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan."
WHEREAS, the Plan was subsequently amended by Amendment No. I effective
August 15, 1997; and
WHEREAS, the Company now desires to amend and restate the Plan effective
April 1, 1998, except for certain provisions for which another effective date is
subsequently provided otherwise in the terms of the Plan, to bring the Plan into
compliance with the Code as modified by the Small Business Job Protection Act of
1996, the General Agreement on Tariffs and Trade under the Uruguay Round
Agreements Act, the Uniformed Services Employment and Reemployment Rights Act of
1994, the Taxpayer Relief Act of 1997, the Internal Revenue Service
Restructuring and Reform Act of 1998, and the Community Renewal Tax Relief Act
of 2000, as well as all applicable rules, regulations and administrative
pronouncements enacted, promulgated or issued since the date the Plan was last
restated; and
WHEREAS, (i) the benefits payable from the Plan are independent of any
benefits an Employee is or may become entitled to under any other funded
pension, profit sharing or savings plan, (ii) the benefits payable to an
Employee or Beneficiary under the Plan shall be determined solely by reference
to the provisions of the Plan in effect on the date of such Employee's
retirement or other termination of employment, except as otherwise specifically
provided herein, and (iii) except as otherwise provided in the Plan or any
amendment to the Plan, the provisions of any amendment to the Plan shall apply
solely to an Employee, former Employee, Participant or Former Participant whose
employment with an Employer terminates on or after the effective date of the
amendment;
2
NOW, THEREFORE, in consideration of the premises and the covenants herein
contained, the Company hereby adopts the following as the provisions of the
revised and restated Plan:
ARTICLE I
DEFINITIONS
-----------
Unless by the context hereof a different meaning is clearly indicated,
whenever used in this Plan, the following words shall have the meanings
hereinafter set forth:
Sec. 1.1 Administrator for the purposes of ERISA means the Company;
provided, that the Company, by action of its governing body, may designate
another person or entity, including the Trustee, the Recordkeeper or a
Committee, as Administrator of the Plan.
Sec. 1.2 Affiliated Company means the Company and any other entity which
is, along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses [as defined in Section 414(b) or (c) of
the Code], any entity which along with the Company is included in an affiliated
service group as defined in Section 414(m) of the Code, and any other entity
which is required to be aggregated with the Company pursuant to Section 414(o)
of the Code.
Sec. 1.3 Allocation Date means the Anniversary Date and each additional
date or dates designated by the Administrator on which allocations of
contributions are made.
Sec. 1.4 Anniversary Date means the last day of each Year.
Sec. 1.5 Alternate Payee means a person defined in Section 414(p)(8) of the
Code who is entitled to benefits under the Plan pursuant to a Qualified Domestic
Relations Order.
Sec. 1.6 Annual Compensation means the sum of (i) the amounts actually paid
to an Employee by the Employer for services rendered, as reported on the
Employee's Federal income tax withholding statement (Form W-2 or its subsequent
equivalent) for the Year, exclusive, however, of reimbursements and other
expense allowances, fringe benefits (cash and noncash), including but not
limited to automobile allowances, taxable group life insurance and amounts that
are paid to the Employee in cash in lieu of being contributed on his behalf to
the Plan or any other qualified defined contribution plan maintained by the
3
Employer, moving expenses, welfare benefits, and all other extraordinary
compensation, such as income attributable to phantom stock plans, and (ii)
amounts applied to purchase benefits pursuant to a salary reduction agreement
under a cafeteria plan as defined in Section 125 of the Code sponsored by an
Employer, amounts deferred pursuant to a salary reduction agreement under any
other plan described in Sections 401(k) and 408(k) of the Code sponsored by an
Employer, and, effective April 1, 2001, elective amounts that are not includible
in gross income by reason of Section 132(f)(4) of the Code. For any Year
beginning after December 31, 1996 (i) only $160,000 of Annual Compensation shall
be taken into account by the Plan with respect to any Participant [or, beginning
April 1, 1998, such other amount as may be determined under Section
401(a)(17)(B) of the Code] (hereinafter referred to as the "Compensation
Limitation"), and (ii) the family aggregation rules formerly required by Section
401(a)(17)(A) of the Code shall no longer apply in determining a Participant's
Annual Compensation.
Sec. 1.7 Beneficiary means any person or fiduciary designated by a
Participant or Former Participant in accordance with the terms hereof and
Section 401(a)(9) of the Code to receive benefits hereunder following the death
of such Participant or Former Participant. Each Participant and Former
Participant may, from time to time, select one or more Beneficiaries to receive
benefits pursuant to Section 10.1 in the event of the death of such Participant
or Former Participant. Such selection shall be made in writing by Notice to the
Administrator. Unless the provisions of the Plan or a Qualified Domestic
Relations Order provide otherwise, the last such selection filed with the
Administrator prior to the date of death of the Participant or Former
Participant shall determine to whom Plan benefits shall be paid. If the
Participant or Former Participant is married at the date of his death, the
Beneficiary shall be the surviving spouse unless the spouse has consented in
writing to the designation of some other Beneficiary, which designation may not
be changed without spousal consent unless the voluntary consent of the spouse
(i) expressly permits designations by the Participant or Former Participant
without any requirement of further consent by the spouse and (ii) acknowledges
that the spouse has the right to limit the consent to a specific Beneficiary.
Such written consent must acknowledge the effect of such selection and such
consent must be witnessed by a Plan representative or a notary public. Spousal
consent is not required if it is established to the satisfaction of the Plan
representative that the consent may not be obtained (i) because the Participant
or Former Participant has no spouse, (ii) because the spouse cannot be located
4
or (iii) because of such other circumstances as the Secretary of Treasury may by
regulations prescribe.
If the Administrator cannot readily determine whether a Participant or
Former Participant has a spouse under the laws of the state in which the
Participant or Former Participant resides resulting from an individual's claim
to be a "common law" spouse of a Participant or Former Participant or similar
circumstances, the Administrator may request such individual to provide the
Administrator with a legal opinion satisfactory to the Administrator or other
evidence demonstrating the individual's status as a spouse of the Participant or
Former Participant. The Administrator has the sole and absolute authority to
determine an individual's status as a spouse of a Participant or Former
Participant and any such determination shall be final, binding and conclusive on
all parties ever claiming an interest in the Plan. Any consent by a spouse (or
establishment that the consent of the spouse may not be obtained) shall be
effective only with respect to that spouse.
If a Participant's or Former Participant's selection is not made in
compliance with these provisions or if all designated persons shall predecease
the Participant or Former Participant, Beneficiary means the first of the
following classes of successive preference beneficiaries then surviving: the
Participant's or Former Participant's:
(a) surviving spouse,
(b) descendants, per stirpes(including adopted children),
(c) parents in equal shares,
(d) brothers and sisters in equal shares, and
(e) estate.
If more than one Beneficiary of a particular class (primary or secondary)
is entitled to benefits, payments shall be made in equal shares to such
Beneficiaries, unless some other specific proportions are clearly designated by
the Participant or Former Participant. If more than one Beneficiary of a
particular class (primary or secondary) is named, the interest of any deceased
Beneficiary of that class shall pass to the surviving Beneficiary or
Beneficiaries of that class except to the extent that the designation provides
for payment to any secondary Beneficiary or Beneficiaries upon the death of a
primary Beneficiary. In determining whether any person named as a Beneficiary is
living at the time of a Participant's or Former Participant's death, if such
5
person and the Participant or Former Participant died in a common disaster and
there is insufficient evidence to determine which person died first, then it
shall be deemed that the Beneficiary died first.
Sec. 1.8 Code means the Internal Revenue Code of 1986, as it may be amended
from time to time. Reference to a section of the Code shall include that
section, applicable Treasury regulations promulgated thereunder and any
comparable section of any future legislation that amends, supplements or
supersedes said section, effective as of the date such comparable section is
effective with respect to the Plan.
Sec. 1.9 Committee means the committee appointed under Article XIV to
administer the Plan, as from time to time constituted. If no such committee is
appointed, the Company shall constitute the Committee.
Sec. 1.10 Company means The RectorSeal Corporation, a Delaware corporation,
or such other organization which, pursuant to a spinoff, merger, consolidation,
reorganization, or similar corporate transaction where a significant portion of
the Company's employees become employees of such organization, adopts and
assumes the Plan and the Trust Agreement as the sponsor with the consent of the
Company and agrees to accept the duties, responsibilities and obligations of the
sponsor of the Plan and the Trust Agreement. Reference in the Plan to the
Company shall refer to any such organization which adopts and assumes the
sponsorship of the Plan and the Trust Agreement.
Sec. 1.11 Disability means the physical or mental incapacity of a
Participant which, in the opinion of a physician approved by the Administrator,
will permanently prevent such Participant from performing any of the usual
duties of his employment.
Sec. 1.12 Early Retirement Date means the Anniversary Date of the Year
coinciding with or next following the later of the date a Participant attains
age 55 and has completed at least ten Years of Service (Vesting), provided the
Participant has elected at least 60 days prior to such Anniversary Date to
terminate his employment with all Affiliated Companies.
Sec. 1.13 Employee means any individual in the employ of an Employer who is
included on the Federal Insurance Contribution Act rolls of an Employer, and
excludes any Leased Employee that Section 414(n) of the Code treats as an
Employee of an Employer, unless classification of such Leased Employee as an
Employee is necessary to maintain the qualification of the Plan. The term
6
"Employee" shall not include any individual who by contract is not classified by
the Employer as a common law employee of the Employer, even if such individual
is included on the Employer's payroll for Federal income tax withholding
purposes or whether such person is later classified as an employee by the
Internal Revenue Service, the Department of Labor, a court, an administrative
agency, or an Employer.
Sec. 1.14 Employer means the Company and any other Affiliated Company, with
respect to its Employees, provided such Affiliated Company is designated by the
governing body of the Company as an Employer under the Plan and whose
designation as such has become effective and has continued in effect. The
designation shall become effective only when it shall have been accepted by the
governing body of the Employer and shall be effective for the Year determined by
the governing body of the Company and the Employer. An Employer may revoke its
acceptance of such designation at any time, but until such acceptance has been
revoked, all of the provisions of the Plan and amendments thereto shall apply to
the Employees of the Employer. In the event the designation of the Employer as
such is revoked by the governing body of the Employer, this will not be deemed a
termination of the Plan.
Sec. 1.15 Entry Date means the first day of the Year.
Sec. 1.16 ERISA means the Employee Retirement Income Security Act of 1974,
as it may be amended from time to time, and applicable regulations promulgated
thereunder.
Sec. 1.17 Five-Year Break in Service means any five consecutive Years
during each of which the Employee or Participant performs for an Affiliated
Company 500 or fewer Hours of Service.
Sec. 1.18 Former Participant means any individual who has been a
Participant in the Plan (i) who is no longer in the employ of an Employer and
who has not yet received the entire benefit to which he is entitled under the
Plan, or (ii) who is still in the employ of an Affiliated Company and who has an
interest in the Plan but who is not eligible for Employer contributions and
forfeitures.
Sec. 1.19 Hours of Service means each hour credited to an individual in
accordance with the following:
(a) An Hour of Service shall be credited to an individual for each hour for
which he is either directly or indirectly paid, or entitled to payment, by
any Affiliated Company or, to the extent permitted by the governing body of
7
the Company or the Administrator in accordance with Section 401(a)(4) of
the Code, by the predecessor company. An Employee on a non-hourly payroll
whose Annual Compensation is not determined on the basis of certain amounts
for each hour worked shall be credited with 45 Hours of Service for each
week during which he would otherwise have at least one Hour of Service,
adjusted pro rata on the basis of 10 hours per day when employment or the
Year begins on other than a Monday or ends on other than a Friday.
(b) An Hour of Service shall be credited to an individual for each hour for
which back pay, irrespective of mitigation of damages, has been either
awarded or agreed to by an Affiliated Company or, to the extent permitted
by the governing body of the Company or the Administrator in accordance
with Section 401(a)(4) of the Code, by the predecessor company. These Hours
of Service shall be credited to the individual for the computation period
or periods to which the award or agreement pertains rather than the
computation period in which the award, agreement or payment is made.
(c) An Hour of Service shall be credited to an individual for each hour
while on unpaid leave pursuant to the Family and Medical Leave Act of 1993
for which he would have been paid or entitled to payment by an Affiliated
Company had he been performing services.
(d) In no event shall an individual be given credit for a specific Hour of
Service under more than one of the above subsections (a), (b) or (c) and,
notwithstanding any other provision of the Plan to the contrary, an
individual shall not be credited with Hours of Service more than once with
respect to the same period of time.
(e) Hours of Service for periods during which no duties are performed shall
be calculated and credited pursuant to Section 2530.200b-2(b) and (c) of
the Department of Labor regulations which are incorporated herein by
reference. No more than 501 Hours of Service shall be credited under the
preceding sentence during any computation period.
(f) Notwithstanding any other provisions of this Section 1.19, in the event
an Employee is:
(i) on leave of absence authorized by his Employer in accordance with
standard personnel policies of such Employer applied in a
8
nondiscriminatory manner to all Employees similarly situated,
including those described in Section 1.19(g) hereof, or
(ii) on military leave while the Employee's reemployment rights are
protected by law,
a Five-Year Break in Service and a One-Year Break in Service shall be
deemed not to have occurred and the Employee shall continue to accrue Hours
of Service under the Plan during the period of leave of absence, at the
same rate he would have had he remained an active Employee throughout such
leave of absence, provided he returns to employment immediately (in the
case of military leave, within the 90 day period after his honorable
discharge or release or within the period prescribed by applicable law,
whichever is longer) upon the expiration of such authorized absence. If an
Employee fails to return to the active employment of an Affiliated Company
within the time specified in a written leave of absence, or after such
period of military service, as appropriate, his service will be deemed
terminated as of the end of such permitted period of absence.
(g) In addition, solely for the purpose of determining a One-Year Break in
Service and a Five-Year Break in Service, the Plan shall credit the
Employee with the Hours of Service which otherwise would normally have been
credited to such individual during the computation period in which an
absence from the service of an Affiliated Company occurs for any period by
reason of (i) pregnancy of the individual, (ii) birth of a child of the
individual, (iii) placement of a child with the individual in connection
with the adoption of such child by such individual, or (iv) for purposes of
caring for such child for a period beginning immediately following such
birth or placement; provided, however, if the Employee has credit for more
than 500 Hours of Service without the application of this sentence in the
computation period in which the absence from the service of an Affiliated
Company occurs for the reasons specified in this sentence, the Plan shall
credit the Employee with such Hours of Service in the following computation
period. The Plan shall not credit any Employee with any Hours of Service
under this subsection (g) unless such Employee timely furnishes the
Administrator information establishing (i) that the absence from the
service of an Affiliated Company was for one or more reasons specified in
the first sentence of this subsection (g) and (ii) the number of days for
which there was an absence.
9
(h) Effective December 12, 1994, each period of qualified military service
(within the meaning of Chapter 43 of Title 38, United States Code) served
by an Employee who is reemployed under that chapter by an Affiliated
Company following such service shall be considered service with an
Affiliated Company for purposes of determining his Hours of Service.
Sec. 1.20 Individual Account means an account or record to be maintained by
the Trustee or the Recordkeeper reflecting the monetary value of the undivided
interest in the Trust Fund of each Participant, each Former Participant and each
Beneficiary and shall include the Other Investments Account and the Parent
Company Stock Account.
Sec. 1.21 Leased Employee means an individual who is not in the employ of
an Employer and who, pursuant to a leasing agreement between an Employer and any
other person ("leasing organization"), has performed services for an Employer
[or for an Employer and any other person related to an Employer within the
meaning of Section 144(a)(3) of the Code] on a substantially full-time basis for
at least one year and who performs after December 31, 1996 such services under
the primary direction or control by the Employer. Leased Employee shall also
include any individual who is deemed to be an employee of an Employer under
Section 414(o) of the Code. Notwithstanding the preceding sentences, if
individuals described in the preceding sentence constitute less than 20% of an
Employer's non-highly compensated work force within the meaning of Section
414(n)(5)(C)(ii) of the Code, the Plan shall not treat an individual as a Leased
Employee if the leasing organization covers the individual in a money purchase
pension plan providing immediate participation, full and immediate vesting and a
non-integrated contribution formula equal to at least ten percent of the
individual's annual compensation [as defined in Section 415(c)(3) of the Code,
but including amounts contributed by an Employer pursuant to a salary reduction
agreement which are excludable from the individual's gross income under Sections
125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code or, effective April 1, 2001,
Section 132(f)(4) of the Code]. If any Leased Employee shall be treated as an
Employee of an Employer, however, contributions or benefits provided by the
leasing organization which are attributable to services of the Leased Employee
performed for an Employer shall be treated as provided by the Employer.
Sec. 1.22 Named Fiduciary means the Company, except to the extent the
Company has delegated specific functions to the Committee, if any, appointed by
the Company pursuant to Article XIV. If no Committee is appointed, the Company
will perform the functions of the Committee.
10
Sec. 1.23 Normal Retirement Date means a Participant's or Former
Participant's 65th birthday.
Sec. 1.24 Notice means, unless otherwise provided specifically in the Plan,
(i) written Notice on an appropriate form provided by the Administrator, which
is properly completed and executed by the party giving such Notice and which is
delivered by hand or by mail to the Administrator or to such other party
designated by the terms of the Plan or by the Administrator to receive the
Notice or (ii) Notice by interactive electronic communication, to the extent
authorized by the Administrator, to the Recordkeeper. Notice to the
Administrator, the Recordkeeper or to any other person as provided herein shall
be deemed to be given when it is actually received (either physically or by
interactive electronic communication, as the case may be) by the party to whom
such Notice is given. For purposes of the Plan, an "interactive electronic
communication" means a communication between a Participant, Former Participant
or Beneficiary and the Recordkeeper pursuant to a system maintained by the
Recordkeeper and communicated to each Participant, Former Participant and
Beneficiary in compliance with final Treasury regulations and final Department
of Labor regulations whereby each such individual may obtain financial
information regarding his Individual Account and amounts available for
withdrawal and exercise options as described herein with respect to his
Individual Account, as well as other actions approved from time to time by the
Administrator, through the use of the telephone, internet or such other system
and a personal identification number assigned to the Participant, Former
Participant or Beneficiary by the Recordkeeper or the Administrator. If a
Participant, Former Participant or Beneficiary (i) consents to participate in
the Plan's interactive electronic communication procedures adopted by the
Administrator, if any, and (ii) acknowledges that actions taken by such
Participant, Former Participant or Beneficiary through the use of his personal
identification number constitute his signature, to the extent allowed by the
Administrator, for purposes of Beneficiary designations and Plan withdrawals and
distributions, including waiver of the 30-day period described in Section 11.2,
the Participant, Former Participant or Beneficiary, as the case may be, will be
deemed to have given his written consent and authorization to any action
resulting from the use of the interactive electronic communication system by the
Participant, Former Participant or Beneficiary.
11
Sec. 1.25 One-Year Break in Service means any Year during which the
Employee or Participant performs for an Affiliated Company 500 or fewer Hours of
Service.
Sec. 1.26 Other Investments Account means the portion of the Individual
Account maintained by the Trustee or the Recordkeeper for each Participant,
Former Participant or Beneficiary reflecting the monetary value of such person's
individual interest in the Trust Fund attributable to Employer contributions and
forfeitures in cash under this Plan which have not been invested in Parent
Company Stock and are to be invested in other assets; it shall be credited with
the net income (or debited with the loss) of the Trust Fund attributable to
investments in the Other Investments Account.
Sec. 1.27 Parent Company Stock means shares of any class of stock,
preferred or common, which are issued by Capital Southwest Corporation, a Texas
corporation, or any other qualifying employer security of Capital Southwest
Corporation, as defined in ERISA. The shares of Parent Company Stock currently
held by the Plan are regularly traded on the Nasdaq National Market.
Sec. 1.28 Parent Company Stock Account means the portion of the Individual
Account maintained by the Trustee or the Recordkeeper for each Participant,
Former Participant or Beneficiary to which is credited shares (including
fractional shares) of Parent Company Stock which are attributable to Employer
contributions and forfeitures under the Plan.
Sec. 1.29 Participant means an Employee who has met the eligibility
requirements of the Plan as provided in Article II hereof and who has begun
participating in the Plan.
Sec. 1.30 Plan means the stock bonus plan embodied herein, as the same may
be amended from time to time, and shall be known as "The RectorSeal Corporation
and Jet-Lube, Inc. Employee Stock Ownership Plan."
Sec. 1.31 Qualified Domestic Relations Order means any judgment, decree or
order (including approval of a property settlement agreement) which (i) relates
to the provision of child support, alimony payments, or marital property rights
to a spouse, former spouse, child or other dependent of a Participant or Former
Participant, (ii) is made pursuant to a state domestic relations law, (iii)
creates or recognizes the existence of an Alternate Payee's right to, or assigns
to an Alternate Payee the right to, receive all or a portion of the benefits
payable with respect to a Participant or Former Participant under the Plan and
(iv) complies with the requirements of Section 414(p) of the Code.
12
Sec. 1.32 Recordkeeper means any person or entity appointed by the Company
or the Committee to perform recordkeeping and other administrative services on
behalf of the Plan. If no Recordkeeper is appointed, the Trustee shall perform
the duties of the Recordkeeper.
Sec. 1.33 Trust Agreement means "The RectorSeal Corporation and Jet-Lube,
Inc. Employee Stock Ownership Plan Trust Agreement" entered into between the
Company and the Trustee to carry out the purposes of the Plan and under which
the Trust Fund is maintained; provided that if such agreement be amended or
supplemented, Trust Agreement, as of a particular date, shall mean such
agreement, as amended and supplemented and in force on such date.
Sec. 1.34 Trust Fund means all assets of whatsoever kind and nature from
time to time held by the Trustee pursuant to terms and conditions of the Trust
Agreement out of which benefits of the Plan are provided.
Sec. 1.35 Trustee means any institution or individuals designated as
Trustee or Trustees by the governing body of the Company, or any successor
trustee or additional trustee or trustees acting at any time as Trustee under
the Trust Agreement.
Sec. 1.36 Year means the 12-month period from April 1 of each year to the
next following March 31.
Sec. 1.37 Year of Service (Participation) means the 12 consecutive month
period commencing with the employment commencement date of an Employee by an
Affiliated Company, which is the date the Employee first performs an Hour of
Service for an Affiliated Company, during which the Employee performs at least
1,000 Hours of Service for an Affiliated Company. If an Employee does not
perform 1,000 Hours of Service in the 12 month period beginning with his
employment commencement date, Year of Service (Participation) means the Year
commencing with the Year immediately following his employment commencement date
during which the Employee performs at least 1,000 Hours of Service for an
Affiliated Company.
Sec. 1.38 Year of Service (Vesting) means any Year during which the
Employee performs at least 1,000 Hours of Service for an Affiliated Company,
subject to the following:
13
(a) if an Employee has a One-Year Break in Service, Years of Service
(Vesting) before such break shall not be taken into account until he has
completed a Year of Service (Vesting) after his return to employment; and
(b) if an Employee has a Five-Year Break in Service, Years of Service
(Vesting) after such break shall not be taken into account for the purposes
of determining the nonforfeitable percentage of his accrued benefit derived
from Employer contributions which accrued before such break.
Sec. 1.39 Gender and Number. Except as otherwise indicated by the context,
any masculine terminology used herein also includes the feminine and neuter, and
vice versa, and the definition of any term herein in a singular shall also
include the plural, and vice versa.
ARTICLE II
ELIGIBILITY OF EMPLOYEES
------------------------
Sec. 2.1 Eligibility. Each eligible Employee shall be deemed to have become
a Participant (unless he elects otherwise pursuant to Section 2.2) as of the
Entry Date which falls within the Employee's completion of one Year of Service
(Participation).
Sec. 2.2 Election Not to Participate. An Employee eligible to participate
or participating in the Plan may elect not to participate (or elect to withdraw
from the Plan if then participating) for a given Year, provided that written
notice of such election is given to the Administrator in satisfactory form
before the end of the Year in question. Upon receipt by the Administrator of
such notice, the Participant shall become a Former Participant retroactively to
the beginning of the particular Year. Such election shall remain in effect
unless and until the Employee ceases to be such or elects to participate again.
An Employee eligible to participate in the Plan who has elected not to
participate (or elected to withdraw) may elect to participate in any Year
thereafter by giving written notice in satisfactory form to the Administrator.
Such election shall be effective immediately, and the Employee shall become an
active Participant as of the date of receipt of such election by the
Administrator or such later date as may be specified in the notice.
Notwithstanding the foregoing provisions of this Section 2.2, William R. Thomas
is excluded from participating in the Plan.
14
Sec. 2.3 Eligibility upon Reemployment. Notwithstanding Section 2.1, each
Employee who completes a Year of Service (Participation) in either his first 12
months of employment or a Year, as required in Section 1.37, but is not employed
at the expiration of such 12-month period or such Year, shall become a
Participant immediately upon his return to the status of Employee, subject to
Section 2.6. An Employee who completes 1,000 Hours of Service in the 12-month
period or the Year while employed by an Affiliated Company which is not an
Employer shall become a Participant as of the Entry Date preceding the date on
which he becomes an Employee of an Employer.
Sec. 2.4 Reemployment of Participant. If the employment of a Participant is
terminated for any reason and he subsequently is reemployed by an Employer, he
shall be eligible to become a Participant (unless he elects otherwise pursuant
to Section 2.2) on the date he resumes employment with an Employer.
Sec. 2.5 Exclusion of Employees Covered by Collective Bargaining.
Notwithstanding Section 2.1, an Employee covered by a collective bargaining
agreement between the Employer and a collective bargaining representative
certified under the Labor Management Relations Act who is otherwise eligible to
become a Participant under this Article shall be excluded if retirement benefits
were the subject of good faith bargaining between the Employee's representative
and the Employer and if the agreement does not require the Employer to include
such Employee in this Plan. An Employee who is a Participant in this Plan when
he is excluded under the provisions of this Section 2.5 shall cease active
participation in this Plan on the effective date of that collective bargaining
agreement and shall not participate in Employer contributions while a member of
the ineligible class but shall not be considered to have terminated employment.
Sec. 2.6 Eligibility Upon Entry or Reentry into Eligible Class of
Employees. In the event a Participant is excluded because he is no longer a
member of an eligible class of Employees as specified in this Article II, such
Employee shall participate as of the Entry Date preceding the date of his return
to an eligible class of Employees. In the event that an Employee who is not a
Former Participant in the Plan becomes a member of the eligible class, such
Employee shall participate as of the Entry Date preceding the date of his
becoming an eligible class member if such Employee has satisfied the eligibility
requirements of Section 2.1 and would have previously become a Participant had
he been in the eligible class.
15
ARTICLE III
CONTRIBUTIONS
-------------
Sec. 3.1 Contributions of the Employer. The governing body of each
Employer, in its discretion, shall determine the amount of, and cause to be
made, its contribution to the Plan. Each Employer's liability for the amount of
its contribution will be established by its governing body, and other actions
taken, within the time required by law so as to permit the contributions for a
particular Year to be deductible for Federal income tax purposes for the
corresponding taxable year, and the amount of such contribution will be
communicated to the Participants as soon as practicable after the amount thereof
has been established.
