SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
Capital Southwest Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applies:
--------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
--------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------
4) Date Filed:
To the Shareholders of Capital Southwest Corporation:
Our annual meeting of shareholders will be held on July 19, 2004, at
10:00 a.m. in the North Dallas Bank Tower Meeting Room (First Floor), 12900
Preston Road, Dallas, Texas.
A notice of the annual meeting, a proxy and a proxy statement
containing information about matters to be acted upon are enclosed. Holders of
our common stock are entitled to vote on the basis of one vote for each share
held. If you attend the annual meeting, you retain the right to vote in person
even though you previously voted by the enclosed proxy.
It is important that your shares be represented at the meeting whether
or not you are personally in attendance. Please review the proxy statement and
sign, date and return the enclosed proxy at your earliest convenience. I look
forward to meeting with you and, together with our directors and officers,
discussing our business. I hope you will be present.
Very truly yours,
/s/ William R. Thomas
William R. Thomas
President and Chairman of the Board
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD July 19, 2004
To the Shareholders of Capital Southwest Corporation:
NOTICE IS HEREBY GIVEN that our annual meeting of shareholders will be
held on Monday, July 19, 2004, at 10:00 a.m., Dallas time, in the Meeting Room
(First Floor) of the North Dallas Bank Tower, 12900 Preston Road, Dallas, Texas,
for the following purposes:
1. To elect five directors to serve until the next annual meeting of
shareholders or until their respective successors shall be elected and
qualified.
2. To ratify the appointment by our audit committee of Ernst & Young LLP as
our independent auditors.
3. To transact such other business as may properly come before the meeting or
any adjournment thereof.
Only record holders of our common stock at the close of business on June 1, 2004
will be entitled to notice of, and to vote at, the meeting and any adjournment
thereof.
If you do not expect to attend in person, please sign, date and return
the proxy in the enclosed envelope. No postage is required for mailing in the
United States.
By Order of the Board of Directors
SUSAN K. HODGSON
Secretary
Dallas, Texas
June 4, 2004
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD July 19, 2004
This proxy statement is furnished in connection with the solicitation
by the Board of Directors of Capital Southwest Corporation, a Texas corporation,
with principal executive offices at 12900 Preston Road, Suite 700, Dallas, Texas
75230, of proxies to be voted at the annual meeting of shareholders to be held
on July 19, 2004 or any adjournment thereof. The date on which this proxy
statement and the enclosed form of proxy are first being sent or given to our
shareholders is on or about June 4, 2004.
PURPOSES OF THE MEETING
The annual meeting of shareholders is to be held for the purposes of
(1) electing five persons to serve as our directors until the next annual
meeting of shareholders, or until their respective successors shall be elected
and qualified; (2) ratifying the appointment by the audit committee of Ernst &
Young LLP as our independent auditors; and (3) transacting such other business
as may properly come before the meeting or any adjournment thereof.
VOTING AT THE MEETING
The record date for holders of our common stock entitled to notice of,
and to vote at, the annual meeting of shareholders is the close of business on
June 1, 2004, at which time we had outstanding and entitled to vote at the
meeting 3,857,051 shares of common stock.
The presence, in person or by proxy, of the holders of a majority of
the shares of common stock outstanding and entitled to vote at the annual
meeting is necessary to constitute a quorum. Each shareholder is entitled to one
vote, in person or by proxy, for each share of common stock held in its name at
the close of business on the record date. Shareholders who are present, in
person or by proxy, but abstain from voting on any matter will be counted as
present at the meeting for purposes of constituting a quorum, but not for
purposes of determining the final vote on any matter. Similarly, nominees (such
as broker-dealers) who are present, in person or by proxy, but abstain or
refrain from voting on any item, will be counted as present at the meeting, but
not voting on any such item.
To be elected a director, each nominee must receive the favorable vote
of the holders of a majority of the shares of common stock entitled to vote and
represented at the annual meeting. In order to ratify the appointment of Ernst &
Young LLP as our independent auditors for the year ending March 31, 2005, the
ratification proposal must receive the favorable vote of a majority of the
shares of common stock entitled to vote and represented at the annual meeting.