Sec. 3.2 Form of Employer Contributions. The Employer contribution by each
Employer may be paid in cash or in securities, other property, or shares having
an equivalent value, or any combination thereof, as the governing body of the
Employer may determine. To the extent that the Trust Fund has cash obligations
payable in one year from the date the Employer contribution is due, such
Employer contribution shall be paid in cash in an amount determined by the
Employer or the Administrator.
Sec. 3.3 Time of Contributions. Contributions made by an Employer pursuant
to Section 3.1 may be made at any time and from time to time, except that the
total contribution for any Year shall be paid in full not later than the time
prescribed by law to enable the Employer to obtain a deduction therefor on its
federal income tax return for said Year. Contributions made after the
Anniversary Date of the Year but within the time for filing an Employer's
federal income tax return (including extensions thereof) shall be deemed made as
of the Anniversary Date of that Year if so directed by the Employer, except such
contributions shall not share in increases, decreases, or income to the Trust
Fund prior to the date actually made. Notwithstanding the foregoing, on an
Employer's request, a contribution which was made upon a mistake of fact or on
deductibility of the contribution shall be returned to the Employer within one
year after payment of the contribution or disallowance of the deduction (to the
extent disallowed), as the case may be; provided, however, the amount returned
to an Employer shall not be increased by any earnings thereon and shall be
reduced by any losses attributable to such amount.
Sec. 3.4 Limit on Employer Contributions. Notwithstanding the foregoing
provisions of this Article III, the contribution of an Employer for any Year
16
shall in no event exceed an amount which will, under the law then in effect, be
deductible by the Employer in computing its federal taxes for the fiscal year of
the Employer in which that Year ends.
Sec. 3.5 Manner of Making Contributions. All contributions to the Trust
Fund shall be paid directly to the Trustee. In connection with each
contribution, the Employer shall provide the Recordkeeper with information that
identifies each Participant on whose behalf the contribution is being made and
the amount thereof. The Recordkeeper shall provide the Trustee with any of the
information received by it which is necessary for the Trustee to perform its
duties and obligations with respect to the Trust Fund.
Sec. 3.6 Contributions with Respect to Military Leave. Notwithstanding any
provision of the Plan to the contrary, contributions with respect to qualified
military service (within the meaning of Chapter 43 of Title 38, United States
Code) shall be permitted in accordance with Section 414(u) of the Code.
ARTICLE IV
ACCOUNTS AND VALUATION OF TRUST FUND
------------------------------------
Sec. 4.1 Participants' Individual Accounts. The assets of the Trust Fund
shall constitute a single fund in which each Participant and Former Participant
shall have his proportionate interest as provided in this Plan. The
Administrator shall maintain, or cause to be maintained, with respect to each
Employer, an Individual Account for each Participant or Former Participant which
shall reflect the credits and charges allocable thereto in accordance with the
Plan. The Administrator shall maintain, or cause to be maintained, records which
will adequately disclose at all times the state of the Trust Fund and of each
separate interest therein. The books, forms and methods of accounting shall be
entirely in the hands of and subject to the supervision of the Administrator.
Sec. 4.2 Valuation of the Trust Fund and of the Interest of Each
Participant. Within a reasonable time after each Allocation Date, the
Administrator shall direct the Trustee to prepare a statement of the condition
of the Trust Fund, setting forth all investments, receipts and disbursements,
and other transactions effected by it during the applicable period, and showing
all the assets of the Trust Fund and the cost and fair market value thereof.
This statement shall be delivered to the Administrator. At least annually, the
17
Administrator shall cause to be prepared, and shall deliver to each Participant
or Former Participant, a report disclosing the status of his Individual Account
in the Trust Fund as of the applicable Allocation Date.
For purposes of determining the market value of securities held by the
Trustee, such securities shall be valued as of the close of business on the
Allocation Date or, if securities shall not have been traded and reported on a
national securities exchange or in the over-the-counter market on such date,
then at the last bid price as of the close of business on the Allocation Date.
Notwithstanding any other provision of this Section 4.2, if the Trustee
shall determine that the Trust Fund assets consist in whole or in part of
property not traded freely on a recognized market, including but not limited to
Parent Company Stock, or that information necessary to ascertain the fair market
value thereof is not readily available to the Trustee, the Trustee shall request
the Administrator to instruct the Trustee as to the value of such property for
all purposes under the Plan, and the Administrator shall comply with such
request. The Administrator may engage a competent appraiser to assist it in this
process. The value placed upon such property by the Administrator in its
instructions to the Trustee shall be conclusive and binding upon the Trustee
subject to the fiduciary provisions of ERISA. If the Administrator shall fail or
refuse to instruct the Trustee as to the value of such property within a
reasonable time after receipt of the Trustee's request to do so, the Trustee may
engage a competent appraiser to fix the fair market value of such property for
all purposes hereunder. The determination of any duly retained appraiser as to
the fair market value of such property shall be the value reported hereunder,
and neither the Administrator nor the Trustee shall have any liability in
connection therewith, subject to the fiduciary provisions of ERISA. The
reasonable fees and expenses incurred for any such appraisal shall be deemed an
expense of the Trustee and paid as provided in Section 15.8.
The determination of the fair market value of the assets of the Trust Fund
and the Administrator's charges or credits to the Individual Accounts with
respect to Participants or Former Participants shall be final and conclusive on
all persons ever interested hereunder, subject to Section 11.6 hereof.
Sec. 4.3 Allocations to Individual Accounts. In order that each
Participant's interest as provided in this Plan may be determined, the
Individual Account of each Participant [or Former Participant, for purposes of
Sec. 4.3(c)(iii)] shall be adjusted as follows:
18
(a) The Parent Company Stock Account of each Participant will be credited
at least once each Year with his allocable share of (i) Parent Company
Stock purchased and paid for by the Trust Fund from contributions or out of
his Other Investments Account or contributed in kind by his Employer, (ii)
forfeitures of Parent Company Stock which are attributable to his Employer
and (iii) stock dividends of Parent Company Stock on Parent Company Stock
held in his Parent Company Stock Account or acquired in exchange for other
assets not yet allocated.
(b) The Other Investments Account of each Participant will be credited with
his remaining allocable share of contributions and forfeitures not
represented by Parent Company Stock which are attributable to his Employer
and with cash dividends on Parent Company Stock in his Parent Company Stock
Account; it will also be credited (or debited) with his share of the net
income (or loss) of the Trust Fund attributable to it. Each Participant's
Other Investments Account may also be debited for any purchases of Parent
Company Stock and the Parent Company Stock Account shall then be credited.
(c) The allocations will be made as follows:
(i) Employer Contributions and Other Items. Employer contributions and
Parent Company Stock attributable thereto will be allocated as of each
Anniversary Date among the Individual Accounts of Participants who are
Employees of each Employer at the end of the Year and, for any Year in
which the Plan is not a top heavy plan as defined in Section 416(g) of
the Code, who completed at least 1,000 Hours of Service during the
Year, and to the Individual Accounts of Former Participants whose
employment was terminated by reason of death, Disability or retirement
under Article VII during the Year, in the ratio in which the Annual
Compensation of each bears to the aggregate Annual Compensation of
all.
(ii) Forfeitures. Forfeitures during a Year attributable to the former
Participants of each Employer, subject to Section 10.5, shall be
allocated as of the Anniversary Date in such Year among the Individual
Accounts of the remaining Participants and Former Participants
employed by the same Employer in the same proportion that the Employer
contributions are (or would be) allocated for such Year.
19
(iii) Net Income (or Loss) of the Trust Fund. The net income (or loss)
of the Trust Fund will be determined as of each Anniversary Date, or
more frequently if the Trustee or the Administrator so desires. Except
as provided herein with respect to certain dividends and tax refunds,
the net income (or loss) of the Trust Fund which is attributable to
assets held in a Participant's and Former Participant's Other
Investments Account shall be allocated to his Other Investments
Account in the ratio which the balance of his Other Investments
Account on the preceding Anniversary Date bears to the sum of such
balances as of the preceding Anniversary Date for all Participants and
Former Participants in the Plan on the subsequent Anniversary Date.
Dividends (excluding dividends of Parent Company Stock) on Parent
Company Stock and tax refunds with respect to Parent Company Stock
shall be allocated to the Other Investments Account of each
Participant or Former Participant in the ratio that the number of
shares of Parent Company Stock held in that Participant's or Former
Participant's Parent Company Stock Account bears to the total number
of shares of Parent Company Stock held in the Parent Company Stock
Accounts of all Participants and Former Participants. Likewise,
dividends declared on any other security held by the Trust Fund shall
be allocated to the Other Investments Account of each Participant or
Former Participant in the ratio that the number of shares of that
security to which the dividend relates held in that Participant's or
Former Participant's Other Investments Account bears to the total
number of shares of that security held in the Other Investments
Accounts of all Participants and Former Participants. The net income
(or loss) includes the increase (or decrease) in the fair market value
of assets of the Trust Fund (other than Parent Company Stock),
interest, dividends, tax refunds, other income and expenses since the
preceding Anniversary Date.
(d) Special Rate for Participants in Qualified Military Service. For
purposes of this Section 4.3, while a Participant is in qualified military
service (within the meaning of chapter 43 of title 38, United States Code),
he shall be considered to be in the service of the Employer and to receive
Annual Compensation during any such period of qualified military service in
an amount equal to the Annual Compensation he would have received during
20
such period if he were not in such service, determined based on the rate of
pay he would have received from the Employer but for the absence during the
period of such service; provided, however, if the Annual Compensation the
Participant would have received during such period is not reasonably
certain, the Participant's average Annual Compensation from the Employer
during the 12-month period immediately preceding the qualified military
service (or, if shorter, the period of employment immediately preceding the
qualified military service) shall be used.
(e) Equitable Allocation. The Administrator may establish accounting
procedures for the purpose of making the allocations, valuations and
adjustments to Individual Accounts of Participants and Former Participants
provided for in this Article IV. Should the Administrator determine that
the strict application of its accounting procedures will not result in an
equitable and nondiscriminatory allocation among the Other Investments
Accounts and Parent Company Stock Accounts of Participants and Former
Participants, it may modify its procedures for the purpose of achieving an
equitable and nondiscriminatory allocation in accordance with the general
concepts of the Plan and the provisions of this Article IV; provided,
however, that such adjustments to achieve equity shall not reduce the
vested portion of a Participant or Former Participant and shall be
consistent with the provisions of the Code.
(f) Computations. All of the computations required to be made under the
provisions of this Article IV shall be made in accordance with generally
accepted accounting principles and such computations, when made, shall be
conclusive with respect thereto and shall be binding upon all the
Participants and Former Participants and all other persons ever having an
interest in the Trust Fund, subject to the provisions of Section 8.1.
(g) Dividends After Anniversary Date. If a Participant or Former
Participant is to receive a distribution or withdrawal from the Plan based
on the immediately preceding Anniversary Date and prior to the date of such
distribution or withdrawal a dividend is declared on any security held by
that Participant's or Former Participant's Individual Account, the amount
of the distribution to such Participant or Former Participant shall be
adjusted to reflect such dividend.
Sec. 4.4 Included Individual Accounts. For the purposes of this Article IV,
references to the Individual Accounts of Participants shall include the
21
Individual Accounts of those who die, become disabled, retire, or whose
employment terminates during the Year in question.
Sec. 4.5 Time When Contributions are Allocated. If directed by the
Administrator, an Employer contribution for a Year may be provisionally
allocated as of any Allocation Date prior to the Anniversary Date, but such
allocation shall be subject to adjustment as of the Anniversary Date.
ARTICLE V
LIMITATION ON ALLOCATIONS
-------------------------
Sec. 5.1 Limitation on Allocations. Notwithstanding any other provision of
the Plan, the following provisions shall be applicable to the Plan:
(a) If this Plan is the only plan maintained by the Employer which covers
the class of Employees eligible to participate hereunder and the
Participant does not participate in and has never participated in a Related
Plan or a welfare benefit fund, as defined in Section 419(e) of the Code,
maintained by the Employer, or an individual medical account, as defined in
Section 415(1)(2) of the Code, maintained by the Employer, which provides
an Annual Addition as defined in Section 5.2(a), the Annual Additions which
may be allocated under this Plan to a Participant's Individual Account for
a Limitation Year shall not exceed the lesser of:
(i) the Maximum Permissible Amount; or
(ii) any other limitation contained in this Plan.
(b) If an Employer maintains, in addition to this Plan, (i) a Related Plan
which covers the same class of Employees eligible to participate hereunder,
(ii) a welfare benefit fund, as defined in Section 419(e) of the Code, or
(iii) an individual medical account, as defined in Section 415(l)(2) of the
Code, which provides an Annual Addition, the Annual Additions which may be
allocated under this Plan to a Participant's Individual Account for a
Limitation Year shall not exceed the lesser of:
(i) the Maximum Permissible Amount, reduced by the sum of any Annual
Additions allocated to the Participant's accounts for the same
22
Limitation Year under this Plan and such other Related Plan and the
welfare plans described in clauses (ii) and (iii) above; or
(ii) any other limitation contained in this Plan.
Sec. 5.2 Definitions. For purposes of this Article V, the following terms
shall have the meanings set forth below:
(a) "Annual Additions" means the sum of the following amounts allocated to
a Participant's Individual Account for a Limitation Year:
(i) all Employer contributions;
(ii) all forfeitures;
(iii) all Employee contributions;
(iv) amounts allocated to an individual medical account, as defined in
Section 415(l)(2) of the Code, which is part of a pension or annuity
plan maintained by the Employer and amounts derived from contributions
which are attributable to post-retirement medical benefits allocated
to the separate account of a key employee, as defined in Section
419A(d)(3) of the Code, under a welfare benefit fund, as defined in
Section 419(e) of the Code, maintained by the Employer; and
(v) all allocations under a simplified employee pension.
For purposes of this Article V, Employee contributions shall be determined
without regard to any (i) rollover contribution within the meaning of
Section 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code, (ii)
contribution by the Employee to an individual retirement account or
individual retirement annuity, and (iii) direct transfers of Employee
contributions from a plan described in Section 401(a) of the Code to the
Plan.
In addition, Annual Additions shall include "excess elective deferrals"
within the meaning of Treas. Reg.ss.1.402(g) 1(c)(1)(iii) that are not
distributed by the defined contribution plan to the participant before
April 15 following the taxable year of deferral, "Excess employee savings
23
contributions" within the meaning of Treas. Reg.ss.1.401(k)-1(g)(7), and
"excess matching contributions" within the meaning of Treas.
Reg.ss.1.401(m)-1(f)(8).
(b) "Excess Amount" means the excess of the Annual Additions allocated to a
Participant's Individual Account for the Limitation Year over the Maximum
Permissible Amount, less loading and other administrative charges allocable
to such excess.
(c) "Limitation Year" means a twelve-consecutive month period ending on the
last day of the Year. All qualified plans maintained by the Employer must
use the same Limitation Year. If the Limitation Year is amended to a
different 12-consecutive month period, the new Limitation Year must begin
on a date within the Limitation Year in which the amendment is made.
(d) "Maximum Permissible Amount" for a Limitation Year with respect to any
Participant shall be the lesser of:
(i) $30,000 [or, beginning April 1, 1999, and each April thereafter,
such other dollar limitation determined for the Limitation Year by
automatically adjusting the $30,000 limitation by the cost-of-living
adjustment factor prescribed by the Secretary of the Treasury under
Section 415(d) of the Code in such manner as the Secretary shall
prescribe]; or
(ii) 25% of the Participant's Annual Compensation for the Limitation
Year.
(e) "Employer" means for purposes of this Article V, any Employer and any
Affiliated Company that adopts this Plan; provided, however, the
determination under Sections 414(b) and (c) of the Code shall be made as if
the phrase "more than 50 percent" were substituted for the phrase "at least
80 percent" each place it is incorporated into Section 414(b) and (c) of
the Code.
(f) "Annual Compensation" means, notwithstanding Section 1.6, for the
purposes of this Article V, a Participant's earned income, wages, salaries,
fees for professional service and other amounts received (without regard to
whether an amount is paid in cash) for personal services actually rendered
in the course of employment with an Employer maintaining the Plan to the
extent that the amounts are includable in gross income [including, but not
limited to, commissions paid salesmen, compensation for services on the
24
basis of a percentage of profits, commissions on insurance premiums, tips,
bonuses, fringe benefits, and reimbursements, or other expense allowances
under a nonaccountable plan, as described in Treas. Reg. ss.1.62-2(c)] and
excluding the following:
(i) Employer contributions to a plan of deferred compensation to the
extent contributions are not included in gross income of the Employee
for the taxable year in which contributed, or on behalf of an Employee
to a simplified employee pension plan to the extent such contributions
are deductible by the Employee, and any distributions from a plan of
deferred compensation whether or not includable in the gross income of
the Employee when distributed;
(ii) amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by an Employee
becomes freely transferable or is no longer subject to a substantial
risk of forfeiture;
(iii) amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(iv) other amounts which receive special tax benefits, or
contributions made by the Employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract under
Section 403(b) of the Code (whether or not the contributions are
excludable from the gross income of the Employee).
For Limitation Years after December 31, 1991, Annual Compensation for any
Limitation Year is the Annual Compensation actually paid or includable in
gross income during such Limitation Year. For Limitation Years after
December 31, 1997, Annual Compensation shall include amounts contributed by
an Employer pursuant to a salary reduction agreement which are excludable
from the Participant's gross income under Sections 125, 402(e)(3),
402(h)(1)(B), 408(p)(2)(A)(i), 457 or 403(b) of the Code. For Limitation
Years beginning on or after January 1, 2001, Annual Compensation shall
include elective amounts that are not includible in the gross income of the
Participant by reason of Section 132(f)(4) of the Code.
25
(g) "Related Plan" means any other defined contribution plan [as defined in
Section 415(k) of the Code] maintained by any Employer as defined in
Section 5.2(e).
(h) "Defined Contribution Plan Fraction" means for any Limitation Year:
(i) the sum of the Annual Additions to the Participant's account under
this Plan and his accounts under any Related Plan and welfare plans
[as described in Section 5.1(b)(ii) and (iii)] as of the close of the
Limitation Year,
divided by:
(ii) the sum of the lesser of the following amounts determined for the
Limitation Year and for each prior Year of his service for an
Employer:
(A) the product of 1.25, multiplied by the dollar limitation in
effect under Section 415(c)(1)(A) of the Code for the Limitation
Year [determined after adjustment under Section 415(d) of the
Code], or
(B) the product of 1.4, multiplied by an amount equal to 25% of
the Participant's Annual Compensation for the Limitation Year.
If the Employee was a Participant as of the end of the first day of the
first Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by an Employer which were in
existence on May 6, 1986, the numerator of the Defined Contribution Plan
Fraction will be adjusted if the sum of that fraction and the Defined
Benefit Plan Fraction otherwise would exceed 1.0 under the terms of this
Plan. Under the adjustment, an amount equal to the product of (i) the
excess of the sum of the fractions over 1.0, times (ii) the denominator of
this fraction, will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they would be
computed under this Section 6.2(h) as of the end of the last Limitation
Year beginning before January 1, 1987, and disregarding any changes in the
terms and conditions of the Plan made after May 6, 1986, but using the
Section 415 limitations applicable to the first Limitation Year beginning
on or after January 1, 1987. The Annual Addition for any Limitation Year
beginning before January 1, 1987, shall not be recomputed to treat all
26
Employee contributions as Annual Additions. The adjustment also will be
made if at the end of the last Limitation Year beginning before January 1,
1984, the sum of the fractions exceeds 1.0 because of accruals or additions
that were made before the limitations of this Article VI became effective
to any plans of an Employer in existence on July 1, 1982. With respect to
any Limitation Year ending after December 31, 1982, the amount taken into
account under Section 5.2(h)(ii) above with respect to each Participant for
all Limitation Years ending before January 1, 1983, shall be an amount
equal to the product of (iii) and (iv), where
(iii) is the amount determined under Section 5.2(h)(ii) [as in effect
for the Limitation Year ending in 1982] for the Limitation Year ending
in 1982, multiplied by
(iv) a fraction, the numerator of which is the lesser of
(A) $51,875, or
(B) 1.4, multiplied by 25% of the Annual Compensation of the
Participant for the Limitation Year ending in 1981, and
the denominator of which is the lesser of
(A) $41,500 or
(B) 25% of the Annual Compensation of the Participant for the
Limitation Year ending in 1981.
(i) "Defined Benefit Plan Fraction" means for any Limitation Year:
(i) the projected Annual Benefit of the Participant under the defined
benefit plans maintained by an Employer determined as of the close of
the Limitation Year,
divided by:
(ii) the lesser of:
(A) the product of 1.25, multiplied by the dollar limitation in
effect under Section 415(b)(1)(A) of the Code for the Limitation
Year, or
27
(B) the product of 1.4, multiplied by 100% of the Participant's
Average Compensation.
If the Employee was a Participant as of the first day of the first
Limitation Year beginning after December 31, 1986, in one or more defined
benefit plans maintained by an Employer which were in existence on May 6,
1986, the denominator of this fraction will not be less than 125% of the
sum of the annual benefits under such plans which the Participant had
accrued as of the close of the last Limitation Year beginning before
January 1, 1987, disregarding any changes in the terms and conditions of
the Plan after May 5, 1986. The preceding sentence applies only if the
defined benefit plans individually and in the aggregate satisfied the
requirements of Section 415 of the Code for all Limitation Years beginning
before January 1, 1987.
(j) "Average Compensation" means the average Annual Compensation during a
Participant's high three years of service, which period is the three
consecutive calendar years (or, the actual number of consecutive years of
employment for those Employees who are employed for less than three
consecutive years with an Employer) during which the Employee had the
greatest aggregate Annual Compensation from the Employer, including any
adjustments under Section 415(d) of the Code.
(k) "Annual Benefit" means a benefit payable annually in the form of a
straight life annuity (with no ancillary benefits) under a plan to which
Employees do not contribute and under which no Rollover Contributions are
made.
Sec. 5.3 Excess Annual Additions. In the event that, notwithstanding
Section 5.5(a) hereof, the limitations with respect to Annual Additions
prescribed hereunder are exceeded with respect to any Participant for the
Limitation Year and such Excess Amount arises as a result of the allocation of
forfeitures, a reasonable error in estimating a Participant's Annual
Compensation [as defined in Section 5.2(f)] for the Year, a reasonable error in
determining the amount of Employee contributions and forfeitures that may be
allocated to the Participant's Individual Account under the limits of Section
415 of the Code, or as a result of other facts and circumstances as established
by the Commissioner of the Internal Revenue Service, the Excess Amount shall not
be deemed an Annual Addition in that Limitation Year, to the extent such Excess
Amount is treated in accordance with any of the following:
28
(a) the Excess Amount attributable to the portion of the Employer
contribution made pursuant to Section 3.1 which has been allocated to a
Participant under the Plan for a Year but which cannot be allocated to his
Individual Account because of the limitation imposed by this Section,
shall, subject to the limitations of Section 5.1(a), be allocated and
reallocated in the current Limitation Year to Individual Accounts of the
other Participants entitled to share in the Employer contributions and
forfeitures for that Year in accordance with Section 4.3. Any Excess Amount
that cannot be allocated will be held unallocated in a suspense account.
All amounts in the suspense account must be allocated and reallocated to
the Participants' Individual Accounts, subject to the limitations of
Section 5.1(a), in succeeding Limitation Years before any Employer
contributions which constitute Annual Additions may be made to the Plan;
and
(b) in the event of termination of the Plan, the suspense account shall
revert to the Employer to the extent it may not then be allocated to any
Participant's Individual Account.
Sec. 5.4 Combined Plan Limits for Limitation Years Beginning Prior to April
1, 2000.
(a) If an Employer maintains, or has ever maintained, one or more defined
benefit plans covering an Employee who is also a Participant in this Plan,
the sum of the Defined Contribution Plan Fraction and the Defined Benefit
Plan Fraction, cannot exceed 1.0 for any Limitation Year beginning prior to
April 1, 2000. This Section 5.4 does not apply for any Limitation Year
beginning after March 31, 2000. The Annual Addition for any Limitation Year
beginning before January 1, 1987 shall not be recomputed to treat all
Employee contributions as an Annual Addition. If the Plan satisfied the
applicable requirements of Section 415 of the Code as in effect for all
Limitation Years beginning before January 1, 1987, an amount shall be
subtracted from the numerator of the Defined Contribution Plan Fraction
(not exceeding such numerator) as prescribed by the Secretary of Treasury
so that the sum of the Defined Benefit Plan Fraction and the Defined
Contribution Plan Fraction computed under Section 415(e)(1) of the Code [as
revised by this Section 5.4(a)] does not exceed 1.0 for such Limitation
Year.
29
(b) For purposes of this Section 5.4, Employee contributions to a defined
benefit plan are treated as a separate defined contribution plan. In
addition, any contributions paid or accrued after December 31, 1985 which
are attributable to medical benefits allocated under a welfare benefit fund
[as defined in Section 419(e) of the Code] during Years ending after
December 31, 1985 to a separate account established for any post-retirement
medical benefits provided with respect to a Participant, who, at any time,
during the Year or any preceding Year, is or was a Key Employee, shall be
treated as Annual Additions to a defined contribution plan. Further, all
defined contribution plans of an Employer are to be treated as one defined
contribution plan and all defined benefit plans of an Employer are to be
treated as one defined benefit plan, whether or not such plans have been
terminated.
(c) If the sum of the Defined Contribution Plan Fraction and the Defined
Benefit Plan Fraction exceeds 1.0 for any Limitation Year beginning prior
to April 1, 2000, the sum of the fractions will be reduced to 1.0 as
follows:
(i) voluntary nondeductible Employee contributions made by a
Participant to the defined benefit plan which constitute an Annual
Addition to a defined contribution plan, to the extent they would
reduce the sum of the fractions to 1.0, will be returned to the
Participant;
(ii) if additional reductions are required for the sum of the
fractions to equal 1.0, voluntary nondeductible Employee contributions
made by a Participant to this Plan which constitute an Annual Addition
to this Plan, to the extent they would reduce the sum of the fractions
to 1.0, will be returned to the Participant;
(iii) if additional reductions are required for the sum of the
fractions to equal 1.0, the Annual Benefit of a Participant under the
defined benefit plan will be reduced (but not below zero and not below
the amount of the Participant's accrued benefit to date) to the extent
necessary to prevent the sum of the fractions, computed as of the
close of the Limitation Year from exceeding 1.0; and
30
(iv) if additional reductions are required for the sum of the
fractions to equal 1.0, the reductions will then be made to the Annual
Additions of this Plan.
Sec. 5.5 Special Rules.
(a) Notwithstanding any other provision of this Article VI, an Employer
shall not contribute any amount that would cause an allocation to the
suspense account as of the date the contribution is allocated. In the event
the making of any Employer contribution, or other contribution, or any part
thereof, would result in the limitations set forth in this Article V being
exceeded, the Administrator shall cause such contributions not to be made.