1
Each proxy delivered to us, unless the shareholder otherwise specifies
therein, will be voted FOR the election as directors of the persons nominated as
directors and FOR the ratification of the appointment by the Audit Committee of
our Board of Directors of Ernst & Young LLP as independent auditors. In each
case where the shareholder has appropriately specified how the proxy is to be
voted, it will be voted in accordance with the specification. As to any other
matter or business which may be properly brought before the meeting, a vote may
be cast pursuant to the accompanying proxy in accordance with the judgment of
the person or persons voting the same, but neither management nor our board of
directors knows of any such other matter or business.
You may vote shares held directly in your name in person at the
meeting. If you want to vote shares that you hold in street name at the meeting,
you must request a legal proxy from your broker, bank or other nominee that
holds your shares.
You may revoke your proxy and change your vote at any time before the
final vote at the meeting. You may do this by signing a new proxy card with a
later date, voting on a later date by proxy, or by attending the meeting and
voting in person. However, your attendance at the meeting will not automatically
revoke your proxy. You must specifically revoke your proxy.
PROPOSAL 1: ELECTION OF DIRECTORS
Five directors are proposed to be elected at the meeting to serve until
the next annual meeting of shareholders or until their respective successors
shall be elected and qualified. Each of the named persons currently serves as
our director. The address of each of the following director nominees is c/o
Capital Southwest Corporation, 12900 Preston Road, Suite 700, Dallas, Texas
75230.
Nominees for Director
Other
Term of Office Principal Directorships
Position(s) and Length of Occupation(s) Held by
Name and Age Held Time Served During Past 5 Years Nominee
- ------------ ----------- --------------- -------------------- -------------
Not Interested Persons
- ----------------------
Graeme W. Henderson Director One year; Self-employed as a
Age 70 director since private investor
1976 and consultant
2
Other
Term of Office Principal Directorships
Position(s) and Length of Occupation(s) Held by
Name and Age Held Time Served During Past 5 Years Nominee
- ------------ ----------- --------------- -------------------- -------------
Samuel B. Ligon Director One year; Chairman of
Age 65 director since Jokari/US, Inc.;
2003 Chairman and CEO
of Smith
Abrasives, Inc.
John H. Wilson Director One year; President of U.S. Encore Wire
Age 61 director since Equity Corporation and
1988 Corporation, a Palm Harbor
venture capital Homes, Inc.
investment firm
Interested Persons
- ------------------
Gary L. Martin Vice One year; Vice President of The
Age 57 President President since Whitmore
and Director 1984 and Manufacturing
director since Company and
1988 Vice President of
the Company
William R. Thomas President, One year; President and Alamo Group
Age 75 Director President since Chairman of the Inc., Encore
and 1980, Chairman Board Wire
Chairman of since 1982 and Corporation, and
the Board director since Palm Harbor
1972 Homes, Inc.
Our Nominating Committee has determined that Messrs. Thomas and Martin,
who are our employees, are "interested persons" as defined in the Investment
Company Act of 1940 and are not "independent" as defined by the Nasdaq Stock
Market Listing Standards. The Committee has determined that Messrs. Henderson,
Ligon and Wilson are "independent" as defined by the Nasdaq Stock Market Listing
Standards and they are not "interested persons" as defined by the Investment
Company Act of 1940.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During our fiscal year ended March 31, 2004, our Board of Directors
held six meetings. The Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee to assist the Board in
carrying out its duties. During the year, our Audit Committee held six meetings
and our Compensation Committee held two meetings. Our Nominating Committee,
which was formed April 19, 2004, held one meeting. No director attended less
than 75% of the total number of board and committee meetings on which the
directors served. Three of our four directors who were serving at the time
attended our 2003 annual meeting of shareholders.
3
Audit Committee
The Audit Committee members are Messrs. Henderson (Chairman), Ligon and
Wilson. The Audit Committee assists the Board in fulfilling its responsibilities
for general oversight of: (1) our accounting and financial reporting processes
and the integrity of our financial statements; (2) our systems of internal
accounting and financial controls; (3) the independence, qualification and
performance of our independent auditors; and (4) our compliance with ethics
policies and legal and regulatory requirements relating to financial statements
and reporting. The committee has the responsibility for selecting our
independent auditors and pre-approving audit and non-audit services. Among other
things, the Audit Committee prepares a report for inclusion in the annual proxy
statement; reviews the Audit Committee charter and the committee's performance;
approves the scope of the annual audit; reviews our corporate policies with
respect to financial reporting and valuation of our investments. The committee
also oversees investigations into complaints concerning financial matters. The
Audit Committee has the authority to obtain advice and assistance from outside
legal, accounting or other advisors as the Audit Committee deems necessary to
carry out its duties.
Compensation Committee
The Compensation Committee members are Messrs. Wilson (Chairman),
Henderson and Ligon. The Compensation Committee (1) discharges the Board's
responsibilities to establish the compensation of our executives; (2) produces
an annual report on executive compensation for inclusion in our annual proxy
statement; and (3) provides general oversight for our compensation structure,
including our equity compensation plans and benefits programs. Other specific
duties and responsibilities of the committee include reviewing and approving
objectives relative to executive officers' compensation; approving and amending
our incentive compensation and stock option programs (subject to shareholder
approval if required); and annually evaluating its performance and its charter.
Nominating Committee
The Nominating Committee members are Messrs. Wilson (Chairman),
Henderson and Ligon. The Nominating Committee has the responsibility to (1)
determine and recommend to the Board the slate of director nominees to be
proposed to our shareholders; (2) identify and recommend to the Board
individuals qualified to become Board members; and (3) insure that the Board and
its committees are appropriately constituted. The Nominating Committee will
consider director nominations made by shareholders, who should send nominations
to our corporate secretary, Susan K. Hodgson. Shareholder nominations proposed
for consideration by the Nominating Committee must include the nominee's name
and qualifications for Board membership. See "Shareholder Proposals" on page 17.
4
The Nominating Committee seeks to identify, and the Board of Directors
selects, director candidates who (1) have significant experience that is
relevant and beneficial to the Board of Directors and the Company, (2) are
willing and able to make sufficient time commitments to the Company's affairs in
order to perform their duties as directors, including regular attendance of
Board and committee meetings, (3) have a record of character and integrity, and
(4) represent the interests of the Company's shareholders. The evaluation
process for nominees is the same regardless of the source of the recommendation.
Committee Member Independence
All of the members of the Audit Committee, the Compensation Committee
and the Nominating Committee are "independent" as defined by the Nasdaq Stock
Market Listing Standards and the Sarbanes-Oxley Act of 2002. Nominating
Committee members are not "interested persons" as defined by the Investment
Company Act of 1940.
Communication with Directors
Shareholders who wish to send communications to independent members of
the Board should address such communications to John H. Wilson, independent
director, at 1500 Three Lincoln Centre, 5430 LBJ Freeway, Dallas, TX 75240.
Compensation of Directors
In addition to reimbursement of travel expenses for attendance at Board
meetings, a director who is not our employee receives an annual fee of $16,000
for service as a director and $6,000 for service as chairman of the Audit
Committee and the Compensation Committee. In addition, non-employee directors
receive $1,000 for each directors' meeting attended (excluding telephone
meetings) and $500 for each committee meeting attended, subject to a maximum of
$6,000 per year in aggregate meeting fees.
Compensation Committee Interlocks and Insider Participation
None of our executive officers served as a member of the compensation
committee of the board of directors or as a director of any other entity, one of
whose executive officers served as a member of our Compensation Committee.
Vote Required
Nominees who receive the affirmative vote of the holders of a majority
of the shares of common stock entitled to vote and represented at the annual
meeting shall be re-elected as our directors. Abstentions will have no effect on
the election of directors. If you hold your shares through a broker, bank or
other nominee and you do not instruct them how to vote on this proposal, your
broker may have authority to vote your shares. You may give each nominee one
vote for each share you hold. The proxy holders intend to vote the shares
represented by proxies to elect the five nominees to the board set forth in
Proposal 1.