If the contribution is made prior to the date as of which it is to be
allocated, then such contribution shall not exceed an amount that would
cause an allocation to the suspense account if the date of the contribution
were an Allocation Date. The Administrator shall cause the Recordkeeper to
maintain records which reflect the contributions to be allocated to the
Individual Account of each Participant in any Limitation Year. In the event
that it is determined prior to or within any Limitation Year that the
foregoing limitations would be exceeded if the full amount of contributions
otherwise allocable would be allocated, the Annual Additions to this Plan
for the remainder of the Limitation Year shall be adjusted by reducing any
Employer contributions, but only to the extent necessary to satisfy the
limitations.
(b) If the Annual Additions with respect to the Participant under other
Related Plans and welfare plans described in Section 5.1(b)(ii) and (iii)
are less than the Maximum Permissible Amount and the Employer contribution
that otherwise would be contributed or allocated to the Participant's
Individual Account under this Plan would cause the Annual Additions for the
Limitation Year to exceed the limitation of Section 5.1(b), the amount
contributed or allocated will be reduced so that the Annual Additions under
all such plans for the Limitation Year will equal the Maximum Permissible
Amount. If the Annual Additions with respect to the Participant under the
Related Plans and welfare plans described in Section 5.1(b)(ii) and (iii)
in the aggregate are equal to or greater than the Maximum Permissible
Amount, no amount will be contributed or allocated to the Participant's
Individual Account under this Plan for the Limitation Year unless the
Annual Additions with respect to the Participant under the Related Plans
are sufficiently reduced. If a Participant's Annual Additions under this
31
Plan and all Related Plans result in an Excess Amount, such Excess Amount
shall be deemed to consist of the amounts last allocated, except that
Annual Additions attributable to a welfare plan described in Section
5.1(b)(ii) and (iii) will be deemed to have been allocated first regardless
of the actual allocation date.
(c) If an Excess Amount was allocated to a Participant on an allocation
date of a Related Plan, the Excess Amount attributed to this Plan will be
the product of:
(i) the total Excess Amount allocated as of such date [including any
amount which would have been allocated but for the limitations of
Section 5.1(b)],
multiplied by:
(ii) the ratio of:
(A) the amount allocated to the Participant as of such date under
this Plan,
divided by:
(B) the total amount allocated as of such date under this Plan
and all Related Plans [determined without regard to Section
5.1(b)].
(d) Prior to the determination of the Participant's actual Annual
Compensation for a Limitation Year, the Maximum Permissible Amount may be
determined on the basis of the Participant's estimated Annual Compensation
for such Limitation Year. Such estimated Annual Compensation shall be
determined on a reasonable basis and shall be uniformly determined for all
Participants similarly situated. Any Employer contributions (including
allocation of forfeitures) based on estimated Annual Compensation shall be
reduced by any Excess Amounts carried over from prior Years.
(e) As soon as is administratively feasible after the end of the Limitation
Year, the Maximum Permissible Amount for such Limitation Year shall be
determined on the basis of the Participant's actual Annual Compensation for
such Limitation Year.
32
ARTICLE VI
INDIVIDUAL ACCOUNTS
-------------------
Sec. 6.1 Participant Interest in Individual Accounts. Each Participant and
Former Participant shall have such right, title or interest in the balance of
his Individual Account as hereinafter provided. In no event shall his
nonforfeitable interest exceed the amount to the credit of his Individual
Account as the same may be adjusted from time to time.
Sec. 6.2 Annual Statement to Participant. At least annually, the
Administrator shall advise each Participant, Former Participant and Beneficiary
for whom an Individual Account is held hereunder of the then fair market value
of such Individual Account.
ARTICLE VII
RETIREMENT
----------
Sec. 7.1 Normal Retirement. A Participant may retire from the employ of his
Employer and all Affiliated Companies on or after his Normal Retirement Date. A
Participant's Individual Account shall become nonforfeitable on his Normal
Retirement Date.
Sec. 7.2 Early Retirement. A Participant may retire from the employ of his
Employer and all Affiliated Companies on or after his Early Retirement Date.
Sec. 7.3 Other Retirement. A Participant's retirement will commence on the
Anniversary Date coinciding with or next following the date the Participant's
employment with his Employer and all Affiliated Companies terminates if he
retires under the provisions of any other qualified retirement plan of his
Employer.
Sec. 7.4 Benefits on Retirement. Upon the retirement of a Participant from
the employment of his Employer and all Affiliated Companies on or after his
Normal Retirement Date or his Early Retirement Date, his entire Individual
Account shall be held for his benefit. Said Participant shall receive payment
from his Individual Account in a single lump sum in accordance with Article XI
hereof as soon as administratively practicable after his Individual Account has
been credited and adjusted (as provided in Article IV) as of the Anniversary
Date concurrent with or next following his retirement. For Participants in the
33
Plan as of March 31, 1994, the Administrator shall direct the Trustee to begin
distribution prior to the time set forth in the preceding sentence if the
Participant directs the Administrator in writing.
Sec. 7.5 Commencement of Benefits. Notwithstanding any other provision of
this Plan to the contrary, a Participant or Former Participant shall begin
receiving distributions from the Plan, as provided in Article XI, by his
Required Beginning Date as defined in Section 11.4(h)(ii).
Sec. 7.6 Final Contribution After Distribution of Benefits. If a
Participant who has already received a distribution of his Individual Account
under this Article is entitled to an allocation of an Employer contribution
under Section 4.3 for the Year in which such distribution was made, such
contribution shall be paid to the Participant as soon as administratively
practicable following the completion of the allocations under Article IV for
such Year.
ARTICLE VIII
DEATH
-----
Sec. 8.1 Benefits on Death. Upon the death of a Participant who is employed
by an Employer or an Affiliated Company, his entire Individual Account shall be
held for the benefit of his Beneficiary. Upon the death of a Participant whose
employment with his Employer and all Affiliated Companies has terminated, his
nonforfeitable interest (determined under Section 10.2) in his Individual
Account which has not been distributed at the time of his death under Articles
VII-X shall be held for the benefit of his Beneficiary. His Beneficiary shall
receive payment from his Individual Account in a single lump sum in accordance
with Article XI hereof as soon as administratively practicable after the
allocations have been completed and his Individual Account has been credited and
adjusted (as provided in Article IV) as of the Anniversary Date concurrent with
or next following the date on which the Participant's death occurs. The
Administrator shall direct the Trustee to begin distribution prior to the time
set forth in the preceding sentence if the Beneficiary directs the Administrator
in writing.
Sec. 8.2 Final Contribution After Payment of Benefits. If the Individual
Account of a deceased Participant whose Beneficiary has already received a
distribution of the Participant's Individual Account under this Article is
34
entitled to an allocation of an Employer contribution under Section 4.3 for the
Year in which such distribution was made, such contribution shall be paid to the
Beneficiary as soon as administratively practicable following the completion of
the allocations under Article IV for such Year.
ARTICLE IX
DISABILITY
----------
Sec. 9.1 Benefits on Disability. In the event of termination of a
Participant's employment with his Employer and all Affiliated Companies due to
Disability, his entire Individual Account shall be held for his benefit. If the
balance of the Participant's Individual Account exceeds $3,500, the Participant
shall receive payment from his Individual Account in a single lump sum in
accordance with Article XI hereof as soon as administratively practicable after
the allocations have been completed and his Individual Account has been credited
and adjusted (as provided in Article IV) as of the Anniversary Date concurrent
with or next following the date his Normal Retirement Date or earlier death
occurs. The Administrator shall direct the Trustee to begin distribution prior
to the time set forth in the preceding sentence if the Participant directs the
Administrator in writing. If the balance of the Participant's Individual Account
does not exceed $3,500, the Participant's entire Individual Account shall be
distributed to him in a single lump sum as soon as administratively practicable
after the allocations have been completed and his Individual Account has been
credited and adjusted (as provided in Article IV) as of the Anniversary Date of
the Year in which the date of his Disability occurs. The Administrator shall
direct the Trustee to begin distribution prior to the time set forth in the
preceding sentence if the Participant directs the Administrator in writing.
Effective April 1, 2002, the dollar amount in this Section 9.1 shall
automatically be adjusted to $5,000.
Sec. 9.2 Final Contribution After Payment of Benefits. If a Participant who
has already received a distribution of his Individual Account under this Article
is entitled to an allocation of an Employer contribution under Section 4.3 for
the Year in which the distribution was made, such contribution shall be paid to
the Participant as soon as administratively practicable following the completion
of the allocations under Article IV for such Year.
35
ARTICLE X
TERMINATION BENEFITS
--------------------
Sec. 10.1 Termination of Employment Other than by Reason of Death,
Disability or Retirement. If the employment of a Participant with his Employer
and all Affiliated Companies terminates for any reason other than retirement
(whether normal or early), death or Disability, such Participant shall be
entitled to such benefits as are hereinafter provided in Section 10.2 at the
time specified in Section 10.3.
Sec. 10.2 Vested Interest. A Participant to whom the provisions of Section
10.2 are applicable shall be entitled (as a vested interest) to receive a
percentage of the then balance to his credit in his Individual Account
determined in accordance with the following schedule:
Years of Service (Vesting) Vested Interest
-------------------------- ---------------
Less than 5 0%
5 or more 100%
Sec. 10.3 Time of Distribution. If the employment of a Participant with his
Employer and all Affiliated Companies terminates for any reason other than
retirement (whether normal or early), death or Disability, and the value of the
vested portion of his Individual Account exceeds $3,500, then the Administrator
shall direct the Trustee, with such Participant's written consent, to distribute
to such Participant the portion of his Individual Account to which he is
entitled under Section 10.2 in a single lump sum in accordance with Article XI
hereof as soon as administratively practicable after his Individual Account has
been credited and adjusted (as provided in Article IV) as of the earlier of (i)
the Anniversary Date immediately following the date the Participant incurs a
One-Year Break in Service following his termination of employment, provided the
written consent of the Participant to such distribution is received by the
Administrator not later than 60 days after such Anniversary Date, or (ii) the
Anniversary Date following the date on which his Normal Retirement Date or
earlier death occurs, but not later than the time specified in Section 11.4. If
the Participant does not elect to receive the distribution when he is first
eligible under the preceding sentence, he may elect to receive the distribution
of his Individual Account in a single lump sum as soon as administratively
practicable after his Individual Account has been credited and adjusted (as
provided in Article IV) as of any subsequent Anniversary Date if he has provided
written consent to such distribution to the Administrator not later than 60 days
36
after such Anniversary Date. If, however, the vested balance of the terminated
Participant's Individual Account does not exceed $3,500, the vested balance of
the Participant's Individual Account shall be distributed to him in a single
lump sum as soon as administratively practicable after the allocations have been
completed and his Individual Account has been credited and adjusted (as provided
in Article IV) as of the Anniversary Date of the Year in which the Participant
incurs a One-Year Break in Service. Effective April 1, 2002, the dollar amount
in this Section 10.3 shall automatically be adjusted to $5,000.
The balance to the credit of a terminated Participant in his Individual
Account which is not vested under the schedule in Section 10.2, if not
previously forfeited, shall be forfeited as of the earlier of (i) the date his
entire vested Individual Account balance has been distributed under Article XI
or (ii) the last day of the Year in which such Participant incurs a Five-Year
Break in Service. If the Participant is not entitled to any portion of his
Individual Account under Section 10.2, he shall be deemed to have received a
distribution and shall forfeit the balance of his Individual Account on the date
of his incurring a One-Year Break in Service. The forfeited amount under this
Section 10.3 shall remain in the Trust Fund and shall be applied as provided in
Section 10.5. If a Former Participant is reemployed by an Affiliated Company
without incurring a Five-Year Break in Service, the portion of his Individual
Account which was forfeited hereunder shall be restored to his Individual
Account in full. If currently unallocated forfeitures are not adequate to effect
the restoration, the Company or any Employer shall make such additional
contribution to the Plan as is necessary to restore the forfeited portion of his
Individual Account.
Sec. 10.4 Forfeiture and Return to Employment Prior to Complete
Distribution. After a Five-Year Break in Service, a Participant to whom this
Article X is applicable, other than a Participant described in Section 10.3,
shall forfeit that portion of the amount of his Individual Account to which he
is not entitled under Section 10.2 and the amount thus forfeited shall remain in
the Trust Fund and shall be applied as provided in Section 10.5. The amount
forfeited by a Participant hereunder shall be charged to his Individual Account
on the Anniversary Date as of which he shall incur a Five-Year Break in Service.
If the Participant returns to the employment of the Employer after a Five-Year
Break in Service, but before the full payment of his Individual Account,
allocations of Employer contributions under Section 4.3 after such Five-Year
37
Break in Service shall be allocated to a Parent Company Stock Account and Other
Investments Account established on behalf of such Participant which is separate
from the Individual Account of such Participant to which is allocated his
account balance attributable to service prior to the Five-Year Break in Service.
Sec. 10.5 Application of Forfeitures. The forfeitures occurring as provided
in Articles X and XI shall first be used to restore the account of a Former
Participant who has been located during that Year as provided in Section 11.9.
If additional forfeitures remain after full restorations under Section 11.9,
then remaining forfeitures shall be used to restore accounts of Former
Participants who are entitled to restorations for that Year under Section 10.3.
If additional forfeitures remain for a Year after application of the two
preceding sentences, the remaining forfeitures may be used to (i) make
corrective allocations and reduce corrective contributions on behalf of any
Participant or Former Participant for that Year, if any, pursuant to Section
15.11 and (ii) pay expenses of the Plan as provided in Section 15.8. If
additional forfeitures remain thereafter, the forfeitures shall be allocated as
provided in Section 4.3(c)(ii) among the appropriate Parent Company Stock
Accounts and Other Investments Accounts on the Anniversary Date of the Year in
which the forfeiture occurs.
ARTICLE XI
DISTRIBUTIONS AND WITHDRAWALS
-----------------------------
Sec. 11.1 Form of Payment. Except as provided in Section 11.4(d), whenever
a Participant, Former Participant or Beneficiary is entitled to or required to
receive benefits hereunder as provided in Articles VII to X, inclusive, the
Administrator shall direct the Trustee to pay such benefits in a lump sum,
provided that a life annuity may not be a part of a lump sum distribution.
Distribution of the amounts from a Participant's Individual Account will be made
entirely in whole shares of Parent Company Stock and the value of any fractional
share will be paid in cash. The distribution which a Participant is entitled to
receive from his Parent Company Stock Account shall be equal to the number of
shares of Parent Company Stock credited to his Parent Company Stock Account as
of the immediately preceding Allocation Date plus any stock dividends to which
he is entitled under Section 4.3(g). Any balance of his Other Investments
Account as of the immediately preceding Allocation Date, plus cash or in-kind
dividends to which the Participant is entitled under Section 4.3(g) will be used
38
to purchase for distribution to him the maximum number of whole shares of Parent
Company Stock at the fair market value per share as of the date of purchase, and
any unexpended balance will be distributed to him in cash.
Sec. 11.2 Consent to Distribution. If the vested balance of the
Participant's or Former Participant's Individual Account exceeds $3,500 and any
part of the Individual Account could be distributed to the Participant or Former
Participant before the Participant or Former Participant attains (or would have
attained if not deceased) his Normal Retirement Date, the Participant or Former
Participant must consent in writing to any distribution of such Individual
Account. The consent of the Participant or Former Participant must be obtained
within the 90-day period prior to the date benefit payments are to commence. The
Administrator shall notify the Participant or Former Participant of the right to
defer any distribution until his Normal Retirement Date. Such Notice shall be
provided no less than 30 days and no more than 90 days before benefit payment is
to commence and shall include a general description of the material features,
and an explanation of the relative values of, the form of benefit available
under Section 11.1 in a manner that would satisfy the notice requirements of
Section 417(a)(3) of the Code and a description of his direct rollover rights
under Section 11.11. If the vested balance of the Participant's Individual
Account does not exceed $3,500, the Participant, Former Participant, or
Beneficiary does not have a right to delay the distribution, but shall be
provided with a notice of his direct rollover rights under Section 11.11. Such
distribution may commence less than 30 days after the Notice required under
Treas. Reg. ss.1.411(a)-11(c) is given, provided that (i) the Administrator
clearly informs the Participant or Former Participant that the Participant or
Former Participant has a right to a period of at least 30 days after receiving
the Notice to consider the decision of whether or not to elect a distribution
(and, if applicable, a particular distribution option) and (ii) the Participant
or Former Participant, after receiving the Notice, affirmatively elects a
distribution in writing to the Administrator. The consent of the Participant or
Former Participant is not required to the extent that a distribution is required
to satisfy either Section 401(a)(9) or Section 415 of the Code. Effective April
1, 2002, the dollar amount in this Section 11.2 shall automatically be adjusted
to $5,000.
Sec. 11.3 Minority or Disability of Distributee. During the minority or
disability of a person entitled to receive benefits hereunder, the Administrator
may, in its sole discretion, direct payment by the Trustee of all or any portion
39
of such benefits due such person directly to him or to his spouse or a relative
or to any individual or institution having custody of such person. Neither an
Employer, the Committee, the Administrator, the Named Fiduciary nor the Trustee
shall be required to see to the application of any payments so made and the
receipt of the payee (including the endorsement of a check or checks) shall be
conclusive as to all interested parties. Any payment made pursuant to the power
herein conferred on the Administrator shall operate as a complete discharge of
all obligations of the Administrator and the Trustee, to the extent of the
distributions so made.
Sec. 11.4 Additional Requirements Relating to Benefit Payments and Death
Distributions. Notwithstanding any other provisions of the Plan, the following
provisions shall be applicable to the Plan effective January 1, 1997:
(a) Payment of benefits shall begin, unless the Participant otherwise
elects, not later than the 60th day after the last day of the Year in which
the latest of the following events occurs:
(i) the Participant reaches the earlier of age 65 or his Normal
Retirement Date;
(ii) the tenth anniversary of the date on which the Participant
commenced participation in the Plan occurs, but not later than the
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2 if such Participant is a Five-Percent
Owner;
(iii) the date the Participant's employment with his Employer and all
Affiliated Companies terminates, but in no event later than the April
1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2 if such Participant is a Five-Percent
Owner.
If a Participant is entitled to receive a distribution of all or a portion
of his Individual Account pursuant to Article VII, VIII, IX or X, he may
elect to defer the date of distribution of that amount, but not beyond his
Required Beginning Date. Once distributions have begun to a Five Percent
Owner after his Required Beginning Date, they must continue to be
distributed, even if the Participant ceases to be a Five Percent Owner in a
subsequent Year. If the Participant fails to consent to a distribution at a
40
time when any part of the balance of the Individual Account could be
distributed prior to the Participant's Normal Retirement Date, such failure
shall be deemed to be an election to defer commencement of payment of any
benefit under this Section 11.4(a); provided that in no event shall he
receive payment of the vested portion of his Individual Account later than
his Required Beginning Date.
(b) All distributions required under this Article XI shall be determined
and made in accordance with Section 401(a)(9) of the Code and the Treasury
regulations thereunder, including the minimum distribution incidental
benefit requirements of Prop. Treas. Reg. ss.1.401(a)(9)-2.
(c) An election of a Participant to defer receipt of benefits shall be made
by submitting to the Administrator a written statement signed by the
Participant describing the benefits and the date on which the Participant
requests that the payments commence; provided, however, a Participant may
not elect to defer receipt or commencement of receipt of benefits beyond
his Required Beginning Date.
(d) If a Participant dies before the distribution of benefits to him under
Section 11.1, distribution to his Beneficiary of his entire Individual
Account must be completed by December 31 of the calendar year containing
the fifth anniversary of the death of such Participant. The provisions of
this Section 11.4(d) shall not apply to the portion of the Participant's
Individual Account which is payable:
(i) to a Designated Beneficiary other than the Participant's surviving
spouse under Section 11.1 on or before December 31 of the calendar
year immediately following the calendar year in which the Participant
died; or
(ii) under Section 11.1 to a Designated Beneficiary who is the
surviving spouse of the Participant at least by the later of (A) the
December 31 of the calendar year immediately following the calendar
year in which the Participant died and (B) the December 31 of the
calendar year in which the Participant would have attained age 70 1/2.
If the Participant has no Designated Beneficiary, distribution of the
Participant's entire Individual Account must be completed by December 31 of
the calendar year containing the fifth anniversary of the Participant's
death.
41
(e) If a portion of the Participant's Individual Account is payable to the
Participant's surviving spouse and such spouse dies before distributions to
such spouse begin, the spouse shall be treated as the Participant under
Section 11.4(e) with the exception of the provisions of subsection (ii)
thereof.
(f) Any portion of a Participant's Individual Account paid to a child shall
be treated as if such portion has been paid to the Participant's surviving
spouse if such portion will become payable to the surviving spouse on the
date the child reaches majority (or other designated event permitted under
regulations prescribed by the Secretary of the Treasury).
(g) Distribution of a Participant's Individual Account is considered to
begin on the Participant's Required Beginning Date or, if Section 11.4(e)
is applicable, the date distribution is required to begin to the surviving
spouse pursuant to Section 11.4(d)(ii).
(h) For purposes of this Section 11.4, the following terms shall have the
meanings set forth below:
(i) "Designated Beneficiary" means the individual who is designated as
the Beneficiary under the Plan in accordance with Section 401(a)(9) of
the Code and the Treasury regulations thereunder.
(ii) "Required Beginning Date" of a Participant means, effective
January 1, 1997, the date determined as follows:
(A) If the Participant is not a Five-Percent Owner and has not
attained age 70 1/2 prior to April 1, 2002, his Required
Beginning Date is the April 1 of the calendar year following the
later of (1) the calendar year in which the Participant attains
age 70 1/2 or (2) the calendar year in which the Participant
retires; or
(B) If the Participant is a Five-Percent Owner, or if the
Participant has attained age 70 1/2 prior to April 1, 2002, his
Required Beginning Date is the April 1 of the calendar year
following the calendar year in which the Participant attains age
70 1/2 even if he has not retired.
42
(iii) "Five-Percent Owner" means a Participant who is a five-percent
owner of the Company within the meaning of Section 416(i)(1)(B)(i) of
the Code (determined in accordance with Section 416 of the Code but
without regard to whether the Plan is top heavy) at any time during
the Year ending with or within the calendar year in which such owner
attains age 70 1/2 or any subsequent Year.
Sec. 11.5 Withdrawals. Except as provided in this Section, no amounts may
be withdrawn by a Participant from his Individual Account until the
Participant's employment with his Employer and all Affiliated Companies has
terminated. In the event of financial hardship, a Participant or Former
Participant may, with the consent of the Administrator, withdraw such portion of
his Individual Account as the Administrator may approve; provided, however, that
no amount in excess of the vested portion of his Individual Account may be
withdrawn from such Individual Account. A request for withdrawal under this
Section 11.5 shall be made in writing to the Administrator, and shall set forth
the particular circumstances constituting the financial hardship and the amount
requested to be withdrawn. The term "financial hardship" shall mean acute
financial necessity resulting from illness or death of members of the family,
education of children and casualty losses not covered by insurance. The
determination by the Administrator as to the existence of financial hardship and
the amount permitted to be withdrawn shall be conclusive but shall be made on a
consistent and nondiscriminatory basis. All amounts not actually withdrawn shall
remain credited to the Individual Account of the Participant or Former
Participant. For the purposes of allocating appreciation, depreciation, income,
expense, gain and loss of the Trust Fund, any withdrawals shall be subtracted
from the Individual Account balance as of the beginning of the Year in which the
withdrawal is made.
Sec. 11.6 Claims Procedure. The Administrator shall make all determinations
as to the right of any person to receive a benefit. Unless the Administrator has
established other procedures which are consistent with regulations issued by the
Department of Labor and communicated such procedures to the Participant, the
procedures of this Section 11.6 shall apply. The denial by the Administrator of
a claim for benefits under the Plan shall be stated in a written instrument
signed by the Administrator and delivered to or mailed to the claimant within 60
days after receipt of the claim by the Administrator, unless special
43
circumstances require an extension of time for processing the claim, in which
case a determination shall be made as soon as possible, but in no event later
than 120 days after receipt of the claim. Written notice of the extension shall
be furnished to the claimant prior to the termination of the initial 60-day
period and shall indicate the circumstances requiring the extension and the date
by which the Administrator expects to render its decision. The written decision
shall set forth:
(a) the specific reason or reasons for the denial;
(b) a specific reference to the pertinent provisions of the Plan on which
the denial is based;
(c) a description of any additional material or information necessary for
the claimant to perfect a claim and an explanation of why such material or
information is necessary; and
(d) a statement that the claimant may:
(i) request a review on written application to the Administrator;
(ii) review pertinent plan documents; and
(iii) submit issues and comments in writing.
If notice of the denial is not furnished in accordance with the above
procedure, the claim shall be deemed denied and the claimant shall be
permitted to proceed with the review procedure. A request by the claimant
for a review of the denied claim must be delivered to the Administrator
within 60 days after receipt by such claimant of written notification of
the denial of such claim. The Administrator shall, not later than 60 days
after receipt of a request for a review, make a determination concerning
the claim. If special circumstances require, the Administrator shall notify
the claimant that an extension of time for processing, not in excess of 120
days after receipt of the request for review, is necessary. A written
statement stating the decision on review, the specific reasons for the
decision, and the specific provisions of the Plan on which the decision is
based shall be mailed or delivered to the claimant within such 60 (or 120)
day period. If the decision on review is not furnished within the
appropriate time, the claim shall be deemed denied on review. All
communications from the Administrator to the claimant shall be written in a
manner calculated to be understood by the claimant. All interpretations,
44
determinations and decisions by the Administrator in respect of any matter
hereunder will be final, conclusive, and binding upon the Company and all
Employers, Participants, Former Participants, Beneficiaries and all other
persons claiming an interest in the Plan.
Sec. 11.7 Administrator's Duty to Trustee. The Administrator will notify
the Trustee at the appropriate time of all facts which may be necessary
hereunder for the proper allocation of increases, decreases, expenses, and
contributions for Participants, the proper payment or distribution of benefits,
or the proper performance of any other act required of the Trustee hereunder.
The Administrator will notify the Trustee of such facts as are needed by the
Trustee to perform its functions under the Plan and the Trust Agreement. The
Administrator will secure appropriate elections, directions, and designations
for Participants, Former Participants and Beneficiaries provided for in the
Plan.
Sec. 11.8 Duty to Keep Administrator Informed of Distributee's Current
Address. Each Participant, Former Participant and Beneficiary must file with the
Administrator from time to time in writing his mailing address and each change
of mailing address. Any communication, statement or Notice addressed to a
Participant, Former Participant or Beneficiary at his last mailing address filed
with the Administrator or if no address is filed with the Administrator then at
his last mailing address as shown on an Employer's records, will be binding on
the Participant or Former Participant, and his Beneficiaries, for all purposes
of the Plan. Neither the Administrator nor the Trustee shall be required to
search for or locate a Participant, Former Participant or Beneficiary.
Sec. 11.9 Failure to Claim Benefits. If the Administrator notifies the
Participant, Former Participant or Beneficiary by registered or certified mail
at his last known address that he is entitled to a distribution and also
notifies him of the provisions of this Section 11.9, and the Participant, Former
Participant or Beneficiary fails to claim his benefits under the Plan or make
his current address known to the Administrator within a reasonable period of
time after such notification, the Administrator shall direct that all unpaid
amounts which would have been payable to such Participant, Former Participant or
Beneficiary will be forfeited and applied as provided in Section 10.5. In the
event that the Participant, Former Participant or Beneficiary is subsequently
located, the Participant's Parent Company Stock Account will be restored and
credited with the number of whole shares of Parent Company Stock and cash for
any fractional share that have an aggregate fair market value equal to the
45
aggregate value of his Individual Account as of the date that account was
forfeited. The shares of Parent Company Stock and cash credited to his Parent
Company Stock Account shall be distributed to the Participant, Former
Participant or Beneficiary, and the Employer shall contribute an amount to the
Plan which is equal to the amount distributed under the terms of this Section
11.9 to the extent that such amount cannot be reinstated through forfeitures
occurring during the Year of payment. Notwithstanding the preceding sentences,
if the Administrator is trying to locate a Participant, Former Participant or
Beneficiary in connection with a minimum required distribution under Section
11.4, and the Administrator determines that such Participant, Former Participant
or Beneficiary cannot be located, the Administrator shall establish an escrow
account outside of the Plan in the name of that Participant, Former Participant
or Beneficiary and direct the Trustee to distribute such amount to that account.
Sec. 11.10 Distribution Pursuant to Qualified Domestic Relations Orders.
The Administrator shall establish policies and procedures for reviewing domestic
relations orders relating to a Participant's or Former Participant's interest in
the Plan. The Administrator or its delegate shall determine whether any such
domestic relations order is a Qualified Domestic Relations Order.
Notwithstanding any other provision of the Plan to the contrary, if the
provisions of a Qualified Domestic Relations Order provide that distributions
shall be made to an Alternate Payee prior to the time that the Participant with
respect to whom the Alternate Payee's benefits are derived is entitled to a
distribution under the Plan, the Administrator shall direct the Trustee to
commence payments to the Alternate Payee as soon as administratively practicable
following the later of (i) the date the Participant attains (or would have
attained) the Earliest Retirement Age (as defined below) or (ii) the receipt of
such Qualified Domestic Relations Order by the Administrator. Until such time as
payment is made to an Alternate Payee pursuant to this Section 11.10, the
Administrator shall direct the Recordkeeper to identify the Alternate Payee's
interest in the Trust Fund and the Alternate Payee shall have no rights under
the Plan other than the rights of a Beneficiary. A distribution to an Alternate
Payee who is the former spouse of the Participant or Former Participant shall be
subject to the provisions of Section 11.11. For purposes of this Section 11.10,
Earliest Retirement Age shall mean the earlier of (i) the date on which the
Participant is entitled to a distribution under the Plan, or (ii) the later of
(A) the date the Participant attains age 50, or (B) the earliest date on which
the Participant could begin receiving benefits under the Plan if his employment
with his Employer and all Affiliated Companies had terminated.
46
Sec. 11.11 Tax Withholding and Participant's Direct Rollover. Unless
provided otherwise in regulations promulgated by Secretary of the Treasury, to
the extent required under Section 3405 of the Code, if a Participant, Former
Participant or Beneficiary receives a distribution or withdrawal from the Plan
consisting of cash or assets other than Parent Company Stock with a combined
value (excluding the value of Parent Company Stock) in excess of $200 (the
"Non-Parent Company Stock Distribution"), the Trustee shall withhold the lesser
of (i) 100% of the Non-Parent Company Stock Distribution made to that
Participant, Former Participant or Beneficiary or (ii) 20% of the value of the
taxable portion of the entire distribution or withdrawal made to a Participant,
Former Participant or Beneficiary after December 31, 1992 which constitutes an
Eligible Rollover Distribution (as defined below). Any amount withheld shall be
deposited by the Trustee with the Internal Revenue Service for the purpose of
paying the distributee's federal income tax liability associated with the
distribution or withdrawal. Notwithstanding the foregoing provisions, commencing
on and after January 1, 1993, each Participant, each Former Participant and each
spouse (or former spouse) of a Participant or Former Participant who is the
Alternate Payee under a Qualified Domestic Relations Order (such individuals
hereinafter being referred to as a "Direct Rollover Distributee") shall be
provided with a Notice described in Section 11.2 and given the right to elect
[pursuant to Section 401(a)(31) of the Code and the applicable Treasury
regulations promulgated thereunder] during the period prescribed in Section 11.2
to rollover all or any portion of the taxable amount of such person's
distribution or withdrawal (subject to limitations and restrictions, if any,
adopted by the Administrator in accordance with applicable Treasury regulations)
directly to an Eligible Retirement Plan (as defined below) and, to the extent a
direct rollover is elected by any Direct Rollover Distributee, the withholding
requirements of this Section 11.11 will not apply. If permitted by the Code or
applicable Treasury regulations, a direct rollover as described in the preceding
sentence may be accomplished by delivering a check from the Plan to the Direct
Rollover Distributee payable to the trustee or custodian of the Eligible
Retirement Plan. Each such direct rollover election shall be in writing on a
form prescribed by the Administrator for such purpose and given to the
Participant, Former Participant or spouse within a reasonable period of time
prior to the distribution or withdrawal.
47
For purposes of this Section 11.11, Eligible Retirement Plan shall mean an
individual retirement account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b) of the Code (other
than an endowment contract), an annuity plan described in Section 403(a) of the
Code, and a qualified trust described in Sections 401(a) and 501(a) of the Code,
that will accept an Eligible Rollover Distribution; provided, however, that in
the case of an Eligible Rollover Distribution to the surviving spouse of a
Participant or Former Participant, an Eligible Retirement Plan shall mean only
an individual retirement account or an individual retirement annuity. For
purposes of this Section 11.11, Eligible Rollover Distribution shall mean any
distribution of all or a portion of a Participant's or Former Participant's
Individual Account to a Direct Rollover Distributee; provided, however, an
Eligible Rollover Distribution shall not mean any distribution of all or a
portion of a Participant's or Former Participant's Individual Account (i) that
is one of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the Direct Rollover
Distributee or the joint lives (or joint life expectancies) of the Direct
Rollover Distributee and his Beneficiary, (ii) that is paid for a specified
period of ten years or more, (iii) that is a part of a series of distributions
during a calendar year to the extent that such distributions are expected to
total less than $200 or a total lump sum distribution which is less than $200,
as described in Q&A-11 of Treas. Reg. ss.1.401(a)(31)-1, (iv) to the extent such
distribution is required by under Section 401(a)(9) of the Code as provided in
Section 11.4, or (v) to the extent such distribution is not includable in gross
income (determined without regard to the exclusion for net annualized
appreciation with respect to employer securities).
ARTICLE XII
NOTICES
-------
Sec. 12.1 Notice. As soon as practicable after a Participant, Former
Participant or Beneficiary makes a request for payment, the Administrator shall
notify the Trustee of the following information and give such directions as are
necessary or advisable under the circumstances:
(a) name and address of the Participant, Former Participant or Beneficiary,
and
(b) amount to be distributed.
48
In addition to the information described above, for distributions and
withdrawals occurring after December 31, 1992, the Administrator shall notify
the Recordkeeper and/or the Trustee, if applicable, as to the identity, address
and other pertinent information of Eligible Retirement Plans as described in
Section 11.11 to which the Direct Rollover Distributee (as defined in Section
11.11)has elected to rollover directly such distribution or withdrawal pursuant
to Section 11.11.
Sec. 12.2 Modification of Notice. At any time and from time to time after
giving the Notice as provided for in Section 12.1, the Administrator may modify
such original Notice or any subsequent Notice by means of a further Notice or
notices to the Trustee but any action taken or payments made by the Trustee
pursuant to a prior Notice shall not be affected by a subsequent Notice.
Sec. 12.3 Reliance on Notice. Upon receipt of any Notice as provided in
this Article XII, the Recordkeeper and/or the Trustee, as applicable, shall
promptly take whatever action and make whatever payments are called for therein,
it being intended that the Recordkeeper and/or the Trustee, as applicable, may
rely on the information and directions in such Notice absolutely and without
question. However, the Recordkeeper and/or the Trustee, as applicable, may call
to the attention of the Administrator any error or oversight which the Trustee
believes to exist in any Notice.
ARTICLE XIII
AMENDMENT OR TERMINATION OF PLAN
--------------------------------
Sec. 13.1 Amendment or Termination by Company. At any time the Company
acting through its governing body may amend or modify the Plan in whole or in
part, retroactively or otherwise, or may terminate or partially terminate the
Plan, or discontinue or modify Employer contributions to the Plan, subject,
however, to the other provisions of this Article XIII. Such termination may be
made without consent being obtained from the Trustee, the Recordkeeper, any
Employer or Affiliated Company, the Administrator, the Committee, the
Participants or their Beneficiaries, the Employees or any other interested
person. Also the Plan shall be considered terminated if the Company ceases
business operations or if there is a complete discontinuance of Employer
contributions to the Plan.
Sec. 13.2 Effect of Amendment. No amendment or modification hereof by the
Company, unless made to secure the approval of the Commissioner of Internal
Revenue or other governmental bureau or agency, shall:
49
(a) operate retroactively to reduce or divest the then vested interest in
any Individual Account or to reduce or divest any benefit then payable
hereunder; or
(b) change the duties or responsibilities of the Trustee without the
written consent or approval of the Trustee.
Each such amendment shall be in writing signed by duly authorized officers of
the Company with such consents or approval, if any, as provided above and shall
become effective as designated in such amendment.
Sec. 13.3 Distribution on Termination or Discontinuance of Contributions.
Upon termination of the Plan or complete discontinuance of contributions to the
Plan, any amount of the Trust Fund previously unallocated, including any amounts
in a suspense account established under Article V, shall be allocated (unless
such allocation would violate Article V), and the Individual Accounts of all
Participants, Former Participants, and Beneficiaries shall thereupon be and
become fully vested and nonforfeitable to the extent then funded. The Trustee
shall deduct from the Trust Fund all unpaid charges and expenses including those
relating to said termination, except as the same may be paid by an Employer. The
Trustee shall then adjust the balance of all Individual Accounts on the basis of
the net value of the Trust Fund. The Administrator shall direct the Trustee to
distribute the amount to the credit of each Participant, Former Participant and
Beneficiary when all appropriate administrative procedures have been completed.
If any amount in a suspense account shall not be allocable because of the
provisions of Article V, such amount shall be returned to the Employer. Upon any
complete discontinuance of contributions by an Employer, the assets of the Trust
Fund shall be held and administered by the Trustee for the benefit of the
Participants employed by such Employer discontinuing contributions in the same
manner and with the same powers, rights, duties and privileges herein described
until the Trust Fund with respect to such Employer has been fully distributed.
Upon the partial termination of the Plan, the Individual Accounts of affected
Participants, Former Participants and Beneficiaries shall thereupon be and
become fully vested and nonforfeitable to the extent then funded and shall be
distributed to such Participants, Former Participants and Beneficiaries by the
Trustee when all appropriate administrative procedures have been completed. The
Administrator shall direct the Trustee to distribute each Participant's entire
50
Individual Account in a single lump sum distribution to him, or to an Eligible
Retirement Plan as defined in Section 11.11 pursuant to the Participant's direct
rollover election described in Section 11.11, as soon as administratively
practicable after the later of (i) the termination date of the Plan or (ii) the
receipt following application of a favorable determination letter from the
Internal Revenue Service with respect to the termination of the Plan.
Sec. 13.4 Reversion of Contributions to Employer. Except as provided in
Section 3.3 and Section 13.3, under no circumstances or conditions shall the
Trust Fund or any portion thereof revert to any Employer or be used for or
diverted to the benefit of anyone other than Participants, Former Participants
and Beneficiaries, it being understood that the Trust Fund shall be for the
exclusive benefit of Participants, Former Participants and Beneficiaries.
Sec. 13.5 Amendment of Vesting Schedule. At any time that the vesting
schedule of the Plan is amended, or the Plan is amended in any way that directly
or indirectly affects the computation of the Participant's nonforfeitable
interest in his Individual Account, each Participant who has completed at least
three Years, whether or not consecutive, during each of which he has completed
not fewer than 1,000 Hours of Service, may elect to have his vested interest in
his Individual Account determined under the vesting schedule in effect prior to
such amendment. An election made under the preceding sentence may be made at any
time within 60 days after the later of the date:
(a) the amendment is adopted;
(b) the amendment becomes effective; or
(c) the Participant is issued written notice of the amendment by the
Administrator.
An election under this Section shall be made in a written instrument delivered
to the Administrator and once made, shall be irrevocable. For the purposes of
this Section, a Participant shall be considered to have completed the three
Years described in this Section if he shall have completed such Years prior to
the end of the period during which he could make an election hereunder.
Sec. 13.6 Merger or Consolidation of Plan. In the event of any merger or
consolidation of the Plan with, or transfer in whole or in part of the assets
and liabilities of the Trust Fund to, another trust fund held under any other
51
plan of deferred compensation maintained or to be established for the benefit of
all or some of the Participants in this Plan, the assets of the Trust Fund
applicable to such Participants shall be transferred to the other trust fund
only if:
(a) each Participant would (if either this Plan or the other plan had then
terminated) receive a benefit immediately after the merger, consolidation,
or transfer which is equal to or greater than the benefit he would have
been entitled to receive immediately before the merger, consolidation, or
transfer (if this Plan had then terminated); and
(b) such other plan and trust fund are qualified under Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code.
Sec. 13.7 Withdrawal of Employer. If an Employer withdraws from
participation in the Plan or completely discontinues contributions to the Plan
without the immediate establishment of a new retirement plan, distribution of
benefits to affected Participants will be made at the time and in the manner
provided in Section 13.3. However, pursuant to rules applied by the
Administrator in a nondiscriminatory manner to all employees similarly situated
or if the withdrawal or discontinuance by an Employer is deemed to be a partial
termination of the Plan, the provisions of Section 13.3 hereof shall apply to an
Employer's withdrawal or discontinuance as if it were a part of the complete
termination of this Plan, but the participation of other Employers hereunder
shall not be affected nor shall the continuation of the Plan with respect to the
participation therein by other Employers be affected by such withdrawal or
discontinuance by an Employer. The assets attributable to the Participants
employed by the withdrawing or discontinuing Employer, may, in the
Administrator's discretion, be retained in and subject to the provisions of this
Plan or distributed in liquidation.
ARTICLE XIV
COMMITTEE
---------
Sec. 14.1 Committee Composition. The Company may appoint a Committee
consisting of any number of members as determined by the Company. The Company
may remove any member of the Committee at any time and a member may resign by
written notice to the Company. Any vacancy in the membership of the Committee
52
shall be filled by appointment of the governing body of the Company, but pending
the filling of any such vacancy the then members of the Committee may act
hereunder as though they alone constitute the full Committee.
Sec. 14.2 Committee Actions. Any and all acts and decisions of the
Committee shall be by at least a majority of the then members, or by a unanimous
written decision taken without a meeting, but the Committee may delegate to any
one or more of its members the authority to sign notices or other documents on
its behalf or to perform ministerial acts for it, in which event the Trustee and
any other person may accept such notice, document or act without question as
having been authorized by the Committee.
Sec. 14.3 Committee Procedure. The Committee may, but need not, call or
hold formal meetings and any decisions made or action taken pursuant to written
approval of a majority of the then members shall be sufficient. The Committee
shall maintain adequate records of its decisions which records shall be subject
to inspection by the Company, any Employer, any Participant, Former Participant
or Beneficiary, and any other person to the extent required by law, but only to
the extent that they apply to such person. Also the Committee may designate one
of its members as Chairman and one of its members as Secretary and may establish
policies and procedures governing it as long as the same are not inconsistent
with the terms of the Plan.
Sec. 14.4 Delegation to Committee and Company's Duty to Furnish
Information. The Committee shall perform the duties and may exercise the powers
and discretion given to it in this Plan and its decisions and actions may be
relied upon by all persons affected thereby. The Trustee and the Recordkeeper
may rely without question upon any notices, directions, or other documents
received from the Committee. The Company and each Employer shall furnish the
Committee with all data and information available to the Company which the
Committee may reasonably require in order to perform its duties. The Committee
may rely without question upon any such data or information furnished by the
Company and each Employer.
In addition to any other powers and responsibilities allocated to the
Committee pursuant to the terms of this Plan, the following powers and
responsibilities shall be exercised by the Committee:
(a) To direct the Trustee as to investments in Parent Company Stock.
53
(b) To administer the Plan as provided in Section 14.5.
(c) To establish and administer the Plan's claims procedure pursuant to
Section 11.6 in a uniform and nondiscriminatory manner and, if appropriate
in its sole discretion, to designate persons or entities to be responsible
for initial claims and requests for review of claims decisions.
(d) To adopt such rules, forms and procedures as it shall deem necessary
for the efficient administration of the Plan in accordance with its terms
and the terms of any applicable law.
(e) To prepare and submit to governmental agencies, Participants, Former
Participants and Beneficiaries such Plan descriptions, reports and other
documents, or summaries thereof, as may be required by applicable law or
necessary in the administration of the Plan.
(f) To remedy possible ambiguities, inconsistencies or omissions in
connection with its power to interpret the Plan; provided, however, that
all such actions and decisions shall be applied in a uniform manner to all
Employees similarly situated.
(g) To authorize disbursements from the Trust Fund, including refunds of
contributions permitted by the Plan (any instructions of the Committee to
the Trustee shall be evidenced in writing and signed by a member of the
Committee delegated with such authority by a majority of the Committee).
(h) To appoint a Recordkeeper who shall perform, without discretionary
authority or control, administrative functions within the framework of
policies, interpretations, rules, practices and procedures adopted by the
Committee or the Administrator.
(i) To employ such advisors (including but not limited to attorneys,
independent public accountants and investment advisors) and such other
technical and clerical personnel as may be required in the Committee's
discretion for the proper administration of the Plan, and to pay the
reasonable expenses of such persons from the Trust Fund.
(j) To establish and to instruct the Trustee and any investment manager
with respect to asset administration objectives and policies consistent
with Plan requirements.
54
(k) To review from time to time, but at least as often as annually, the
investment performance of the Trustee and any insurance company or
investment manager acting with respect to any portion of the Trust Fund.
The Committee may engage the services of such person it deems appropriate
including, investment managers, to review investments held by the Plan and
the financial condition of insurance companies issuing insurance contracts
to the Plan.
(l) To supervise at least one audit of the Plan's assets for each Year and
review the Trustee's annual accounting.
Sec. 14.5 Construction of Plan and Trustee's and Recordkeeper's Reliance.
Any and all matters involving the Plan, including but not limited to any and all
disputes which may arise involving Participants, Former Participants, and
Beneficiaries and/or the Trustee or the Recordkeeper shall be referred to the
Committee. The Committee has the exclusive discretionary authority to construe
the terms of the Plan and the exclusive discretionary authority to determine
eligibility for all benefits hereunder. Any such determinations or
interpretations of the Plan adopted by the Committee shall be final and
conclusive and shall bind all parties. The Trustee and the Recordkeeper may rely
upon the decision of the Committee with respect to any question concerning the
meaning, interpretation, or application of any provision of the Plan. The
Committee's interpretations and determinations with respect to the Plan and the
Trust Agreement shall be based on such information as is reasonably available to
the Committee at the time a decision is made. In addition, in administering the
Plan, the Committee may rely conclusively upon an Affiliated Company's payroll
and personnel records maintained in the ordinary course of business.
Sec. 14.6 Committee Member's Abstention in Cases Involving Own Rights.
Notwithstanding any other provision of this Article XIV, no Committee member
shall vote or act upon any matter involving his own rights, benefits, or
participation in the Plan.
Sec. 14.7 Counsel to Committee. The Committee may engage agents to assist
it and may engage legal counsel who may be legal counsel for the Company. All
reasonable expenses incurred by the Committee may be paid from the Trust Fund.
Sec. 14.8 Indemnification of Employees and Directors. The Company hereby
indemnifies each member of the Committee and each employee, officer and director
of an Affiliated Company who are delegated responsibilities under or pursuant to
the Plan against any and all liabilities and expenses, including attorneys'
55
fees, actually and reasonably incurred by them in connection with any
threatened, pending or completed legal action or judicial or administrative
proceeding to which they may be a party, or may be threatened to be made a
party, by reason of membership on the Committee or other delegation of
responsibilities, except with regard to any matters as to which they shall be
adjudged in such action or proceeding to be liable for gross negligence or
willful misconduct in connection therewith. In addition, the Company may provide
appropriate insurance coverage for the members of the Committee or each such
other individual indemnified pursuant to this Section 14.8 who is not otherwise
appropriately insured.
Sec. 14.9 Action Taken in Good Faith. To the extent permitted by ERISA, the
members of the Committee and each employee, officer and director of an
Affiliated Company who are fiduciaries with respect to the Plan shall be
entitled to rely upon, and be fully protected with respect to any action taken
or suffered by them in good faith in reliance upon, all tables, valuations,
certificates, reports and opinions furnished by the Recordkeeper, the Trustee,
or any accountant, attorney, insurance company or investment manager acting at
any time hereunder.
ARTICLE XV
MISCELLANEOUS
-------------
Sec. 15.1 No Employment or Compensation Agreement. Nothing contained in the
Plan shall be construed as giving any person or entity any legal or equitable
right against the Company, any Employer, any Affiliated Company, their
stockholders or partners, officers or directors, the Named Fiduciary, the
Committee, the Administrator, the Trustee or the Recordkeeper, except as the
same shall be specifically provided in the Plan. Nor shall anything in the Plan
give any Participant or other Employee the right to be retained in the service
of any Employer. The employment of all persons by any Employer shall remain
subject to termination by that Employer to the same extent as if the Plan had
never been executed.
Sec. 15.2 Spendthrift Provision. Except (i) as provided by the terms of a
domestic relations order which is determined to be qualified under Section
414(p) of the Code, or (ii) as permitted pursuant to Section 401(a)(13) of the
Code and Section 206(d) of ERISA, no Participant, Former Participant, or
56
Beneficiary shall have the right to assign, alienate or transfer his interest
hereunder, nor shall his interest be subject to claims of his creditors or
others, it being understood that all provisions of the Plan shall be for the
exclusive benefit of those designated herein.
Sec. 15.3 Construction. It is the intention of each Employer that the Plan
be qualified under Section 401 of the Code and comply with the applicable
provisions of ERISA, and all provisions hereof should be construed to that
result.
Sec. 15.4 Titles. Titles of Articles and Sections hereof are for
convenience only and shall not be considered in construing the Plan.
Sec. 15.5 Texas Law Applicable. The Plan and each of its provisions shall
be construed and their validity determined by the laws of the State of Texas to
the extent not preempted by ERISA or other applicable federal law.
Sec. 15.6 Successors and Assigns. The Plan shall be binding upon the
successors and assigns of the Company and each Employer and the Trustee and upon
the heirs and personal representatives of those individuals who become
Participants hereunder.
Sec. 15.7 Allocation of Fiduciary Responsibility by Named Fiduciary. A
fiduciary with respect to the Plan, as described in Section 3(21) of ERISA,
shall only have those specific powers, duties, responsibilities and obligations
as are explicitly given such fiduciary under the terms of the Plan and the Trust
Agreement or allocated to such fiduciary pursuant to the procedures set forth
herein. The Named Fiduciary may, by written instrument, allocate some or all of
its responsibilities to another fiduciary, including the Trustee, or designate
another person to carry out some or all of its fiduciary responsibilities. Each
fiduciary to whom responsibilities are allocated by the Named Fiduciary will be
furnished a copy of the Plan and their acceptance of such responsibility will be
made by agreeing in writing to act in the capacity designated. It is intended
that each fiduciary shall be responsible only for the proper exercise of his own
powers, duties, responsibilities and obligations under the Plan and shall not be
responsible for any act or failure to act of another fiduciary. The Named
Fiduciary shall not be liable for an act or omission of any person (who is
allocated a fiduciary responsibility or who is designated to carry out such
responsibility) in carrying out a fiduciary responsibility except to the extent
that with respect to the allocation or designation, continuation thereof, or
implementation or establishment of the allocation or designation procedures the
57
Named Fiduciary (i) did not perform all of his duties and responsibilities and
exercise his powers hereunder with the care, skill, prudence, and diligence
under the circumstances then prevailing that a prudent man acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aims, (ii) knowingly participates in
or knowingly undertakes to conceal an act or omission of another fiduciary of
the Plan, with the knowledge that such act or omission is a breach of fiduciary
responsibility, (iii) did not make reasonable efforts under the circumstances to
remedy a breach of fiduciary responsibility of which the Named Fiduciary has
knowledge, or (iv) did not carry out its specific responsibilities, in
accordance with the standard set forth in (i) above, and as a result, it has
enabled another fiduciary of the Plan to commit a breach. Any person or group of
persons may serve in more than one fiduciary capacity with respect to the Plan.
Sec. 15.8 Expenses of Administration. Except to the extent paid by an
Employer, the Administrator shall cause the Trustee to pay from the assets of
the Plan, including from the unallocated forfeitures as provided in Section
10.5, all expenses incurred in the administration of the Plan, including
expenses of the Committee, the Recordkeeper and the Administrator, and expenses
and compensation of the Trustee and the expenses of counsel. The Employer shall
pay all brokerage commissions, taxes and other costs incident to the purchase
and sale of securities.
Sec. 15.9 Plan Controls. The Trust Agreement is a part of the Plan. In case
of any inconsistency between the terms of the Plan and the Trust Agreement, the
provisions of the Plan shall control. In the event of any conflict between the
terms of the Plan and any summary thereof or other document relating thereto,
from whatever source, the terms of the Plan shall govern.
Sec. 15.10 Effect of Mistakes. In the event of a mistake or misstatement as
to the age or eligibility of any person, or the amount of any kind of
contributions, withdrawals or distributions made or to be made to a Participant,
or other person, the Administrator shall, to the extent it deems possible, make
such adjustment as will in its judgment afford to such person the credits,
distributions or other rights to which he is properly entitled under the Plan.
Sec. 15.11 Operation of the Plan; Permitted Corrections. The Company
intends to operate and administer the Plan as a tax qualified retirement plan
under Section 401(a) of the Code. In the event that the Administrator determines
that the operation of the Plan or the form of the Plan, or both, fails to comply
58
in any respect with the applicable requirements of the Code, the Company may
take whatever action it deems necessary and appropriate under the circumstances
to comply with its intent to maintain the Plan as a tax-qualified retirement
plan, including corrections made pursuant to, or consistent with the purposes
of, the Employee Plans Compliance Resolution System, as set forth in Revenue
Procedure 2001-17 issued by the Internal Revenue Service, as the principles of
such Revenue Procedure may be modified or expanded from time to time, or any
other correction procedures available generally to the Company with respect to
the Plan.
ARTICLE XVI
ADOPTION BY AFFILIATED COMPANIES
--------------------------------
Sec. 16.1 Transfer of Employment to Another Employer. When an Employee's
employment with any Employer is terminated, but such Employee continues to be a
Participant by reason of continued employment by another Employer, the
Participant concerned shall not be considered to have changed Employers for
purposes of determining the Participant's eligibility, vesting rights,
participation, and Plan benefits. An Employee who was a Participant when so
transferred, and who is otherwise an eligible Employee, shall continue as a
Participant in the Plan as adopted by his new Employer (whether the Company or
another Employer) and shall continue without any requirement or re-enrollment
unless otherwise required by the Plan. In such event, all notices, elections,
designations, directions and the like theretofore made shall continue in effect.
All interests then credited to the Participant shall constitute interests
credited to the Participant under the Plan as adopted by his new Employer
(whether the Company or another Employer). Employer contributions shall, subject
to the terms and limitations of the Plan, continue to be made by the
Participant's new Employer (whether the Company or another Employer). Any
portion of his Individual Account which is forfeited shall be allocated to the
Individual Accounts of Participants who are Employees of the Employer which
originally made the contributions so forfeited.
Sec. 16.2 Contributions and Forfeitures. Each Participant shall have his
Individual Account credited with his share of his former Employer's
contributions and with his share of his new Employer's contributions. The Annual
Compensation received by such Participant from each Employer during the portion
of the Year employed by an Employer shall constitute the basis for his
allocation of that particular Employer's contribution. Forfeitures shall be
59
applied as provided in Section 10.5 only for the benefit of the Participants
employed by the Employer for whom the Participant works or last worked at the
time the forfeiture occurs.
Sec. 16.3 Transfers of Employment Between Affiliated Companies. If an
Employee of one Affiliated Company transfers to the employment of another
Affiliated Company and such Affiliated Company has a comparable plan and trust
agreement, the Trustee of each plan and trust shall make suitable arrangements
for the transfer of the assets held in his Individual Account from the Plan of
the former employer to the plan of the successor employer. The Employee will be
granted credit for Years of Service (Vesting) with the former employer and will
not be deemed to have terminated his employment. Annual Compensation from the
former employer will be considered to be Annual Compensation from the successor
employer.
If an Employee participating in this Plan transfers to the employment of an
Affiliated Company which does not have a comparable plan in force, he shall not
be deemed to have terminated employment with the Employer. The value of his
Individual Account will be held for his benefit until he terminates employment
with all Affiliated Companies, dies or retires in accordance with Article VII,
at which time the value of his Individual Account will be distributed to him or
his Beneficiary as provided elsewhere herein. No further Employer contributions
will be made on his behalf, but he will be granted credit for Years of Service
(Vesting) with the Affiliated Company. In the event that he is reemployed by an
Employer, he shall immediately become a Participant in this Plan.
Sec. 16.4 Action by Company. The Employers delegate to the Company the
authority to amend the Plan, remove the Trustee, or a Committee member, appoint
a new or additional Trustee or Committee member, or take all other actions
concerning the Plan without joinder or approval of the other Employers.
Sec. 16.5 Termination of Employer's Status as Affiliated Company.
Termination of an Employer's status as an Affiliated Company other than by
merger or liquidation into the Company shall terminate the Plan and the Trust
Agreement as adopted by such Employer unless, and except to the extent that, the
governing body of the Company shall adopt a resolution consenting to the
continuance of the Plan and the Trust Agreement as adopted by the Employer,
specifying conditions therefor, such as amendments to the Plan and the Trust
Agreement as adopted by the Employer and the investment in, disposition or
distribution of Parent Company Stock, and the governing body of the Employer
shall consent to and adopt such conditions, investments and the like.
60
ARTICLE XVII
THE TRUSTEE
Sec. 17.1 Trust Fund. A Trust Fund has been created and will be maintained
for the purposes of the Plan, and the monies thereof will be invested in
accordance with the terms of the Trust Agreement which forms a part of the Plan.
All Employer contributions will be paid into the Trust Fund, and all benefits
under the Plan will be paid from the Trust Fund.
Sec. 17.2 Trustee's Duties. Except as otherwise specifically provided in
the Trust Agreement, the Trustee's obligations, duties and responsibilities are
governed solely by the terms of the Trust Agreement, reference to which is
hereby made for all purposes.
Sec. 17.3 Benefits Only from Trust Fund. Any person having any claim under
the Plan will look solely to the assets of the Trust Fund for satisfaction. In
no event will any Employer or any of its officers, Employees, agents, members of
its governing body, the Trustee, any successor trustee, the Administrator, the
Recordkeeper or any member of the Committee, be liable in their individual
capacities to any person whomsoever, under the provisions of the Plan or the
Trust Agreement, absent a breach of fiduciary responsibility determined pursuant
to the applicable provisions of ERISA.
Sec. 17.4 Trust Fund Applicable Only to Payment of Benefits. The Trust Fund
will be used and applied only in accordance with the provisions of the Plan, to
provide the benefits thereof, except as provided in Section 15.8 regarding
payment of administrative expenses, and no part of the corpus or income of the
Trust Fund will be used for, or diverted to, purposes other than for the
exclusive benefit of the Participants and other persons thereunder entitled to
benefits.
Sec. 17.5 Texas Trust Code. Although it is intended that the foregoing
powers of the Trustee be applicable hereunder, it is also intended that all
provisions of the Texas Trust Code, and any amendments thereto, not inconsistent
with the above enumerated powers or other provisions of the Plan, shall be
applicable in the administration of the Trust Fund.
61
Sec. 17.6 Voting Rights. At each annual or special meeting of the
stockholders of Capital Southwest Corporation or by actions taken without a
meeting, the Trustee may vote or refrain from voting any and all shares of
Parent Company Stock held in the Trust Fund in such manner as deemed, in the
Trustee's sole discretion, to be in the best interest of the Participants and
Beneficiaries. The Administrator may from time to time direct the Trustee as to
the manner of voting such shares, and the Trustee shall follow such instructions
and shall bear no responsibility for the propriety of the decisions of the
Administrator.
ARTICLE XVIII
INVESTMENTS
-----------
Sec. 18.1 Investment of Contributions and Trust Assets. All Employer
contributions in cash and any other cash received by the Trust Fund attributable
to Employer contributions under the Plan, including dividends, will first be
used to pay current obligations of the Trust Fund, and any excess will be used
either to pay other obligations of the Trust Fund, to buy Parent Company Stock
from holders of outstanding stock or newly issued or treasury stock or to make
other prudent investments; provided, however, that at all times the Trustee
shall attempt to invest 100% of the Trust Fund assets in Parent Company Stock
consistent with market availability or other conditions. The Administrator may
from time to time direct the Trustee as to the extent of investment in Parent
Company Stock and the Trustee shall follow such instructions and shall bear no
responsibility for the propriety of the investment decision of the
Administrator. All purchases of Parent Company Stock shall be made at a price,
or at prices, which in the judgment of the Trustee do not exceed the fair market
value of such shares of Parent Company Stock, which may be above the quoted
market price on a national securities exchange or in the over-the-counter
market. If no current obligations of the Trust Fund are outstanding and unpaid
and the Trustee determines that it is in the best interest of the Trust Fund,
the Trustee may invest funds of the Trust Fund temporarily in securities issued
or guaranteed by the United States of America or any agency thereof, in
certificates of deposit, or in short-term commercial paper, or such funds may be
held temporarily in cash.
62
ARTICLE XIX
TOP HEAVY PROVISIONS
Sec. 19.1 Minimum Allocation Requirements. Notwithstanding the provisions
of Section 4.3, for any Year in which the Plan is a Top Heavy Plan, the
requirement for 1,000 Hours of Service shall not apply and Employer
contributions and forfeitures which are allocated to any Participant who on the
last day of the Year is a Non-Key Employee who has satisfied the eligibility
requirements of Section 2.1, shall not be less than the lesser of (i) three
percent of such Participant's Annual Compensation [as defined in Section 5.2(f)]
or (ii) the largest percentage of Employer contributions, as a percentage of the
amount of the Annual Compensation [as defined in Section 5.2(f)] of Participants
who are Key Employees, but not in excess of the Compensation Limitation as
defined in Section 1.6 allocated to any such Participant who is a Key Employee
for that Year; provided, however, if the Employer maintains a defined benefit
plan which designates this Plan to satisfy Section 401 or 410 of the Code, (ii)
above shall not apply.
Sec. 19.2 Adjustment to Limitation on Allocations for Years Beginning Prior
to April 1, 2000. Notwithstanding the provisions of Sections 5.2(h)(ii)(A) and
5.2(i)(ii)(A), for any Year beginning prior to April 1, 2000 in which the Plan
is a Top Heavy Plan, the following provisions shall be applicable to Section 5.2
of the Plan:
(a) Section 5.2(h)(ii)(A) shall be revised by substituting "1.0" for "1.25"
and the numerator of the fraction described in Section 5.2(h)(iv)(A) shall
be revised by substituting "$41,500" for "$51,875" unless (i) the Plan
would not be a Top Heavy Plan as defined in Section 19.4(f) if "90%" were
substituted for 60% in such definition, and (ii) the minimum allocation
requirements of Section 19.1 for a Participant who is a Non-Key Employee of
an Employer are satisfied and, in applying such provisions, "four percent"
is substituted for "three percent;" and
(b) Section 5.2(i)(ii)(A) shall be revised by substituting "1.0" for "1.25"
unless (i) the Plan would not be a Top Heavy Plan as defined in Section
19.4(f) if "90%" were substituted for 60% in such definition, and (ii) the
minimum benefit requirements of Section 416(h)(2)(A) of the Code are
satisfied for all participants in the defined benefit pension plan who are
Non-Key Employees.
63
This Section 19.2 does not apply for any Year beginning after March 31, 2000.
Sec. 19.3 Vesting Schedule. Notwithstanding the provisions of Section 10.2,
beginning with the first Year in which the Plan is a Top Heavy Plan, the
following provisions shall be applicable to Section 10.2:
(a) Except as provided in Section 19.3(b) below, each Participant shall be
entitled (as a vested interest) to receive the greater of the vested
interest calculated pursuant to Article X or a percentage of the then
combined balance to his credit in his Parent Company Stock Account and
Other Investments Account determined in accordance with the following
schedule:
Years of Service (Vesting) Vested Interest
-------------------------- ---------------
Less than 3 0%
3 or more 100%
(b) The schedule in Section 19.3(a) above shall not apply to the Individual
Account of any Participant who does not perform an Hour of Service after
the Determination Date on which the Plan first became a Top Heavy Plan; any
such Participant's vested interest in his Parent Company Stock Account and
Other Investments Account shall be determined by applying the schedule in
Section 10.2 of the Plan as applicable to the Plan prior to the
Determination Date on which the Plan first became a Top Heavy Plan.
Sec. 19.4 Definitions.
(a) "Determination Date" means for any Year the Anniversary Date of the
preceding Year, or in the case of the first Year of the Plan, the
Anniversary Date of that Year.
(b) "Key Employee" means, as of any Determination Date [as defined in
Section 19.4(a)], any Employee or former Employee (or Beneficiary of such
Employee) of an Employer who, at any time during the Year which includes
the Determination Date, or during the preceding four Years, is:
(i) an officer of any Employer having Annual Compensation greater than
50% of the amount in effect under Section 415(b)(1)(A) of the Code for
any such Year;
64
(ii) one of the ten Employees having Annual Compensation from any
Employer of more than the dollar limitation in effect under Section
415(c)(1)(A) of the Code and owning the largest interests in any such
Employer;
(iii) a more than five-percent owner of any Employer; or
(iv) a more than one percent owner of any Employer having Annual
Compensation from all Employers of more than $150,000.
For purposes of this subsection (b), Annual Compensation shall mean annual
compensation as defined in Section 415(c)(3) of the Code, but including
amounts contributed by an Employer pursuant to a salary reduction agreement
which are excludable from the Participant's gross income under Sections
125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code or, effective January 1,
2001, Section 132(f)(4) of the Code. For purposes of subsection (b)(i), no
more than 50 Employees (or, if lesser, the greater of three or ten percent
of the Employees of all Employers) shall be treated as officers. For
purposes of subsection (b)(ii) above, if two Employees have the same
interest in an Employer, the Employee having the greater Annual
Compensation shall be treated as having the larger interest. The
constructive ownership rules of Section 318 of the Code (or the principles
of that section, in the case of an unincorporated Employer) will apply to
determine ownership in each Employer.
(c) "Non-Key Employee" means any Employee who is not a Key Employee.
(d) "Permissive Aggregation Group" means the Required Aggregation Group
plus any other qualified plans maintained by an Employer which, when
considered as a group with the Required Aggregation Group, would continue
to satisfy the requirements of Sections 401(a)(4) and 410 of the Code.
(e) "Required Aggregation Group" means (i) each qualified plan of an
Employer in which at least one Key Employee participates, and (ii) any
other qualified plan of an Employer which enables a plan described in (i)
to meet the requirements of Sections 401(a)(4) or 410 of the Code.
(f) "Top Heavy Plan" means the Plan for a Year beginning after December 31,
1983, if the Plan is the only plan maintained by an Employer and the top
heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio
65
is a fraction, the numerator of which is the sum of the present value of
the Individual Accounts of all Key Employees of Employers as of the
Determination Date, the contributions due as of the Determination Date, and
distributions made within the five-year period immediately preceding the
Determination Date (including distributions under a terminated plan which
if it had not been terminated would have been required to be included in an
aggregation group), and the denominator of which is a similar sum
determined for all Employees. The top heavy ratio shall be calculated
without regard to (i) the Individual Account of a Participant who is not a
Key Employee but who was a Key Employee in a prior Year, (ii) the
Individual Account of any individual who has not performed any services for
an Employer at any time during the five-year period ending on the
Determination Date, and (iii) voluntary deductible Employee contributions,
if any. The top heavy ratio, including distributions, rollover and
transfers, to the extent such items must be taken into account, shall be
calculated in accordance with Section 416 of the Code and the regulations
thereunder. If an Employer maintains other qualified plans (including a
simplified employee pension plan) or has ever maintained one or more
defined benefit plans which have covered or could cover a Participant in
this Plan, this Plan is top heavy for a Year beginning after December 31,
1983 only if it is part of the Required Aggregation Group, and the top
heavy ratio for both the Required Aggregation Group and the Permissive
Aggregation Group exceeds 60%. The top heavy ratio shall be calculated as
described above, taking into account all plans within the aggregation group
and with reference to Determination Dates that fall within the same
calendar year; provided that if a defined benefit plan is included in the
aggregation group, the present value of accrued benefits (instead of
account balances) of participants in that plan shall be computed for
purposes of calculating the top heavy ratio. The accrued benefit under a
defined benefit plan in both the numerator and the denominator of the top
heavy ratio are increased for any distribution of an accrued benefit made
in the five-year period ending on the Determination Date. The accrued
benefit of a Participant other than a Key Employee shall be determined
under (i) the method, if any, that uniformly applies for accrual purposes
under all defined benefit plans maintained by an Employer, or (ii) if there
is no such method, as if such benefit accrued not more rapidly than the
66
slowest accrual rate permitted under the fractional rule of Section
411(b)(1)(C) of the Code. The value of account balances and the present
value of accrued benefits will be determined as of the most recent
Allocation Date that falls within or ends with the 12-month period ending
on the Determination Date, except as provided in Section 416 of the Code
and the Treasury regulations thereunder for the first and second plan years
of a defined benefit plan. The actuarial assumptions (interest rate and
mortality only) used by the actuary under the defined benefit plan shall be
used to calculate the present value of accrued benefits from the defined
benefit plan.
IN WITNESS WHEREOF, The RectorSeal Corporation, the Company, acting by and
through its duly authorized officers, has caused this revised and restated Plan
to be executed as of the day and year first above written.
THE RECTORSEAL CORPORATION
By
-------------------------
EXHIBIT 10.2
AMENDMENT NO. 1
TO
THE RECTORSEAL CORPORATION AND JET-LUBE, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Revised and Restated Effective April 1, 1998)
THIS AMENDMENT NO. 1, executed this __ day of March, 2002, and effective
the first day of April, 2002, unless specifically provided otherwise in this
Amendment No. 1, by The RectorSeal Corporation, a Delaware corporation, having
its principal office in Houston, Texas (hereinafter referred to as the
"Company").
W I T N E S S E T H:
WHEREAS, the Company revised and restated The RectorSeal Corporation
and Jet-Lube, Inc. Employee Stock Ownership Plan (the "Plan") effective April 1,
1998, except for certain provisions for which another effective date was
subsequently provided elsewhere in the terms of the Plan, to (i) incorporate the
prior amendment to the Plan and (ii) bring the Plan into compliance with the
Internal Revenue Code of 1986, as amended, as modified by the Small Business Job
Protection Act of 1996, the General Agreement on Tariffs and Trade under the
Uruguay Round Agreements Act, the Uniformed Services Employment and Reemployment
Rights Act of 1994, the Taxpayer Relief Act of 1997, the Internal Revenue
Service Restructuring and Reform Act of 1998, and the Community Renewal Tax
Relief Act of 2000, as well as all applicable rules, regulations and
administrative pronouncements enacted, promulgated or issued since the date the
Plan was last restated;
WHEREAS, the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA") was signed into law on June 7, 2001, many provisions of which
commence to apply to the Plan effective April 1, 2002;
WHEREAS, the Company desires to adopt this Amendment No. 1 effective as of
April 1, 2002, unless specifically otherwise in this Amendment No. 1, to (i)
reflect certain provisions of EGTRRA and (ii) constitute good faith compliance
with the requirements of EGTRRA; and
WHEREAS, this Amendment No. 1 (i) is to be construed in accordance with
EGTRRA and the guidance issued thereunder and (ii) shall supercede the
provisions of the Plan to the extent those provisions are inconsistent with the
provisions of this Amendment No. 1;
NOW, THEREFORE, in consideration of the premises and the covenants
herein contained, the Company hereby adopts the following Amendment No. 1 to the
Plan:
SECTION I (Plan Section 1.6). INCREASE IN COMPENSATION LIMIT
The Annual Compensation of each Participant taken into account in determining
allocations for any Year beginning after December 31, 2001, shall not exceed
$200,000, as adjusted for cost-of-living increases in accordance with section
401(a)(17)(B) of the Code. Annual Compensation means Annual Compensation during
the Year or such other consecutive 12-month period over which Annual
Compensation is otherwise determined under the Plan (the determination period).
The cost-of-living adjustment in effect for a calendar year applies to Annual
Compensation for the determination period that begins with or within such
calendar year.
SECTION II (Plan Section 5.2(d)). LIMITATIONS ON CONTRIBUTIONS
1. Effective date. This section shall be effective for Limitation Years
beginning after December 31, 2001.
2. Maximum Annual Addition. Except to the extent permitted under section
414(v) of the Code, if applicable, the Annual Addition that may be contributed
or allocated to a Participant's Individual Account under the Plan for any
Limitation Year shall not exceed the lesser of:
(a) $40,000, as adjusted for increases in the cost-of-living under
section 415(d) of the Code, or
(b) 100 percent of the Participant's Annual Compensation, within
the meaning of section 415(c)(3) of the Code, for the
Limitation Year.
The Annual Compensation limit referred to in (b) shall not apply to any
contribution for medical benefits after separation from service (within the
meaning of section 401(h) or section 419A(f)(2) of the Code) which is otherwise
treated as an Annual Addition.
SECTION III (Plan Section 11.11). DIRECT ROLLOVERS OF PLAN DISTRIBUTIONS
1. Effective date. This section shall apply to distributions made after
December 31, 2001.
2. Modification of definition of Eligible Retirement Plan. For purposes of
the direct rollover provisions in section 11.11 of the Plan, an Eligible
Retirement Plan shall also mean an annuity contract described in section 403(b)
of the Code and an eligible plan under section 457(b) of the Code which is
maintained by a state, political subdivision of a state, or any agency or
instrumentality of a state or political subdivision of a state and which agrees
to separately account for amounts transferred into such plan from this Plan. The
definition of Eligible Retirement Plan shall also apply in the case of a
distribution to a surviving spouse, or to a spouse or former spouse who is the
Alternate Payee under a Qualified Domestic Relations Order, as defined in
section 414(p) of the Code.
-2-
3. Modification of definition of Eligible Rollover Distribution to exclude
hardship distributions. For purposes of the direct rollover provisions in
section 11.11 of the Plan, any amount that is distributed on account of hardship
shall not be an Eligible Rollover Distribution and the distributee may not elect
to have any portion of such a distribution paid directly to an Eligible
Retirement Plan.
SECTION IV (Plan ARTICLE XIX). MODIFICATION OF TOP-HEAVY RULES
1. Effective date. This section shall apply for purposes of determining
whether the Plan is a Top-Heavy Plan under section 416(g) of the Code for Years
beginning after December 31, 2001, and whether the Plan satisfies the minimum
benefits requirements of section 416(c) of the Code for such Years. This section
amends Article XIX of the Plan.
2. Determination of top-heavy status.
2.1 Key Employee. Key Employee means any Employee or former Employee
(including any deceased Employee) who at any time during the Year that includes
the Determination Date was an officer of the Employer having Annual Compensation
greater than $130,000 (as adjusted under section 416(i)(1) of the Code for Years
beginning after December 31, 2002), a 5-percent owner of the Employer, or a
1-percent owner of the Employer having Annual Compensation of more than
$150,000. For this purpose, Annual Compensation means compensation within the
meaning of section 415(c)(3) of the Code. The determination of who is a Key
Employee will be made in accordance with section 416(i)(1) of the Code and the
applicable regulations and other guidance of general applicability issued
thereunder.
2.2 Determination of present values and amounts. This section 2.2 shall
apply for purposes of determining the present values of accrued benefits and the
amounts of Individual Account Balances of Employees as of the Determination
Date.
2.2.1 Distributions during Year ending on the Determination Date. The present
values of accrued benefits and the amounts of Individual Account balances of an
Employee as of the Determination Date shall be increased by the distributions
made with respect to the Employee under the Plan and any plan aggregated with
the Plan under section 416(g)(2) of the Code during the 1-year period ending on
the Determination Date. The preceding sentence shall also apply to distributions
under a terminated plan which, had it not been terminated, would have been
aggregated with the Plan under section 416(g)(2)(A)(i) of the Code. In the case
of a distribution made for a reason other than separation from service, death,
or disability, this provision shall be applied by substituting "5-year period"
for "1-year period."
2.2.2 Employees not performing services during Year ending on the
Determination Date. The accrued benefits and Individual Accounts of any
individual who has not performed services for the Employer during the 1-year
period ending on the Determination Date shall not be taken into account.
-3-
3. Minimum benefits.
3.1 Matching Contributions. Employer Matching Contributions shall be taken
into account for purposes of satisfying the minimum contribution requirements of
section 416(c)(2) of the Code and the Plan. The preceding sentence shall apply
with respect to Matching Contributions under the Plan or, if the Plan provides
that the minimum contribution requirement shall be met in another plan, such
other plan. Employer Matching Contributions that are used to satisfy the minimum
contribution requirements shall be treated as Matching Contributions for
purposes of the Actual Contribution Percentage test and other requirements of
section 401(m) of the Code.
3.2 Contributions under other plans. The Employer may provide in the Plan
that the minimum benefit requirement shall be met in another plan (including
another plan that consists solely of a cash or deferred arrangement which meets
the requirements of section 401(k)(12) of the Code and matching contributions
with respect to which the requirements of section 401(m)(11) of the Code are
met).
IN WITNESS WHEREOF, the Company, acting by and through its duly
authorized officers, has caused this Amendment No. 1 to be executed as of the
day and year first above written.
THE RECTORSEAL CORPORATION
By:
-----------------------
COMPANY
-4-
EXHIBIT 10.5
AMENDMENT THREE TO
------------------
RETIREMENT PLAN FOR EMPLOYEES OF
--------------------------------
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
------------------------------------------------
As Amended and Restated Effective April 1, 1989
-----------------------------------------------
WHEREAS, effective as of April 1, 1989, the Retirement Plan for Employees
of Capital Southwest Corporation and Its Affiliates (the "Plan") was amended and
restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the Plan, the Plan may be amended;
and
WHEREAS, it is necessary that certain technical amendments be made to the
Plan in order to comply with the Retirement Protection Act of 1994, the
Uniformed Services Employment and Reemployment Rights Act of 1994, the Small
Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, and the
Community Renewal Tax Relief Act of 2000, and it is appropriate that certain
other amendments be made;
NOW, THEREFORE, the Plan is hereby amended, effective as of the dates
specified below, as follows:
1. Effective as of April 1, 1997, the fourth paragraph of Section 1.1(A)(6)
of the Plan (which provides for family aggregation for certain Participants) is
deleted in its entirety.
2. Effective as of April 1, 2001, clause (b) in the first paragraph of
Section 1.1(A)(6) of the Plan is amended to read in its entirety as follows:
"(b) the amounts, if any, that would have been includable in the employee's
Compensation under (a) above for such calendar year if they had not
been contributed on his behalf by the Employer pursuant to a salary
reduction agreement and had not been excluded from his gross income
under the provisions of Section 125 (cafeteria plan) or Section 132(f)
(qualified transportation fringes) of the Internal Revenue Code."
-2-
3. Effective as of January 1, 2002, Section 1.1(A)(13) of the Plan is
amended to delete the word "or" in clause (b), to replace the period at the end
of clause (c) with a semicolon and the word "or", and to add a new clause (d)
which shall read in its entirety as follows:
"(d) any individual who by contract is not classified by the Employer as a
common law employee of the Employer, even if such individual is
included on the Employer's payroll for Federal income tax withholding
purposes or whether such person is later classified as an employee by
the Internal Revenue Service, the Department of Labor, a court, an
administrative agency, or an Employer."
4. Effective as of April 1, 1997, Section 1.1(A)(16) of the Plan is amended
to read in its entirety as follows:
"(16)'Highly Compensated Employee' shall mean any 'highly compensated
active employee' or 'highly compensated former employee.'
(a) A 'highly compensated active employee' includes any employee who
performs service for an Employer or Controlled Group Member
during the determination year and who, during the look-back year,
received compensation from the Employer or Controlled Group
Member in excess of $80,000 (as adjusted pursuant to Section
415(d) of the Internal Revenue Code) and was a member of the
top-paid group for such year. The term 'highly compensated active
employee' also includes an employee who is a '5-percent owner'
(within the meaning of Section 414(q) of the Internal Revenue
Code) any time during the look-back year or the determination
year. An employee is in the 'top-paid group' for a year if such
employee is in the group consisting of the top 20% of the
employees of all Controlled Group Members when ranked on the
basis of compensation paid during such year.
The 'determination year' shall be the Plan Year and the
'look-back year' shall be the twelve-month period immediately
preceding the determination year. The calendar year which begins
with or within the look-back year shall be treated as the
look-back year for purposes of determining whether an employee is
a highly compensated employee on account of the employee's
compensation for a look-back year under Section 414(q)(1)(B) of
the Internal Revenue Code.
-3-
(b) A 'highly compensated former employee' includes any employee who
separated from service (or was deemed to have separated) prior to
the determination year, performs no service for the Employer or a
Controlled Group Member during the determination year, and was a
highly compensated active employee for either the separation year
or any determination year ending on or after the employee's 55th
birthday.
(c) The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of
employees in the top-paid group and the compensation that is
considered, shall be made in accordance with Section 414(q) of
the Internal Revenue Code and regulations thereunder. The method
of determination set forth above in this Section shall apply to
all plans (both retirement and nonretirement) of the Employer for
which the definition of 'highly compensated employee' is
applicable."
5. Effective as of January 1, 1997, Section 1.1(A)(32) of the Plan is
amended to add the following paragraph at the end thereof:
"Notwithstanding the foregoing provisions of this Section 1.1(A)(32),
each participant who is not a 5-percent owner, who has attained age 70
1/2 in a calendar year after 1995 and prior to 2002 and who has not
retired by the end of such calendar year, shall be entitled to elect,
at the time and in the manner specified by the Committee, but in any
event prior to April 1 of the calendar year following the calendar
year in which such Participant attained age 70 1/2, to defer such
Participant's Required Beginning Date until April 1 of the calendar
year that next follows the calendar year in which he retires. Upon
such election by the Participant, his Required Beginning Date shall
become April 1 of the calendar year immediately following the calendar
year in which he retires.
For purposes of this Section 1.1(A)(32), a Participant is treated as a
5-percent owner after December 31, 1996, if such Participant is a
5-percent owner, as defined in Section 416 of the Internal Revenue
Code, with respect to the Plan Year ending in the calendar year in
which the Participant attains age 70 1/2."
6. Effective as of January 1, 2002, Section 1.1(A)(32) of the Plan is
amended to add the following paragraph at the end thereof:
"Notwithstanding the foregoing provisions of this Section 1.1(A)(32),
the Required Beginning Date for each Participant who is not a
5-percent owner and who attains age 70 1/2 on or after January 1,
-4-
2002, shall be April 1 of the calendar year following the calendar
year in which such Participant attains age 70 1/2 or retires,
whichever occurs later."
7. Effective as of December 12, 1994, the second paragraph in Section 1.3
of the Plan is amended to add the following sentence at the end thereof:
"Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with section 414(u) of
the Internal Revenue Code."
8. Effective as of January 1, 2002, Section 1 of the Plan is amended to add
a new Section 1.8 which shall read in its entirety as follows:
"1.8 - SERVICE AND TERMINATION OF SERVICE
For purposes of the Plan, an Employee or Participant shall be
considered to be in the service of the Employer and shall not be considered
to have incurred a termination of his service until the date of his early,
normal or disability retirement, death, resignation, discharge or other
termination of his employment with an Employer, notwithstanding any payment
or agreement to pay severance pay in connection with the termination of his
employment."
9. Effective as of January 1, 1997, Section 2.1(C) of the Plan is amended
to add the following paragraph at the end thereof:
"Where a Participant's monthly retirement income commences after April
1 following the calendar year in which such Participant attains age 70 1/2,
the accrued benefit of such Participant shall be actuarially increased in
accordance with regulations or other official pronouncements of the
Internal Revenue Service to take into account the period beginning on April
1 following the calendar year in which the Participant attains age 70 1/2
and ending on the date on which benefits under the Plan commence after
retirement in an amount sufficient to satisfy Section 401(a)(9) of the
Internal Revenue Code."
10. Effective as of April 1, 1997, Section 2.4(A)(2)(b) of the Plan is
amended to read in its entirety as follows:
"(b) if he had completed at least 10 years of Vesting Service as of
the date of termination of his service and he so elects in
writing filed with the Committee at least 30 but not more than 90
days prior to the effective date thereof (or if the Participant
waives the 30-day notice period with any required spousal
consent, then more than 7 days but not more than 90 days prior to
the effective date thereof), the first day of any month, which is
prior to his Normal Retirement Date and is on or after the date
-5-
on which he attained the age of 55 years, that he specifies in
his written election filed with the Committee."
11. Effective as of April 1, 1997, the following parenthetical phrase shall
be inserted in the first sentence of the fourth paragraph of Section 3.1 of the
Plan after the words "90 days prior to the effective date thereof" and before
the comma which follows such words:
"(or, if the Participant waives the 30-day notice period with any
required spousal consent, then more than 7 days but not more than 90
days prior to the effective date thereof)"
12. Effective as of April 1, 1998, the first sentence of Section 3.2 of the
Plan is amended to read in its entirety as follows:
"3.2 - LUMP-SUM PAYMENT OF SMALL RETIREMENT INCOME
-------------------------------------------
Notwithstanding any provision of the Plan to the contrary, if the
single-sum value of the retirement income or other benefit payable on
behalf of any Participant hereunder whose retirement income or other
benefit payments have not commenced does not exceed the maximum amount that
is permissible as an involuntary cash-out of accrued benefits under
Sections 411(a)(11) and 417(e) of the Internal Revenue Code and regulations
issued with respect thereto ($5,000 as of April 1, 1998), the actuarial
equivalent of such benefit shall be paid in a lump sum; provided, however,
that a lump-sum distribution under this Section 3.2 will not be permitted
after the Annuity Starting Date and will not be permitted in the case of a
Participant who is entitled to receive disability retirement income
payments."
13. Effective as of January 1, 2000, Section 4.1(A)(1) of the Plan is
amended to read in its entirety as follows:
"(1) Maximum Amount of Retirement Income: Any provisions herein to the
contrary notwithstanding, in no event shall the monthly retirement income
that is payable on or after the first day of the limitation year beginning
in 1987 to a Participant hereunder exceed the maximum amount of retirement
income for defined benefit plans as specified in Section 415 of the
Internal Revenue Code and regulations and rulings issued pursuant thereto;
provided, however, that:
(a) the maximum amount of retirement income applicable to a
Participant who was a participant in the Superseded Plan, if any,
before the limitation year beginning in 1983 and whose Credited
Service includes service that was accrued prior to such
-6-
limitation year, shall not be less than his current accrued
benefit within the meaning of Section 235(g)(4) of the Tax Equity
and Fiscal Responsibility Act of 1982;
and
(b) such maximum amount of retirement income applicable to a
Participant who was a participant in the Superseded Plan, if any,
before the limitation year beginning in 1987 and whose Credited
Service includes service that was accrued prior to such
limitation year, shall not be less than his current accrued
benefit within the meaning of Section 1106(i)(3)(B) of the Tax
Reform Act of 1986.
In determining the maximum monthly retirement income payable on behalf of
any Participant, all defined benefit plans (whether or not terminated) of
the Controlled Group Members are to be treated as one defined benefit plan.
The proportion of the maximum monthly retirement income applicable to all
such defined benefit plans of the Controlled Group Members shall be
determined on a pro rata basis depending upon the actuarially equivalent
amount of retirement income otherwise accrued under each such defined
benefit plan."
14. Effective as of January 1, 1995, Section 4.1(A)(2) of the Plan is
amended to read in its entirety as follows:
"(2)Actuarial Assumptions: The mortality assumptions that are used to
compute the actuarially equivalent maximum amount of retirement income
permitted under this Section 4.1(A) on and after January 1, 1995 shall be
based upon the mortality table prescribed by the Secretary of Treasury
pursuant to Section 415(b)(2)(E) of the Internal Revenue Code. The interest
rate assumptions that are used to compute the actuarially equivalent
maximum amounts of retirement income permitted under the provisions of this
Section 4.1(A) shall be the same as those that are used in computing
actuarially equivalent benefits payable on behalf of a Participant upon his
retirement or termination of service and upon the exercise of optional
forms of retirement income under the Plan except that:
(a) the interest rate assumption shall not be less than 5% for the
purposes of converting the maximum retirement income to a form
other than a straight life annuity (with no ancillary benefits);
provided, however, for the purposes of converting the maximum
retirement income to any form of benefit which is subject to
Section 417(e)(3) of the Internal Revenue Code (which shall
include lump-sum distributions and other forms of distribution
that provide payments in the form of a decreasing annuity or that
provide payments for a period less than the life of the
recipient), such minimum interest rate assumption that applies on
and after January 1, 1995 shall (in lieu of 5%) be the annual
-7-
rate of interest on 30-year Treasury securities for the second
full calendar month immediately preceding the first day of the
Plan Year during which the Annuity Starting Date occurs;
(b) the interest rate assumption shall not be greater than 5% for the
purposes of adjusting the maximum retirement income payable to a
Participant who is over the social security retirement age within
the meaning of Section 415(b)(8) of the Internal Revenue Code (or
age 65 in the case of a governmental plan or a plan maintained by
a tax exempt organization) so that it is actuarially equivalent
to such a retirement income commencing at the social security
retirement age (or age 65 in the case of a governmental plan or a
plan maintained by a tax exempt organization); and
(c) the factor for adjusting the maximum permissible retirement
income to a Participant who is less than age 62 years so that it
is actuarially equivalent to such a retirement income commencing
at age 62 years shall be equal to (i) the factor for determining
actuarial equivalence for early retirement under the Plan or (ii)
an actuarially computed reduction factor determined using an
interest rate assumption of 5% and the mortality assumptions
specified in the first sentence of this Section 4.1(A)(2) (except
that the mortality decrement shall be ignored if a death benefit
at least equal to the single-sum value of the Participant's
Accrued Deferred Monthly Retirement Income Commencing at Normal
Retirement Date would be payable under the Plan on behalf of the
Participant if he remained in the service of the Employer and his
service were to be terminated by reason of his death prior to his
Normal Retirement Date), whichever factor will provide the
greater reduction. The factor for determining actuarial
equivalence for early retirement under the Plan for any given age
below age 62 years shall be determined by dividing the early
retirement adjustment factor that applies under the Plan at such
given age by the early retirement adjustment factor that applies
under the Plan at age 62 years."
15. Effective as of January 1, 1998, Section 4.1(A)(4)(e) of the Plan is
amended to add the following sentence between the second and third sentences
thereof:
"Notwithstanding any provisions of this subsection to the contrary, the
term 'IRC 415 Compensation' shall also include (i) any elective deferral as
defined in Section 402(g)(3) of the Internal Revenue Code, and (ii) any
-8-
amount which is contributed or deferred by the Employer at the election of
the Employee and which is not includible in the gross income of the
Employee by reason of Section 125 or Section 457 of the Internal Revenue
Code."
16. Effective as of January 1, 2000, Section 4.1(A)(4) is amended to delete
Subsections (b), (c), and (d), and to redesignate Subsections (e) and (f) as
Subsections (b) and (c), respectively.
17. Effective as of January 1, 2001, the third sentence of Section
4.1(A)(4)(b) of the Plan is amended to read in its entirety as follows:
"Notwithstanding any provisions of this subsection to the contrary,
the term 'IRC 415 Compensation' shall also include (i) any elective
deferral as defined in Section 402(g)(3) of the Internal Revenue Code, and
(ii) any amount which is contributed or deferred by the Employer at the
election of the Employee and which is not includible in the gross income of
the Employee by reason of Section 125, Section 132(f)(4), or Section 457 of
the Internal Revenue Code."
18. Effective as of April 1, 1997, Section 4.1(C) of the Plan is amended to
delete the next to the last sentence and substitute in lieu thereof the
following sentence:
"Any provisions of Section 3.1 hereof to the contrary notwithstanding, if
any Participant is not provided with the written notification described in
the first sentence of this section at least 30 days before his Annuity
Starting Date but is provided in the written notification a period of at
least 30 days in which to make his election under this section, he may
waive such notice period (with any applicable spousal consent) and file his
election with the Committee, and his retirement income or other benefit may
commence within 30 days after the date on which he was provided with such
written notification, but more than 7 days after such date."
19. Effective as of January 1, 2000, Section 4.6(D) of the Plan is deleted
in its entirety.
20. Effective as of April 1, 1996, Section 5.8 of the Plan is amended to
add the following paragraph at the end thereof:
"Notwithstanding any provision of the Plan to the contrary, in the
event that the Plan is terminated, the benefits of any missing participants
shall be transferred to the Pension Benefit Guaranty Corporation in
accordance with Section 4050 of the Employee Retirement Income Security Act
of 1974, as amended."
-9-
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this 28th day of
December 2001.
CAPITAL SOUTHWEST CORPORATION
By___________________________
Title:_______________________
EXHIBIT 13
Twelve Largest Investments - March 31, 2002
================================================================================
Palm Harbor Homes, Inc. $109,971,000
- --------------------------------------------------------------------------------
Palm Harbor Homes, Dallas, Texas, is an integrated manufactured housing
company, building, retailing, financing and insuring homes produced in 15 plants
in Alabama, Arizona, Florida, Georgia, North Carolina, Ohio, Oregon and Texas
and sold in 28 states by approximately 100 independent dealers and 151
company-owned retail superstores. Palm Harbor manufactures high-quality,
energy-efficient homes designed to meet the need for affordable housing,
particularly among retirees and newly-formed families.
During the year ended March 29, 2002, Palm Harbor earned $19,448,000 ($0.85
per share) on net sales of $627,380,000, compared with earnings of $19,829,000
($0.87 per share) on net sales of $650,451,000 in the previous year. The March
28, 2002 closing Nasdaq bid price of Palm Harbor's common stock was $20.80 per
share.
At March 31, 2002, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $109,971,000 ($14.00 per share),
consisting of 7,855,121 restricted shares of common stock, representing a
fully-diluted equity interest of 34.3%.
================================================================================
The RectorSeal Corporation $50,000,000
- --------------------------------------------------------------------------------
The RectorSeal Corporation, Houston, Texas, with two plants in Texas and a
plant in New York, manufactures chemical specialty products including pipe
thread sealants, firestop sealants, plastic solvent cements and other
formulations for plumbing and industrial applications. RectorSeal's major
subsidiary, Jet-Lube, Inc., with plants in Texas, England and Canada, produces
anti-seize compounds, specialty lubricants and other products used in industrial
and oil field applications. Another subsidiary, Cargo Chemical, produces a
limited line of automotive chemical products. RectorSeal also owns a 20% equity
interest in The Whitmore Manufacturing Company (described subsequently).
During the year ended March 31, 2002, RectorSeal earned $5,277,000 on
revenues of $57,338,000, compared with earnings of $5,669,000 on revenues of
$56,240,000 in the previous year. RectorSeal's earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.
At March 31, 2002, Capital Southwest owned 100% of RectorSeal's common
stock having a cost of $52,600 and a value of $50,000,000.
================================================================================
Skylawn Corporation $38,000,000
- --------------------------------------------------------------------------------
Skylawn Corporation, Hayward, California, owns and operates cemeteries,
mausoleums and mortuaries. Skylawn's operations, all of which are in California,
include a mausoleum and an adjacent mortuary in Oakland and cemeteries and
mausoleums in San Mateo, Hayward, Sacramento and Napa, the latter three of which
also have mortuaries at the cemetery sites. These entities have provided
cemetery and funeral services to their respective communities for many years. A
captive insurance company and funeral and cemetery trusts enable Skylawn's
clients to make pre-need arrangements.
For the fiscal year ended March 31, 2002, Skylawn earned $3,772,000 on
revenues of $26,928,000, compared with earnings of $4,120,000 on revenues of
$25,799,000 in the previous year.
At March 31, 2002, Capital Southwest owned 100% of Skylawn Corporation's
common stock, which had a cost of $4,510,400 and was valued at $38,000,000.
================================================================================
Alamo Group Inc. $31,034,000
- --------------------------------------------------------------------------------
Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and
distributor of heavy-duty, tractor-mounted mowing and other vegetation
maintenance equipment, street-sweeping equipment and replacement parts. Founded
in 1969, Alamo Group operates 13 manufacturing facilities and serves
governmental, industrial and agricultural markets in the U.S., Canada and
Europe.
For the year ended December 31, 2001, Alamo reported consolidated earnings
of $10,812,000 ($1.11 per share) on net sales of $246,047,000, compared with
earnings of $10,770,000 ($1.11 per share) on net sales of $215,874,000 in the
previous year. The March 28, 2002 closing NYSE market price of Alamo's common
stock was $16.25 per share.
At March 31, 2002, the $2,065,047 investment in Alamo by Capital Southwest
and its subsidiary was valued at $31,034,000 ($11.00 per share), consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 27.2%.
================================================================================
Encore Wire Corporation $24,521,000
- --------------------------------------------------------------------------------
Encore Wire Corporation, McKinney, Texas, manufactures a broad line of
copper electrical wire and cable including non-metallic sheathed cable,
underground feeder cable and THHN cable for residential, commercial and
industrial construction. Encore's products are sold through large-volume
distributors and building materials retailers.
For the year ended December 31, 2001, Encore reported net income of
$9,130,000 ($0.60 per share) on net sales of $281,010,000, compared with net
income of $8,050,000 ($0.52 per share) on net sales of $283,689,000 in the
previous year. The March 28, 2002 closing Nasdaq bid price of Encore's common
stock was $16.56 per share.
At March 31, 2002, the $5,800,000 investment in 2,724,500 shares of
Encore's restricted common stock by Capital Southwest and its subsidiary was
valued at $24,521,000 ($9.00 per share), representing a fully-diluted equity
interest of 16.9%.
================================================================================
Media Recovery, Inc. $10,000,000
- --------------------------------------------------------------------------------
Media Recovery, Inc., Graham, Texas, distributes computer and office
automation supplies and accessories to corporate customers through its direct
sales force with 25 offices in 18 states. Its Shockwatch division manufactures
impact and tilt monitoring devices used to detect mishandled shipments. Media
Recovery's subsidiary, The Damage Prevention Company, Denver, Colorado,
manufactures dunnage products used to prevent damage in trucking, rail and
export container shipments.
During the year ended September 30, 2001, Media Recovery reported net
income of $3,007,000 on net sales of $110,840,000, compared with net income of
$3,139,000 on net sales of $94,373,000 in the previous year.
At March 31, 2002, the $5,415,000 investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $10,000,000, consisting of 4,800,000
shares of Series A convertible preferred stock, representing a fully-diluted
equity interest of 71.2%.
================================================================================
The Whitmore Manufacturing Company $8,800,000
- --------------------------------------------------------------------------------
The Whitmore Manufacturing Company, with plants in Rockwall, Texas and
Cleveland, Ohio, manufactures specialty lubricants for heavy equipment used in
surface mining, railroads and other industries, and produces water-based
coatings for the automotive and primary metals industries. Whitmore's
subsidiary, Fluid Protection Corporation, manufactures fluid contamination
control devices.
During the year ended March 31, 2002, Whitmore reported net income of
$88,000 on net sales of $12,151,000, compared with net income of $41,000 on net
sales of $11,536,000 in the previous year. The company is owned 80% by Capital
Southwest and 20% by Capital Southwest's subsidiary, The RectorSeal Corporation
(described on page 7).
At March 31, 2002, the direct investment in Whitmore by Capital Southwest
was valued at $8,800,000 and had a cost of $1,600,000.
================================================================================
All Components, Inc. $8,700,000
- --------------------------------------------------------------------------------
All Components, Inc., Farmers Branch, Texas, distributes and produces
memory and other components for personal computer manufacturers, retailers and
value-added resellers. Through its Dallas-based sales and distribution center
and its contract manufacturing plants in Austin, Texas and Boise, Idaho, the
company serves over 2,000 customers throughout the United States.
During the year ended August 31, 2001, All Components reported net income
of $5,220,000 on net sales of $152,022,000, compared with net income of
$4,025,000 on net sales of $220,835,000 in the previous year.
At March 31, 2002, the $150,000 investment in All Components by Capital
Southwest's subsidiary was valued at $8,700,000 consisting of 150,000 shares of
Series A convertible preferred stock, representing a 29.0% fully-diluted equity
interest.
================================================================================
Liberty Media Corporation $8,562,488
- --------------------------------------------------------------------------------
Liberty Media Corporation, Englewood, Colorado, acquired by AT&T as part of
Tele-Communications, Inc. in 1999 and now an independent company, produces,
acquires and distributes entertainment, sports and informational programming
services and electronic retailing services, which are delivered via cable
television and other technologies to viewers in the United States and overseas.
For the year ended December 31, 2001, Liberty Media reported a net loss of
$6.203 billion ($2.40 per share) on net sales of $2.059 billion, compared with
net income of $1.485 billion ($0.57 per share) on net sales of $1.526 billion in
the previous year. The March 28, 2002 closing NYSE market price of Series A
common stock was $12.64 per share.
At March 31, 2002, Capital Southwest owned 677,412 unrestricted shares of
Series A common stock, having a total cost of $25 and a market value of
$8,562,488 ($12.64 per share).
================================================================================
PETsMART, Inc. $7,515,223
- --------------------------------------------------------------------------------
PETsMART, Inc., Phoenix, Arizona, is the largest specialty retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 500 pet superstores in the United States and Canada and is the leading
direct marketer of pet products and information through it e-commerce site and
its pet and equine catalog business.
For the year ended February 3, 2002, PETsMART, Inc. reported net income of
$39,567,000 ($0.35 per share) on net sales of $2.501 billion, compared with a
net loss of $30,904,000 ($0.28 per share) on net sales of $2.224 billion in the
previous year. The March 28,2002 closing Nasdaq bid price of PETsMART's common
stock was $13.56 per share.
At March 31, 2002, Capital Southwest and its subsidiary owned 554,220
unrestricted shares of common stock, having a cost of $2,437,129 and a market
value of $7,515,223 ($13.56 per share).
================================================================================
Mail-Well, Inc. $6,814,000
- --------------------------------------------------------------------------------
Mail-Well, Inc., Englewood, Colorado, is the leading manufacturer of
envelopes in the United States and Canada and one of North America's largest
commercial printers. Upon completion of planned divestitures, the company will
operate 77 facilities serving over 20,000 customers of its envelope and printing
businesses.
For the year ended December 31, 2001, Mail-Well reported a net loss of
$136,217,000 ($2.86 per share) on net sales of $1.653 billion, compared with net
income of $27,618,000 ($0.56 per share) on net sales of $1.824 billion in the
previous year. The March 28, 2002 closing NYSE market price of Mail-Well's
common stock was $6.28 per share.
At March 31, 2002, the $2,986,870 investment in Mail-Well by Capital
Southwest was valued at $6,814,000 ($3.25 per share), consisting of 2,096,588
restricted shares of common stock, representing a fully-diluted equity interest
of 3.4%.
================================================================================
Concert Industries Ltd. $5,922,000
- --------------------------------------------------------------------------------
Concert Industries Ltd., Vancouver, British Columbia, manufactures air-laid
super-absorbent materials in facilities in Thurso and Gatineau Quebec;
Falkenhagen, Germany; and Charleston, South Carolina. Its non-woven fabrics are
used in feminine hygiene, specialty diapers and adult incontinence products.
Other applications are industrial wipes, food packaging and disposable medical
products.
During the year ended December 31, 2001, Concert lost C$16,560,000 (C$0.64
per share) on net sales of C$109,895,000, compared with net income of
C$7,375,000 (C$0.31 per share) on net sales of C$86,606,000 in the year 2000.
The March 28, 2002 closing Toronto Stock Exchange market price of Concert's
common stock was C$5.55 (US$3.49) per share.
At March 31, 2002, the US$9,367,649 investment by Capital Southwest and its
subsidiary in 2,833,485 shares of restricted common stock and warrants to
acquire 457,401 shares of common stock was valued at US$5,922,000, representing
a fully-diluted equity interest of 8.4%.
Portfolio of Investments - March 31, 2002
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
+AT&T CORP. <1% ++133,245 shares common
New York, New York stock (acquired 3-9-99) $ 33 $ 2,091,947
Major provider of voice, data and
video communications services
including business and consumer
long distance and broadband (cable).
- ------------------------------------------------------------------------------------------------------------------------------------
+AT&T WIRELESS SERVICES, INC. <1% ++42,878 shares common stock
Redmond, Washington (acquired 7-9-01) 10 383,758
Provider of wireless voice and data
services and products in the cellular
and PCS markets.
- ------------------------------------------------------------------------------------------------------------------------------------
+ALAMO GROUP INC. 27.2% 2,821,300 shares common stock
Seguin, Texas (acquired 4-1-73 thru 10-4-99) 2,065,047 31,034,000
Tractor-mounted mowing and vegetation
maintenance equipment for governmental,
industrial and agricultural markets;
street-sweeping equipment for municipalities.
- ------------------------------------------------------------------------------------------------------------------------------------
ALL COMPONENTS, INC. 29.0% 150,000 shares Series A convertible
Farmers Branch, Texas preferred stock,convertible into
Distribution and production of memory and 600,000 shares of common stock
other components for personal computer at $0.25 per share
manufacturers, retailers and value-added (acquired 9-16-94) 150,000 8,700,000
resellers.
- ------------------------------------------------------------------------------------------------------------------------------------
+ALLTEL CORPORATION <1% ++8,880 shares common stock
Little Rock, Arkansas (acquired 7-1-98) 108,355 493,284
Wireline and wireless communications and
information services.
- ------------------------------------------------------------------------------------------------------------------------------------
BALCO, INC. 89.7% 14% subordinated debentures,
Wichita, Kansas payable 2002 (acquired 8-13-91) 80,000 80,000
Specialty architectural products 14% subordinated debenture,
used in the construction and remodeling payable 2002, last maturing
of commercial and institutional buildings. $160,000 convertible into 160,000
shares of common stock at $1.00
per share (acquired 6-1-91) 160,000 949,000
285,000 shares common stock
and 60,920 shares Class B
non-voting common stock
(acquired 10-25-83 and
5-30-01) 464,920 2,051,000
--------- ---------
704,920 3,080,000
- ------------------------------------------------------------------------------------------------------------------------------------
BOXX TECHNOLOGIES, INC. 16.8% 3,125,354 shares Series B
Austin, Texas convertible preferred stock,
Workstations for computer graphics convertible into 3,125,354 1,500,000 2
imaging and design. shares of common stock at
$0.50 per share (acquired
8-20-99 thru 8-8-01)
Warrants to purchase 80,000
shares of Series B preferred
stock at $0.50 per share, -- --
expiring 2005 (acquired 8-24-00) --------- ---------
1,500,000 2
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
1,500,000 2
- ------------------------------------------------------------------------------------------------------------------------------------
+CONCERT INDUSTRIES LTD. 8.4% 2,833,485 shares common stock
Vancouver, British Columbia (acquired 5-31-00 thru 6-1-01) $ 9,131,224 $ 5,922,000
Manufacture and sale of latex, Warrant to purchase 83,643 shares
thermal and multi-bonded of common stock at C$6.00
air-laid nonwoven fabrics (US$3.769) per share, expiring
having superabsorbent properties. 2002 (acquired 5-31-00) 47,525 --
Warrants to purchase 373,758
shares of common stock at
C$8.00 (US$5.025) per share,
expiring 2003 (acquired 6-1-01) 188,900 --
--------- ---------
9,367,649 5,922,000
- ------------------------------------------------------------------------------------------------------------------------------------
DENNIS TOOL COMPANY 66.2% 20,725 shares 5% convertible preferred
Houston, Texas stock, convertible into 20,725 shares
Polycrystalline diamond compacts of common stock at $48.25 per share
(PDCs) used in oil field drill (acquired 8-10-98) 999,981 500,000
bits and in mining and industrial 140,137 shares common stock
applications. (acquired 3-7-94 and 8-10-98) 2,329,963 1,500,000
--------- ---------
3,329,944 2,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
+DREW SCIENTIFIC GROUP PLC <1% ++49,925 shares common stock
Cumbria, England (acquired 3-21-01) 182,689 12,446
Diagnostic medical equipment and consumables.
- ------------------------------------------------------------------------------------------------------------------------------------
+ENCORE WIRE CORPORATION 16.9% 2,724,500 shares common stock
McKinney, Texas (acquired 7-16-92 thru 10-7-98) 5,800,000 24,521,000
Electrical wire and cable for residential
and commercial use.
- ------------------------------------------------------------------------------------------------------------------------------------
EXOPACK HOLDING CORP. 1.3% 4,500 shares common stock
Paper and plastic flexible packaging for products (acquired 7-27-01) 450,000 450,000
Spartanburg, South Carolina
such as pet food, building materials, chemicals
and other commodities.
- ------------------------------------------------------------------------------------------------------------------------------------
EXTREME INTERNATIONAL, INC. 41.3% 12% subordinated notes,
(formerly Rewind Holdings, Inc.) payable 2001 to 2004 4,176,750 1,000,000
Sugar Land, Texas (acquired 10-21-96 thru 4-30-01)
Owns Bill Young Productions, Texas 375 shares 8% Series A convertible
Video and Post, and Extreme Communications, preferred stock, convertible into
which produce radio and television 1,500,000 shares of common stock at
commercials and corporate communications videos. $0.25 per share (acquired 10-21-96) 375,000 --
Warrants to purchase 1,056,000 shares
of common stock at $0.25 per share,
expiring 2005 and 2008 (acquired
8-11-98 thru 4-30-01) -- --
--------- ---------
4,551,750 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
+FMC CORPORATION <1% ++6,430 shares common stock
Chicago, Illinois (acquired 6-6-86) 66,726 269,545
Chemicals for agricultural, industrial
and consumer markets.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
+FMC TECHNOLOGIES, INC. <1% ++11,057 shares common stock
Chicago, Illinois (acquired 1-2-02) $ 57,051 $ 220,366
Technology solutions for the energy,
food processing and air transportation
industries.
- ------------------------------------------------------------------------------------------------------------------------------------
HEELING, INC. 43.0% 10% subordinated debenture due 2006
Carrollton, Texas (acquired 10-30-00 thru 12-7-00) 1,800,000 1,800,000
Heelys stealth skate shoes ("one wheel in 1,745,455 shares Series A preferred
the heel") sold through specialty skate, stock (acquired 5-26-00) 480,000 480,000
lifestyle and sporting goods stores, 436,364 shares Series B convertible
footwear chains and over the Internet preferred stock, convertible into
at Heelys.com. 436,364 shares of common stock at
$0.275 per share (acquired 5-26-00) 120,000 120,000
--------- ---------
2,400,000 2,400,000
- ------------------------------------------------------------------------------------------------------------------------------------
+HOLOGIC, INC. <1% ++158,205 shares common stock
Bedford, Massachusetts (acquired 8-27-99) 220,000 2,444,267
Medical instruments including bone
densitometers, mammography devices
and digital radiography systems.
- ------------------------------------------------------------------------------------------------------------------------------------
+KIMBERLY-CLARK CORPORATION <1% ++77,180 shares common stock
Dallas, Texas (acquired 12-18-97) 2,396,926 4,989,687
Manufacturer of tissue, personal care
and health care products.
- ------------------------------------------------------------------------------------------------------------------------------------
+LIBERTY MEDIA CORPORATION <1% ++677,412 shares Series A common
(formerly AT&T Corp. - Liberty Media Group) stock (acquired 3-9-99) 25 8,562,488
Englewood, Colorado
Global media and entertainment company owning
interests in video programming,
communications and Internet businesses.
- ------------------------------------------------------------------------------------------------------------------------------------
+MAIL-WELL, INC. 3.4% 2,096,588 shares common stock
Englewood, Colorado (acquired 2-18-94 thru 11-10-98) 2,986,870 6,814,000
Envelopes and commercial printing.
- ------------------------------------------------------------------------------------------------------------------------------------
MEDIA RECOVERY, INC. 71.2% 4,800,000 shares Series A convertible
Graham, Texas preferred stock, convertible into
Computer and office automation supplies 4,800,000 shares of common stock at
and accessories;impact and tilt monitoring $1.00 per share (acquired 11-4-97) 5,415,000 10,000,000
devices to detect mishandled
shipments; dunnage for protecting shipments.
- ------------------------------------------------------------------------------------------------------------------------------------
+MYLAN LABORATORIES, INC. <1% ++64,143 shares common stock
Pittsburgh, Pennsylvania (acquired 11-20-91) 200,000 1,889,653
Proprietary and generic pharmaceutical products.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
ORGANIZED LIVING, INC. 8.2% 3,333,335 shares Series D
Lenexa, Kansas convertible preferred stock,
Specialty retailer of products designed convertible into 3,333,335
to provide home and office storage and shares of common stock at $1.80
organization solutions. per share (acquired 1-7-00
and 10-30-00) $ 6,000,000 $ 3,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
PALLET ONE, INC. 8.8% 150,000 shares common stock
Bartow, Florida (acquired 10-18-01) 150,000 150,000
Wooden pallet manufacturer with 12 1,350,000 shares Series A
manufacturing facilities. preferred stock (acquired
10-18-01) 1,350,000 1,350,000
--------- ---------
1,500,000 1,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
+PALM HARBOR HOMES, INC. 34.3% 7,855,121 shares common stock
Dallas, Texas (acquired 1-3-85 thru 7-31-95) 10,931,955 109,971,000
Integrated manufacturing, retailing,
financing and insuring of manufactured
housing produced in 15 plants.
- ------------------------------------------------------------------------------------------------------------------------------------
+PETSMART, INC. <1% ++554,220 shares common stock
Phoenix, Arizona (acquired 6-1-95) 2,437,129 7,515,223
Retail chain of more than 500 stores selling
pet foods, supplies and services.
- ------------------------------------------------------------------------------------------------------------------------------------
THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock
Houston, Texas (acquired 1-5-73 and 3-31-73) 52,600 50,000,000
Chemical specialty products for industrial,
construction, oil field and automotive
applications; owns 20% of Whitmore
Manufacturing.
- ------------------------------------------------------------------------------------------------------------------------------------
SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock
Hayward, California (acquired 7-16-69) 4,510,400 38,000,000
Cemeteries, mausoleums and mortuaries
located in northern California.
- ------------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION - FON Group <1% ++72,000 shares common stock
Westwood, Kansas (acquired 6-20-84) 449,654 1,100,880
Diversified telecommunications company.
- ------------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION - PCS Group <1% ++36,000 shares common stock
Overland Park, Kansas (acquired 11-23-98) 53,991 370,440
Domestic wireless telephony services.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
SPROCKETS.COM, INC. 1.2% 31,196 shares common stock
Boston, Massachusetts (acquired 6-29-01) $ 1,244,883 $ 1
Provides web-based file transfer
and collaboration platforms to 168,403 shares Series B
acilitate the creation of visual redeemable convertible
media from multiple locations. preferred stock,
convertible into 168,403
shares of common stock at $0.30 49,488 --
per share (acquired 6-29-01)
Warrants to purchase 4,693 shares of
common stock at $41.04 per share
expiring 2006 (acquired 6-29-01) 5,629 --
--------- ---------
1,300,000 1
- ------------------------------------------------------------------------------------------------------------------------------------
TCI HOLDINGS, INC. -- 21 shares 12% Series C cumulative
Denver, Colorado compounding preferred stock
Cable television systems and (acquired 1-30-90) -- 677,250
microwave relay systems.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS CAPITAL BANCSHARES, INC. 3.0% 344,828 shares common stock
Dallas, Texas (acquired 5-1-00) 5,000,006 5,000,006
Owns both Texas Capital Bank, NA, which
serves middle market clients, and
Bank Direct, an Internet bank.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS PETROCHEMICAL HOLDINGS, INC. 5.0% 30,000 shares common stock
Houston, Texas (acquired 6-27-96) 3,000,000 1
Butadiene for synthetic rubber, MTBE for
gasoline octane enhancement and
butylenes for varied applications.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS SHREDDER, INC. 53.3% 3,296 shares Series A preferred stock
San Antonio, Texas (acquired 3-6-91 and 6-1-98) 329,600 329,600
Design and manufacture of heavy-duty 750 shares Series B convertible
shredder systems for recycling preferred stock, convertible
steel and other materials into 750,000 shares of common
from junk automobiles. stock at $0.10 per share
(acquired 3-6-91) 75,000 2,587,500
--------- ---------
404,600 2,917,100
- ------------------------------------------------------------------------------------------------------------------------------------
VOCALDATA, INC. 2.8% 650,001 shares Series A convertible
Richardson, Texas preferred stock, convertible into
Hardware and software for customer 1,300,002 shares of common
premises telephony equipment based on stock at $0.875 per share
Voice Over Internet Protocol. (acquired 11-4-99 and 12-3-99) 1,137,500 1
200,287 shares Series B convertible
preferred convertible stock, into
200,287 shares of common stock at
$1.759 per share
(acquired 10-26-00) 352,305 1
--------- ---------
1,489,805 2
- ------------------------------------------------------------------------------------------------------------------------------------
THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock
Rockwall, Texas (acquired 8-31-79) 1,600,000 8,800,000
Specialized mining and industrial lubricants;
automotive transit coatings.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- Diamond State Ventures, L.P.
- 1.9% limited partnership
interest (acquired 10-12-99
thru 8-15-01) $ 165,625 $ 165,625
-- First Capital Group of Texas III,
L.P. - 3.3% limited partnership
interest (acquired 12-26-00
and 5-1-01) 247,929 247,929
100.0% Humac Company - 1,041,000 shares
common stock (acquired 1-31-75
and 12-31-75) -- 140,000
-- STARTech Seed Fund I - 12.6% limited
partnership
interest (acquired 4-17-98
thru 1-5-00) 178,066 178,066
-- STARTech Seed Fund II - 3.1% limited
partnership
interest (acquired 4-28-00
thru 3-5-02) 600,000 300,000
-- Sterling Group Partners I, L.P. -
1.7% limited partnership
interest (acquired 4-20-01
and 7-27-01) 319,100 319,100
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $82,193,855 $347,481,066
=========== ============
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Notes to Portfolio of Investments
(a) The percentages in the "Equity" column express the potential equity
interests held by Capital Southwest Corporation and Capital Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the issuer's common stock the Company owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all outstanding warrants, convertible securities and employee stock options.
The symbol "<1%" indicates that the Company holds a potential equity interest of
less than one percent.
(b) Unrestricted securities (indicated by ++) are freely marketable securities
having readily available market quotations. All other securities are restricted
securities which are subject to one or more restrictions on resale and are not
freely marketable. At March 31, 2002, restricted securities represented
approximately 91% of the value of the consolidated investment portfolio.
(c) Under the valuation policy of the Company, unrestricted securities are
valued at the closing sale price for listed securities and at the lower of the
closing bid price or the last sale price for Nasdaq securities on the valuation
date. Restricted securities, including securities of publicly-owned companies
which are subject to restrictions on resale, are valued at fair value as
determined by the Board of Directors. Fair value is considered to be the amount
which the Company may reasonably expect to receive for portfolio securities if
such securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the is- suer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities, the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
(d) Agreements between certain issuers and the Company provide that the issuers
will bear substantially all costs in connection with the disposition of common
stocks, including those costs involved in registration under the Securities Act
of 1933 but excluding underwriting discounts and commissions. These agreements,
which cover common stocks owned at March 31, 2002 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks, apply to restricted securities of all issuers in the
investment portfolio of the Company except securities of the following issuers,
which are not obligated to bear registration costs: Humac Company, Skylawn
Corporation and The Whitmore Manufacturing Company.
(e) The descriptions of the companies and ownership percentages shown in the
portfolio of investments were obtained from published reports and other sources
believed to be reliable, are supplemental and are not covered by the report of
independent auditors. Acquisition dates indicated are the dates specific
securities were acquired. Certain securities were received in exchange for or
upon conversion or exercise of other securities previously acquired.
Portfolio Changes During the Year
New Investments and Additions to Previous Investments
Amount
----------
Balco, Inc. ......................................... $ 204,000
BOXX Technologies, Inc. .............................. 500,000
Diamond State Ventures, L.P. ......................... 46,429
Exopack Holding Corp. ................................ 450,000
Extreme International, Inc. .......................... 228,000
First Capital Group of Texas III, L.P. ............... 147,929
PalletOne, Inc. ...................................... 1,500,000
STARTech Seed Fund II ................................ 150,000
Sterling Group Partners I ............................ 319,100
----------
$3,545,458
==========
Dispositions
Amount
Cost Received
---------- ----------
Cisco Systems, Inc. .................................. $ 321,934 $ 325,989
CyberSource Corporation .............................. 1,000,000 186,883
Drew Scientific Group PLC ............................ 2,956,472 149,941
Global Crossing Ltd. ................................. 78,346 96,637
Liberty Satellite & Technology, Inc. ................. -- 28,355
Mylan Laboratories, Inc. ............................. 200,000 2,352,594
PETsMART, Inc. ....................................... 441,604 1,351,080
Photon Dynamics, Inc. (formerly Intelligent
Reasoning Systems, Inc.) ........................... 1,542,756 1,146,167
Triton Energy Limited ................................ 144,167 270,990
Miscellaneous ........................................ -- 14,529
---------- ----------
$6,685,279 $5,923,165
========== ==========
Repayments Received .................................. $2,267,970
==========
Significant Non-Cash Transaction
On June 1, 2001, the Company exchanged US$8,471,623 principal amount of 8%
subordinated debentures of Concert Industries Ltd. for 2,046,199 shares of
common stock at US$4.14 (C$6.36) per share and 373,758 warrants to purchase
common stock at C$8.00 (US$5.025) per share, expiring 12-31-03.
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Financial Condition
March 31
------------------------------
Assets 2002 2001
------------- -------------
Investments at market or fair value
(Notes 1, 2 and 10)
Companies more than 25% owned
(Cost: 2002 - $23,194,865,
2001 - $23,140,865) .............................. $ 243,024,999 $ 205,273,759
Companies 5% to 25% owned
(Cost: 2002 - $27,167,649,
2001 - $17,642,756) .............................. 34,943,003 19,623,004
Companies less than 5% owned
(Cost: 2002 - $31,831,341,
2001 - $46,818,025) .............................. 69,513,064 91,020,746
------------- -------------
Total investments
(Cost: 2002 - $82,193,855,
2001 - $87,601,646) .............................. 347,481,066 315,917,509
Cash and cash equivalents ............................. 1,977,180 1,137,767
Receivables ........................................... 1,753,297 264,377
Other assets (Note 8) ................................. 5,971,361 5,348,315
------------- -------------
Totals ................................................ $ 357,182,904 $ 322,667,968
============= =============
March 31
------------------------------
Liabilities and Shareholders' Equity 2002 2001
------------- -------------
Note payable to bank (Note 4) ............. $ 6,500,000 $ 5,000,000
Notes payable to portfolio companies (Note 4) ......... 2,500,000 6,000,000
Accrued interest and other liabilities (Note 8) ....... 2,018,140 2,135,052
Deferred income taxes (Note 3) ........................ 90,673,722 77,924,303
Subordinated debenture (Note 5) ....................... 5,000,000 5,000,000
------------- -------------
Total liabilities ................. 106,691,862 96,059,355
------------- -------------
Shareholders' equity (Notes 3 and 6)
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,266,416
shares at March 31, 2002 and 4,252,416
shares at March 31, 2001 ....................... 4,266,416 4,252,416
Additional capital ................................. 6,935,497 6,450,747
Undistributed net investment
income ........................................... 3,297,838 3,550,573
Undistributed net realized gain on
investments ...................................... 69,844,380 70,382,314
Unrealized appreciation of investments -
net of deferred income taxes ..................... 173,180,213 149,005,865
Treasury stock - at cost
(437,365 shares) ................................. (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $65.42 per share on the 3,829,051
shares outstanding at March 31, 2002,
and $59.40 per share on the 3,815,051
shares outstanding at March 31, 2001 .......... 250,491,042 226,608,613
------------- -------------
Totals ....................................... $ 357,182,904 $ 322,667,968
============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Operations
Years Ended March 31
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Investment income (Note 9):
Interest .......................................... $ 322,521 $ 542,241 $ 884,152
Dividends ......................................... 3,293,633 2,955,833 1,878,853
Management and directors' fees .................... 530,400 530,400 525,400
------------ ------------ ------------
4,146,554 4,028,474 3,288,405
------------ ------------ ------------
Operating expenses:
Salaries .......................................... 894,612 850,959 804,933
Net pension benefit (Note 8) ...................... (504,536) (486,174) (435,984)
Other operating expenses (Notes 7 and 11) ......... 633,254 614,861 657,770
------------ ------------ ------------
1,023,330 979,646 1,026,719
------------ ------------ ------------
Income before interest expense and income taxes ...... 3,123,224 3,048,828 2,261,686
Interest expense ..................................... 929,372 1,144,337 456,262
------------ ------------ ------------
Income before income taxes ........................... 2,193,852 1,904,491 1,805,424
Income tax expense (Note 3) .......................... 151,956 181,991 142,494
------------ ------------ ------------
Net investment income ................................ $ 2,041,896 $ 1,722,500 $ 1,662,930
============ ============ ============
Proceeds from disposition of investments ............. $ 5,923,165 $ 7,657,377 $ 14,893,442
Cost of investments sold (Note 1) .................... 6,685,279 12,782,870 5,662,000
------------ ------------ ------------
Realized gain (loss) on investments before
income taxes (Note 9) .............................. (762,114) (5,125,493) 9,231,442
Income tax expense (benefit) ......................... (224,180) (1,894,506) 3,211,550
------------ ------------ ------------
Net realized gain (loss) on investments .............. (537,934) (3,230,987) 6,019,892
------------ ------------ ------------
Increase (decrease) in unrealized appreciation of
investments before income taxes .................... 36,971,348 (10,310,835) (38,071,790)
Increase (decrease) in deferred income taxes on
appreciation of investments (Note 3) ............... 12,797,000 (3,841,000) (13,322,000)
------------ ------------ ------------
Net increase (decrease) in unrealized appreciation
of investments ..................................... 24,174,348 (6,469,835) (24,749,790)
------------ ------------ ------------
Net realized and unrealized gain (loss) on investments $ 23,636,414 $ (9,700,822) $(18,729,898)
============ ============ ============
Increase (decrease) in net assets from operations .... $ 25,678,310 $ (7,978,322) $(17,066,968)
============ ============ ============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Changes in Net Assets
Years Ended March 31
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
Operations
Net investment income ........................................... $ 2,041,896 $ 1,722,500 $ 1,662,930
Net realized gain (loss) on investments ......................... (537,934) (3,230,987) 6,019,892
Net increase (decrease) in unrealized appreciation of investments 24,174,348 (6,469,835) (24,749,790)
------------- ------------- -------------
Increase (decrease) in net assets from operations ............... 25,678,310 (7,978,322) (17,066,968)
Distributions from:
Undistributed net investment income ............................. (2,294,631) (2,289,031) (2,289,031)
Capital share transactions
Exercise of employee stock options .............................. 498,750 -- --
------------- ------------- -------------
Increase (decrease) in net assets .............................. 23,882,429 (10,267,353) (19,355,999)
Net assets, beginning of year ...................................... 226,608,613 236,875,966 256,231,965
------------- ------------- -------------
Net assets, end of year ............................................ $ 250,491,042 $ 226,608,613 $ 236,875,966
============= ============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended March 31
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities
Increase (decrease) in net assets from operations ................... $ 25,678,310 $ (7,978,322) $(17,066,968)
Adjustments to reconcile increase (decrease) in net assets from
operations to net cash provided by (used in) operating activities:
Depreciation and amortization .................................... 26,258 29,891 31,976
Net pension benefit .............................................. (504,536) (486,174) (435,984)
Net realized and unrealized (gain) loss on investments ........... (23,636,414) 9,700,822 18,729,898
(Increase) decrease in receivables ............................... (1,488,920) (25,783) 77,113
Increase in other assets ......................................... (17,922) (8,923) (44,754)
Increase (decrease) in accrued interest and other liabilities .... (44,479) (27,179) 41,504
Decrease in accrued pension cost ................................. (199,280) (209,947) --
Deferred income taxes ............................................ 176,600 170,400 152,600
------------ ------------ ------------
Net cash provided by (used in) operating activities ................. (10,383) 1,164,785 1,485,385
------------ ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments ............................ 5,923,165 7,657,377 14,893,442
Purchases of securities ............................................. (3,545,458) (15,922,079) (21,924,423)
Maturities of securities ............................................ 2,267,970 540,000 4,840,000
Income taxes paid on realized gain on investments ................... -- -- (4,069,101)
------------ ------------ ------------
Net cash provided by (used in) investing activities ................. 4,645,677 (7,724,702) (6,260,082)
------------ ------------ ------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank ........................ 1,500,000 (55,000,000) 60,000,000
Increase (decrease) in notes payable to portfolio companies ......... (3,500,000) 1,000,000 5,000,000
Distributions from undistributed net investment income .............. (2,294,631) (2,289,031) (2,289,031)
Proceeds from exercise of employee stock options .................... 498,750 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities ................. (3,795,881) (56,289,031) 62,710,969
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................ 839,413 (62,848,948) 57,936,272
Cash and cash equivalents at beginning of year ...................... 1,137,767 63,986,715 6,050,443
------------ ------------ ------------
Cash and cash equivalents at end of year ............................ $ 1,977,180 $ 1,137,767 $ 63,986,715
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:. Interest ............................ $ 922,011 $ 1,144,558 $ 436,023
Income taxes ........................ $ 287 $ 11,591 $ 4,092,891
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Capital Southwest Corporation ("CSC") is a business development company
subject to regulation under the Investment Company Act of 1940. Capital
Southwest Venture Corporation ("CSVC"), a wholly-owned subsidiary of CSC, is a
Federal licensee under the Small Business Investment Act of 1958. The following
is a summary of significant accounting policies followed in the preparation of
the consolidated financial statements of CSC and CSVC (together, the "Company"):
Principles of Consolidation. The consolidated financial statements have
been prepared on the value method of accounting in accordance with accounting
principles generally accepted in the United States of America for investment
companies. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.
Investments. Investments are stated at market or fair value determined by
the Board of Directors as described in the Notes to Portfolio of Investments and
Note 2 below. The average cost method is used in determining cost of investments
sold. Investments are recorded on a trade date basis. Dividends are recognized
on the ex-dividend date and interest income is accrued daily.
Segment Information. The Company operates and manages its business in a
singular segment. As an investment company, the Company invests in portfolio
companies in various industries and geographic areas as presented in the
portfolio of investments.
2. Valuation of Investments
The consolidated financial statements as of March 31, 2002 and 2001 include
securities valued at $317,137,082 (91% of the value of the consolidated
investment portfolio) and $285,059,091 (90% of the value of the consolidated
investment portfolio), respectively, whose values have been determined by the
Board of Directors in the absence of readily ascertainable market values.
Because of the inherent uncertainty of valuation, these values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
3. Income taxes
For the tax years ended December 31, 2001, 2000 and 1999, CSC and CSVC
qualified to be taxed as regulated investment companies ("RICs") under
applicable provisions of the Internal Revenue Code. As RICs, CSC and CSVC must
distribute at least 90% of their taxable net investment income (investment
company taxable income) and may either distribute or retain their taxable net
realized gain on investments (capital gains). Both CSC and CSVC intend to meet
the applicable qualifications to be taxed as RICs in future years; however,
either company's ability to meet certain portfolio diversification requirements
of RICs in future years may not be controllable by such company.
No material provision was made for Federal income taxes on the investment
company taxable income of CSC and CSVC for the 2002, 2001 and 2000 fiscal years.
Such income was distributed to shareholders in the form of cash dividends for
which CSC and CSVC receive a tax deduction. With respect to net investment
income, the income tax expense for each of the three years ended March 31, 2002
includes a deferred tax provision related to the net pension benefit.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $92,107,000 and
$79,310,000 have been provided on net unrealized appreciation of investments of
$265,287,211 and $228,315,863 at March 31, 2002 and 2001, respectively. Such
appreciation is not included in taxable income until realized. Deferred income
taxes on net unrealized appreciation of investments have been provided at the
then currently effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 2002 and 2001.
4. Notes Payable
The note payable to bank at March 31, 2002 and 2001 was from an unsecured
$15,000,000 revolving line of credit, of which $6,500,000 and $5,000,000 had
been drawn, respectively. The revolving line of credit bears interest at the
bank's base rate less .50% or LIBOR plus 1.25% and matures on July 31, 2002.
The notes payable to portfolio companies were demand promissory notes to
Skylawn Corporation and The Whitmore Manufacturing Company with interest payable
at prime minus 2.25%. Interest expense on these portfolio companies' notes were
$216,280 in 2002 and $421,870 in 2001.
5. Subordinated Debenture
The subordinated debenture of $5,000,000 outstanding at March 31, 2002 and
2001 is payable to others and guaranteed by the Small Business Administration
("SBA"), bears interest at 8.0% and matures June 1, 2002.
6. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase 28,000,
42,000 and 42,000 shares of common stock at $35.625 per share (the market price
at the time of grant) were outstanding and exercisable at March 31, 2002, 2001
and 2000, respectively, and expire in 2003. During the three years ended March
31, 14,000 options were exercised in 2002 and -0- were exercised in 2001 and
2000. The 1984 Incentive Stock Option Plan expired in 1994.
Under the 1999 Stock Option Plan, 140,000 shares of common stock were
reserved for issuance to employees and officers of the Company. Options to
purchase 32,000 shares at a price of $77.00 per share and 6,000 shares at a
price of $84.70 per share were granted during the year ended March 31, 2000. No
options were granted during the year ended March 31, 2001. Options to purchase
29,000 shares at a price of $65.00 per share and 15,000 shares at a price of
$65.70 per share were granted during the year ended March 31, 2002. During the
year ended March 31, 2002, options to purchase 27,500 shares were canceled,
leaving a total of 54,500 options outstanding at March 31, 2002 and a total of
85,500 options available for future grant. Options to purchase 38,000 shares
were outstanding at March 31, 2001 and 2000. All options were granted at or
above market price and expire ten years from the date of grant and are generally
exercisable on or after the first anniversary of the date of grant in five to
ten annual installments. At March 31, 2002, 2001 and 2000, options to purchase
8,100, 7,750 and 2,400 shares under the 1999 Stock Option Plan were exercisable.
At March 31, 2002, if all vested outstanding options for which the market
price exceeds the exercise price had been exercised, the Company's net asset
value would have been reduced by $0.22 per share, assuming the option proceeds
received increased the Company's net asset value and the optioned shares
increased the number of shares outstanding. As of March 31, 2001, exercise of
all such options would have reduced the Company's net asset value by $0.26 per
share.
7. Employee Stock Ownership Plan
The Company and one of its wholly-owned portfolio companies sponsor a
qualified employee stock ownership plan ("ESOP") in which certain employees
participate. Contributions to the plan, which are invested in Company stock, are
made at the discretion of the Board of Directors. A participant's interest in
contributions to the ESOP fully vests after five years of active service. During
the three years ended March 31, the Company made contributions to the ESOP,
which were charged against net investment income, of $28,322 in 2002, $42,997 in
2001 and $43,862 in 2000.
8. Retirement Plans
The Company sponsors a qualified defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned portfolio companies.
The following information about the plan represents amounts and information
related to the Company's participation in the plan and is presented as though
the Company sponsored a single-employer plan. Benefits are based on years of
service and an average of the highest five consecutive years of compensation
during the last ten years of employment. The funding policy of the plan is to
contribute annual amounts that are currently deductible for tax reporting
purposes. No contribution was made to the plan during the three years ended
March 31, 2002.
The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2002, 2001 and 2000:
Years Ended March 31
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Change in benefit obligation
Benefit obligation at beginning
of year ........................ $ 3,255,669 $ 3,260,366 $ 3,315,119
Service cost ......................... 58,428 50,961 43,818
Interest cost ........................ 207,940 205,976 193,397
Actuarial gain (loss) ................ 94,298 59,571 (201,158)
Benefits paid ........................ (331,872) (321,205) (90,810)
------------ ------------ ------------
Benefit obligation at end of year .... $ 3,284,463 $ 3,255,669 $ 3,260,366
============ ============ ============
Change in plan assets
Fair value of plan assets at beginning
of year ........................ $ 8,758,035 $ 9,837,547 $ 10,074,598
Actual return on plan assets ......... 984,157 (758,307) (146,241)
Benefits paid ........................ (331,872) (321,205) (90,810)
------------ ------------ ------------
Fair value of plan assets at end of
year ............................ $ 9,410,320 $ 8,758,035 $ 9,837,547
============ ============ ============
The following table sets forth the qualified plan's funded status and
amounts recognized in the Company's consolidated statements of financial
condition:
March 31
--------------------------
2002 2001
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................ $(2,906,821) $(2,938,747)
=========== ===========
Projected benefit obligation for service rendered to
date .......................................... $(3,284,463) $(3,255,669)
Plan assets at fair value* ......................... 9,410,320 8,758,035
----------- -----------
Excess of plan assets over the projected benefit
obligation .................................... 6,125,857 5,502,366
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions ........................ 32,117 109,379
Prior service costs not yet recognized ............. (140,319) (151,642)
Unrecognized net assets being amortized over
19 years ...................................... (221,477) (295,308)
----------- -----------
Prepaid pension cost included in other assets ...... $ 5,796,178 $ 5,164,795
=========== ===========
- --------------
*Primarily equities and bonds including approximately 30,000 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Service cost - benefits earned during
the year ....................... $ 58,428 $ 50,961 $ 43,818
Interest cost on projected benefit
obligation ..................... 207,940 205,976 193,397
Actual return on assets ............. (984,157) 758,307 146,241
Net amortization and deferral ....... 86,406 (1,653,169) (960,903)
----------- ----------- -----------
Net pension benefit from
qualified plan ................. $ (631,383) $ (637,925) $ (577,447)
=========== =========== ===========
The Company also sponsors an unfunded Retirement Restoration Plan, which is
a nonqualified plan that provides for the payment, upon retirement, of the
difference between the maximum annual payment permissible under the qualified
retirement plan pursuant to Federal limitations and the amount which would
otherwise have been payable under the qualified plan.
The following table sets forth the Retirement Restoration Plan's benefit
obligations at March 31, 2002, 2001 and 2000:
Years Ended March 31
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ................... $ 1,758,214 $ 2,026,495 $ 2,166,180
Service cost .................... 8,573 4,945 4,089
Interest cost ................... 113,779 113,497 117,541
Actuarial gain (loss) ........... 97,210 (176,776) (261,315)
Benefits paid ................... (199,280) (209,947) --
----------- ----------- -----------
Benefit obligation at end of year $ 1,778,496 $ 1,758,214 $ 2,026,495
=========== =========== ===========
The following table sets forth the status of the Retirement Restoration
Plan and the amounts recognized in the consolidated statements of financial
condition:
March 31
--------------------------
2002 2001
----------- -----------
Projected benefit obligation ..................... $(1,778,496) $(1,758,214)
Unrecognized net (gain) loss from past ex-
perience different from that assumed
and effects of changes in assumptions ....... (34,465) (131,675)
Unrecognized prior service costs ................. 65,380 69,875
----------- -----------
Accrued pension cost included in other liabilities $(1,747,581) $(1,820,014)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 2002, 2001 and 2000 of $126,847, $151,751 and $141,463, respectively,
are offset against the net pension benefit from the qualified plan.
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.5% and 5.0%, respectively, at March 31,
2002, March 31, 2001 and March 31, 2000. The expected long-term rate of return
used to project estimated earnings on plan assets for the qualified plan was
7.5% for the years ended March 31, 2002, March 31, 2001 and March 31, 2000. The
calculations also assume retirement at age 65, the normal retirement age.
9. Sources of Income
Income was derived from the following sources:
Investment Income Realized Gain
Years Ended ------------------------------------------ (Loss) on
March 31 Investments
- -------- Other Before Income
2002 Interest Dividends Income Taxes
- ---- ------------------------------------------------------
Companies more than
25% owned ......... $ 39,200 $ 2,996,591 $ 487,400 $ --
Companies 5% to 25%
owned ............. 99,041 -- -- --
Companies less than
5% owned .......... 133,549 297,042 43,000 (762,114)
Other sources,
including temporary
investments ....... 50,731 -- -- --
------------------------------------------------------
$ 322,521 $ 3,293,633 $ 530,400 $ (762,114)
======================================================
2001
- ----
Companies more than
25% owned ......... $ 72,800 $ 2,585,386 $ 494,900 $ --
Companies 5% to 25%
owned ............. -- -- -- (3,000,000)
Companies less than
5% owned .......... 217,080 370,447 35,500 (2,125,493)
Other sources,
including temporary
investments ....... 252,361 -- -- --
------------------------------------------------------
$ 542,241 $ 2,955,833 $ 530,400 $(5,125,493)
======================================================
2000
- ----
Companies more than
25% owned ......... $ 106,400 $ 1,440,755 $ 487,400 $ --
Companies 5% to 25%
owned ............. -- -- (1,500) 8,133,870
Companies less than
5% owned .......... 173,105 438,098 39,500 1,097,572
Other sources,
including temporary
investments ....... 604,647 -- -- --
------------------------------------------------------
$ 884,152 $ 1,878,853 $ 525,400 $ 9,231,442
======================================================
10. Summarized Financial Information of Wholly-Owned Portfolio Companies
The Company has three significant wholly-owned portfolio companies - The
RectorSeal Corporation, The Whitmore Manufacturing Company and Skylawn
Corporation - which are neither investment companies nor business development
companies. Accordingly, the accounts of such portfolio companies are not
included with those of the Company. Summarized combined financial information of
the three portfolio companies is as follows:
(all figures in thousands) March 31
------------------------------
2002 2001
-------- --------
Condensed Balance Sheet Data
Assets
Cash and temporary
investments ...................... $ 21,884 $ 14,815
Receivables ........................ 28,092 30,504
Inventories ........................ 38,721 37,536
Property, plant and equipment ...... 38,109 38,609
Other assets ....................... 21,072 19,783
-------- --------
Totals ........................... $147,878 $141,247
======== ========
Liabilities and Shareholder's Equity
Long-term debt ..................... $ 10,594 $ 8,334
Other liabilities .................. 16,926 19,414
Shareholder's equity ............... 120,358 113,499
-------- --------
Totals ........................... $147,878 $141,247
======== ========
Condensed Statements of Income ........ 2002 2001 2000
-------- -------- --------
Revenues ........................... $ 96,417 $ 93,575 $ 91,608
Costs and operating expenses ....... $ 83,475 $ 80,952 $ 79,237
Net income ......................... $ 9,137 $ 9,830 $ 7,917
11. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$3,239,346 in six portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $59,000 through February, 2003. For the
three years ended March 31, total rental expense charged to investment income
was $58,984 in 2002, $58,145 in 2001 and $57,479 in 2000.
Selected Per Share Data and Ratios
Years Ended March
-----------------------------------------------------------------
Per Share Data 2002 2001 2000 1999 1998
-----------------------------------------------------------------
Investment income ............................................ $ 1.08 $ 1.06 $ .86 $ 1.00 $ 1.28
Operating expenses ........................................... (.27) (.26) (.27) (.40) (.42)
Interest expense ............................................. (.24) (.30) (.12) (.11) (.11)
Income taxes ................................................. (.04) (.05) (.03) (.03) (.03)
-----------------------------------------------------------------
Net investment income ........................................ .53 .45 .44 .46 .72
Distributions from undistributed net investment income ....... (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments ...................... (.14) (.85) 1.58 .26 1.71
Net increase (decrease) in unrealized appreciation of
investments after deferred taxes .... 6.31 (1.69) (6.49) (10.81) 18.32
Exercise of employee stock options* .......................... (.08) -- -- (.30) (.13)
-----------------------------------------------------------------
Increase (decrease) in net asset value ....................... 6.02 (2.69) (5.07) (10.99) 20.02
Net asset value:
Beginning of year .......................................... 59.40 62.09 67.16 78.15 58.13
-----------------------------------------------------------------
End of year ................................................ $ 65.42 $ 59.40 $ 62.09 $ 67.16 $ 78.15
=================================================================
Increase (decrease) in deferred taxes on
unrealized appreciation ................................... $ 3.26 $ (1.01) $ (3.49) $ (6.04) $ 9.74
Deferred taxes on unrealized appreciation:
Beginning of year .......................................... 20.79 21.80 25.29 31.33 21.59
-----------------------------------------------------------------
Ending of year ............................................. $ 24.05 $ 20.79 $ 21.80 $ 25.29 $ 31.33
=================================================================
Ratios and Supplemental Data
Ratio of operating expenses to average net assets ............ .42% .42% .42% .55% .60%
Ratio of operating expenses to average net assets
plus average deferred taxes on unrealized appreciation .... .31% .31% .31% .39% .44%
Ratio of net investment income to average net assets ......... .85% .74% .67% .63% 1.05%
Portfolio turnover rate ...................................... 1.05% 2.56% 4.26% .19% 2.45%
Shares outstanding at end of period (000s omitted) ........... 3,829 3,815 3,815 3,815 3,788
- --------------
*Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
Independent Auditors' Report
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statements of financial
condition of Capital Southwest Corporation and subsidiary as of March 31, 2002
and 2001, including the portfolio of investments as of March 31, 2002, and the
related consolidated statements of operations, changes in net assets, and cash
flows for each of the years in the three-year period ended March 31, 2002 and
the selected per share data and ratios for each of the years in the five-year
period ended March 31, 2002. These financial statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and per share data and
ratios based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and per share data and ratios are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included the physical
examination of securities owned as of March 31, 2002 and 2001, held by the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements and selected per share
data and ratios referred to above present fairly, in all material respects, the
financial position of Capital Southwest Corporation and subsidiary as of March
31, 2002 and 2001, the results of their operations, the changes in their net
assets and their cash flows for each of the years in the three-year period ended
March 31, 2002, and the selected per share data and ratios for each of the years
in the five-year period ended March 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
April 19, 2002
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The composite measure of the Company's financial performance in the
Consolidated Statements of Operations is captioned "Increase (decrease) in net
assets from operations" and consists of three elements. The first is "Net
investment income", which is the difference between the Company's income from
interest, dividends and fees and its combined operating and interest expenses,
net of applicable income taxes. The second element is "Net realized gain (loss)
on investments", which is the difference between the proceeds received from
disposition of portfolio securities and their stated cost, net of applicable
income tax expense. The third element is the "Net increase (decrease) in
unrealized appreciation of investments", which is the net change in the market
or fair value of the Company's investment portfolio, compared with stated cost,
net of an increase or decrease in deferred income taxes which would become
payable if the unrealized appreciation were realized through the sale or other
disposition of the investment portfolio. It should be noted that the "Net
realized gain (loss) on investments" and "Net increase (decrease) in unrealized
appreciation of investments" are directly related in that when an appreciated
portfolio security is sold to realize a gain, a corresponding decrease in net
unrealized appreciation occurs by transferring the gain associated with the
transaction from being "unrealized" to being "realized." Conversely, when a loss
is realized on a depreciated portfolio security, an increase in net unrealized
appreciation occurs.
Net Investment Income
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential return from equity participation and provides minimal
current yield in the form of interest or dividends. The Company also earns
interest income from the short-term investment of cash funds, and the annual
amount of such income varies based upon the average level of funds invested
during the year and fluctuations in short-term interest rates. During the three
years ended March 31, the Company had interest income from temporary cash
investments of $48,877 in 2002, $249,000 in 2001 and $599,000 in 2000. The
Company also receives management fees from its wholly-owned portfolio companies
which aggregated $458,400 in each of the years ended March 31, 2002, March 31,
2001 and March 31, 2000. During the three years ended March 31, 2002, the
Company recorded dividend income from the following sources:
Years Ended March 31
------------------------------------
2002 2001 2000
---------- ---------- ----------
AT&T Corp. ................................ $ 19,987 $ 68,621 $ 146,570
Alamo Group Inc. .......................... 677,112 677,112 790,756
Dennis Tool Company ....................... 49,999 49,999 49,999
Kimberly-Clark Corporation ................ 87,985 84,126 81,039
The RectorSeal Corporation ................ 960,000 960,000 240,000
Skylawn Corporation ....................... 1,069,480 658,275 300,000
TCI Holdings, Inc. ........................ 81,270 81,270 81,270
Texas Shredder, Inc. ...................... 44,506 40,460 40,460
The Whitmore Manufacturing Company ........ 240,000 240,000 60,000
Other ..................................... 63,294 95,970 88,759
---------- ---------- ----------
$3,293,633 $2,955,833 $1,878,853
========== ========== ==========
Total operating expenses, excluding interest expense, increased by $43,684
or 4.5% and decreased by $47,073 or 4.6% during the years ended March 31, 2002
and 2001, respectively. Due to the nature of its business, the majority of the
Company's operating expenses are related to employee and director compensation,
office expenses, legal and accounting fees and the net pension benefit. Interest
expense decreased by $214,965 during the year ended March 31, 2002 due to a
decrease in interest rates. For the year ended March 31, 2001, interest expense
increased by $688,075 due to increased borrowings.
Net Realized Gain (Loss) on Investments
Net realized loss on investments was $537,934 (after income tax benefit of
$224,180) during the year ended March 31, 2002, compared with a loss of
$3,230,987 (after income tax benefit of $1,894,506) during 2001 and a gain of
$6,019,892 (after income tax expense of $3,211,550) during 2000. Management does
not attempt to maintain a comparable level of realized gains from year to year,
but instead attempts to maximize total investment portfolio appreciation. This
strategy often dictates the long-term holding of portfolio securities in pursuit
of increased values and increased unrealized appreciation, but may at opportune
times dictate realizing gains or losses through the disposition of certain
portfolio investments.
Net Increase (Decrease) in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded an increase
(decrease) in unrealized appreciation of investments before income taxes of
$36,971,348, $(10,310,835) and $(38,071,790) in 2002, 2001 and 2000,
respectively. As explained in the first paragraph of this discussion and
analysis, the realization of gains or losses results in a corresponding decrease
or increase in unrealized appreciation of investments. Set forth in the
following table are the significant increases and decreases in unrealized
appreciation (before the related change in deferred income taxes and excluding
the effect of gains or losses realized during the year) by portfolio company for
securities held at the end of each year.
Years Ended March 31
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
AT&T Corp. .................... $ (746,162) $ (4,681,896) $ 430,271
Alamo Group Inc. .............. 2,821,000 2,821,000 7,276,953
All Components, Inc. .......... (50,000) 3,450,000 1,975,000
American Homestar Corporation . -- -- (4,224,707)
Amfibe, Inc. .................. -- -- 3,900,000
Balco, Inc. ................... 1,482,240 -- (2,529,600)
CDC Technologies, Inc./Drew
Scientific Group PLC ..... (38,098) (2,592,541) (3,099,156)
Concert Industries Ltd. ....... (3,740,000) 294,351 --
Dyntec, Inc. .................. -- -- (4,499,998)
Encore Wire Corporation ....... 10,898,000 -- (2,724,000)
Liberty Media Group ........... (921,280) (10,605,732) 11,183,260
Mail-Well, Inc. ............... (524,000) (6,290,000) (5,241,000)
Media Recovery, Inc. .......... (8,000,000) 10,000,000 2,585,000
Organized Living, Inc. ........ (3,000,000) -- --
Palm Harbor Homes, Inc. ....... 31,420,000 (7,855,000) (39,276,000)
PETsMART, Inc. ................ 5,298,343 654,220 (3,271,100)
The RectorSeal Corporation .... 2,500,000 5,500,000 3,500,000
Skylawn Corporation ........... -- 3,000,000 --
Sprint Corporation-FON Group .. (482,400) (2,952,720) 1,003,500
A description of the investments listed above and other material components
of the investment portfolio is included elsewhere in this report under the
caption "Portfolio of Investments - March 31, 2002."
Deferred Taxes on Unrealized Appreciation of Investments
The Company provides for deferred Federal income taxes on net unrealized
appreciation of investments. Such taxes would become payable at such time as
unrealized appreciation is realized through the sale or other disposition of
those components of the investment portfolio which would result in taxable
transactions. At March 31, 2002 consolidated deferred Federal income taxes of
$92,107,000 were provided on net unrealized appreciation of investments of
$265,287,211 compared with deferred taxes of $79,310,000 on net unrealized
appreciation of $228,315,863 at March 31, 2001. Deferred income taxes at March
31, 2002 and 2001 were provided at the then currently effective maximum Federal
corporate tax rate on capital gains of 35%.
Portfolio Investments
During the year ended March 31, 2002, the Company invested $3,545,458 in
various portfolio securities listed elsewhere in this report under the caption
"Portfolio Changes During the Year," which also lists dispositions of portfolio
securities. During the 2001 and 2000 fiscal years, the Company invested a total
of $15,922,079 and $21,924,423, respectively.
Financial Liquidity and Capital Resources
At March 31, 2002, the Company had cash and cash equivalents of
approximately $2.0 million. Pursuant to Small Business Administration ("SBA")
regulations, cash and cash equivalents of $0.7 million held by CSVC may not be
transferred or advanced to CSC without the consent of the SBA. Under current SBA
regulations and subject to SBA's approval of its credit application, CSVC would
be entitled to borrow up to $58.8 million in addition to the $5 million
presently outstanding. The Company also has an unsecured $15,000,000 revolving
line of credit from a commercial bank, of which $8,500,000 was available at
March 31, 2002. With the exception of a capital gain distribution made in the
form of a distribution of the stock of a portfolio company in the fiscal year
ended March 31, 1996, the Company has elected to retain all gains realized
during the past 34 years. Retention of future gains is viewed as an important
source of funds to sustain the Company's investment activity. Approximately
$30.3 million of the Company's investment portfolio is represented by
unrestricted publicly-traded securities, which have an ascertainable market
value and represent a primary source of liquidity.
Funds to be used by the Company for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Skylawn
Corporation, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies of the Company, to the extent of their
available cash reserves and borrowing capacities.
Management believes that the Company's cash and cash equivalents and cash
available from other sources described above are adequate to meet its expected
requirements. Consistent with the long-term strategy of the Company, the
disposition of investments from time to time may also be an important source of
funds for future investment activities.
Critical Accounting Policies
Valuation of Investments
In accordance with the Investment Company Act of 1940, investments in
unrestricted securities (freely marketable securities having readily available
market quotations) are valued at market and investments in restricted securities
(securities subject to one or more resale restrictions) are valued at fair value
determined in good faith by the Company's Board of Directors. Under the
valuation policy of the Company, unrestricted securities are valued at the
closing sale price for listed securities and at the lower of the closing bid
price or the last sale price for Nasdaq securities on the valuation date.
Restricted securities, including securities of publicly-owned companies which
are subject to restrictions on resale, are valued at fair value, which is
considered to be the amount the Company may reasonably expect to receive if such
securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
Deferred Income Taxes
In future years, the Company may not qualify or elect to be taxed as a
regulated investment company ("RIC") under applicable provisions of the Internal
Revenue Code. Therefore, deferred Federal income taxes have been provided on net
unrealized appreciation of investments at the then currently effective corporate
tax rate on capital gains.
Impact of Inflation
The Company does not believe that its business is materially affected by
inflation, other than the impact which inflation may have on the securities
markets, the valuations of business enterprises and the relationship of such
valuations to underlying earnings, all of which will influence the value of the
Company's investments.
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
business development company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. Accordingly the Company states that:
The Company's objective is to achieve capital appreciation through
investments in businesses believed to have favorable growth potential. Such
businesses are often undercapitalized small companies which lack management
depth and have not yet attained profitability. The Company's venture investments
often include securities which do not yield interest or dividends and are
subject to legal or contractual restrictions on resale, which restrictions
adversely affect the liquidity and marketability of such securities.
Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company, there is a
significantly greater risk of loss than is the case with traditional investment
securities. The high-risk, long-term nature of the Company's venture investment
activities may prevent shareholders of the Company from achieving price
appreciation and dividend distributions.
Selected Consolidated Financial Data
(all figures in thousands except per share data)
1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ........................ $ 34,929 $ 33,953 $ 41,993 $ 49,730 $ 58,544 $ 59,908
Unrealized appreciation .................... 100,277 113,153 132,212 153,031 198,386 233,383
--------- --------- --------- --------- --------- ---------
Investments at market or
fair value .............................. 135,206 147,106 174,205 202,761 256,930 293,291
Total assets ............................... 208,871 176,422 270,874 213,811 326,972 310,760
Subordinated debentures .................... 11,000 15,000 15,000 11,000 11,000 5,000
Deferred taxes on
unrealized appreciation ................. 33,761 38,112 45,932 53,247 69,121 81,313
Net assets ................................. 107,522 121,455 133,053 147,370 189,048 218,972
Shares outstanding ......................... 3,644 3,681 3,715 3,735 3,767 3,767
- -----------------------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...................... $ 2,363 $ 2,189 $ 2,870 $ 2,447 $ 2,855 $ 2,574
Net realized gain (loss) on
investments ............................. 14,313 5,099 (475) 142 11,174 6,806
Net increase (decrease) in
unrealized appreciation
before distributions .................... (4,541) 8,524 11,160 13,584 38,746 22,804
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions .................... 12,135 15,812 13,555 16,173 52,775 32,184
Cash dividends paid ........................ (2,181) (2,202) (2,228) (2,241) (2,270) (2,260)
Securities distributed ..................... -- -- -- -- (9,402) --
Employee stock options
exercised ............................... 429 322 272 385 575 --
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets .......... 10,383 13,932 11,599 14,317 41,678 29,924
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ................. $ 9.27 $ 10.35 $ 12.36 $ 14.26 $ 18.35 $ 21.59
Net assets ................................. 29.51 32.99 35.81 39.46 50.18 58.13
Closing market price ....................... 24.25 36.50 38.125 38.00 60.00 67.875
Cash dividends paid ........................ .60 .60 .60 .60 .60 .60
Securities distributed ..................... -- -- -- -- 2.50 --
Selected Consolidated Financial Data Continued
(all figures in thousands except per share data)
1998 1999 2000 2001 2002
- ------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ........................ $ 61,154 $ 73,580 $ 85,002 $ 87,602 $ 82,194
Unrealized appreciation .................... 340,132 276,698 238,627 228,316 265,287
--------- --------- --------- --------- ---------
Investments at market or
fair value .............................. 401,286 350,278 323,629 315,918 347,481
Total assets ............................... 522,324 360,786 392,586 322,668 357,183
Subordinated debentures .................... 5,000 5,000 5,000 5,000 5,000
Deferred taxes on
unrealized appreciation ................. 118,674 96,473 83,151 79,310 92,107
Net assets ................................. 296,023 256,232 236,876 226,609 250,491
Shares outstanding ......................... 3,788 3,815 3,815 3,815 3,829
- ------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...................... $ 2,726 $ 1,762 $ 1,663 $ 1,723 $ 2,042
Net realized gain (loss) on
investments ............................. 6,485 995 6,020 (3,231) (538)
Net increase (decrease) in
unrealized appreciation
before distributions .................... 69,388 (41,233) (24,750) (6,470) 24,174
--------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions .................... 78,599 (38,476) (17,067) (7,978) 25,678
Cash dividends paid ........................ (2,268) (2,280) (2,289) (2,289) (2,295)
Securities distributed ..................... -- -- -- -- --
Employee stock options
exercised ............................... 720 965 -- -- 499
--------- --------- --------- --------- ---------
Increase (decrease) in net assets .......... 77,051 (39,791) (19,356) (10,267) 23,882
- ------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ................. $ 31.33 $ 25.29 $ 21.80 $ 20.79 $ 24.05
Net assets ................................. 78.15 67.16 62.09 59.40 65.42
Closing market price ....................... 94.00 73.00 54.75 65.00 68.75
Cash dividends paid ........................ .60 .60 .60 .60 .60
Securities distributed ..................... -- -- -- -- --
Shareholder Information
Stock Transfer Agent
American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038
(telephone 800-937-5449) serves as transfer agent for the Company's common
stock. Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.
Shareholders
The Company had approximately 900 record holders of its common stock at
March 31, 2002. This total does not include an estimated 1,800 shareholders with
shares held under beneficial ownership in nominee name or within clearinghouse
positions of brokerage firms or banks.
Market Prices
The Company's common stock trades on The Nasdaq Stock Market under the
symbol CSWC. The following high and low selling prices for the shares during
each quarter of the last two fiscal years were taken from quotations provided to
the Company by Nasdaq:
Quarter Ended High Low
- --------------------------------------------------------------------------------
June 30, 2000.................................... $61 1/4 $ 53
September 30, 2000............................... 62 1/2 57
December 31, 2000................................ 59 3/4 50 5/8
March 31, 2001................................... 68% 52
Quarter Ended High Low
- --------------------------------------------------------------------------------
June 30, 2001.................................... $69.00 $ 59.00
September 30, 2001............................... 68.20 60.25
December 31, 2001............................... 67.19 57.35
March 31, 2002................................... 69.01 63.28
Dividends
The payment dates and amounts of cash dividends per share since April 1, 2000
are as follows:
Payment Date Cash Dividend
- --------------------------------------------------------------------------------
May 31, 2000.............................................. $0.20
November 30, 2000......................................... 0.40
May 31, 2001.............................................. 0.20
November 30, 2001......................................... 0.40
May 31, 2002.............................................. 0.20
The amounts and timing of cash dividend payments have generally been
dictated by requirements of the Internal Revenue Code regarding the distribution
of taxable net investment income (ordinary income) of regulated investment
companies. Instead of distributing realized long-term capital gains to
shareholders, the Company has ordinarily elected to retain such gains to fund
future investments.
Automatic Dividend Reinvestment and Optional Cash Contribution Plan
As a service to its shareholders, the Company offers an Automatic Dividend
Reinvestment and Optional Cash Contribution Plan for shareholders of record who
own a minimum of 25 shares. The Company pays all costs of administration of the
Plan except brokerage transaction fees. Upon request, shareholders may obtain
information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas,
Texas 75230. Telephone (972) 233-8242. Questions and answers about the Plan are
on the next page.
Annual Meeting
The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday, July 15, 2002, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
Capital Southwest Corporation:
We consent to the incorporation by reference in the registration statement (No.
33-43881) on Form S-8 of Capital Southwest Corporation of our report dated April
19, 2002, with respect to the consolidated statements of financial condition of
Capital Southwest Corporation and subsidiary as of March 31, 2002 and 2001, the
portfolio of investments as of March 31, 2002, and the related consolidated
statements of operations, changes in net assets, and cash flows for each of the
years in the three-year period ended March 31, 2002, and the selected per share
data and ratios for each of the years in the five-year period ended March 31,
2002, which report appears in the annual report to shareholders for the year
ended March 31, 2002, and is incorporated by reference in the March 31, 2002
annual report on Form 10-K of Capital Southwest Corporation.
KPMG LLP
Dallas, Texas
June 5, 2002