5
Board Recommendation
The Board recommends that you vote "For" each of the nominees to the
Board set forth in this Proposal 1.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of May 1, 2004 by (1) each person,
so far as is known to our management, who is the beneficial owner (as that term
is defined in the rules and regulations of the SEC) of more than 5% of our
outstanding common stock, (2) each executive officer named in the Summary
Compensation Table, (3) each nominee for director, and (4) all directors and
executive officers as a group. Unless otherwise indicated below, each of the
persons named in the table has sole voting and investment power with respect to
the shares indicated to be beneficially owned.
Name and Address of Shares Owned Percent of
Beneficial Owner Beneficially Class
---------------- ------------ ----
William R. Thomas.......................... 965,799 (1)(2)(3) 25.0%
12900 Preston Rd., Suite 700
Dallas, Texas 75230
Artisan Partners Limited Partnership ...... 378,969 (4) 9.8
1000 North Water Street #1770
Milwaukee, Wisconsin 53202
Third Avenue Management LLC................ 334,773 (5) 8.7
622 Third Avenue, 32nd Floor
New York, New York 10017
First Manhattan Company ................... 227,487 (6) 5.9
437 Madison Avenue
New York, New York 10022
Gary L. Martin ............................ 220,449 (2) 5.7
12900 Preston Rd., Suite 700
Dallas, Texas 75230
Patrick F. Hamner ......................... 132,208 (2)(3) 3.4
Graeme W. Henderson ....................... 4,700 (7) 0.1
William M. Ashbaugh ....................... 3,000 (3) -
Samuel B. Ligon ........................... 1,000 -
John H. Wilson ............................ 1,000 -
All directors and executive officers as a
group (8 persons).......................... 1,123,090 (8) 29.0
6
- ----------
(1) Mr. Thomas has sole voting and investment power with respect to 615,000
shares, which include 75,948 shares owned by his two children and 206,525
shares owned by Thomas Heritage Partners, Ltd., in which Mr. Thomas has a
50.7% limited partnership interest. Mr. Thomas holds a majority interest in
and is President and sole manager of Thomas Heritage Company, LLC, the sole
general partner of Thomas Heritage Partners, Ltd.
(2) Mr. Thomas is a trustee of certain trusts pursuant to ESOPs for our
employees and employees of our wholly-owned portfolio companies owning
256,655 shares, with the power as trustee to vote such shares. Mr. Thomas
also participates in the power to direct the trustees in the voting of
88,144 shares owned by a trust pursuant to a pension plan for our employees
and certain of our wholly-owned portfolio companies. Accordingly, Mr.
Thomas has shared voting and investment power with respect to the 344,799
shares, representing 8.9% of our outstanding common stock, owned by the
aforementioned trusts. Under the rules and regulations of the SEC, Mr.
Thomas is deemed to be the beneficial owner of such 344,799 shares, which
are included in the shares beneficially owned by Mr. Thomas.
Mr. Martin serves as trustee, with Mr. Thomas, of one of the aforementioned
trusts owning 32,036 shares and participates in the power to direct the
trustees in the voting of 88,144 shares owned by the other aforementioned
trust. Accordingly, Mr. Martin has shared voting and investment power with
respect to the 120,180 shares. Under the rules and regulations of the SEC,
Mr. Martin is deemed to be the beneficial owner of such 120,180 shares,
which are included in the shares beneficially owned by Mr. Martin. Of the
shares owned by a trust pursuant to the aforementioned ESOPs, 4,121 were
allocated to Mr. Martin, all of which were vested.
Mr. Hamner, with Messrs. Thomas and Martin, participates in the power to
direct the trustees in the voting of 88,144 shares owned by one of the
aforementioned trusts. Under the rules and regulations of the SEC, Mr.
Hamner is deemed to be the beneficial owner of such 88,144 shares, which
are included in the shares beneficially owned by Mr. Hamner.
(3) Includes 3,000, 9,000 and 6,000 shares subject to immediately exercisable
stock options held by Messrs. Ashbaugh, Hamner and Thomas, respectively.
(4) As reported to us by Artisan Partners Limited Partnership, Artisan Partners
or Artisan Investment Corporation or Andrew A. Ziegler, individually, or
Carlene Murphy Ziegler, individually, had sole voting and dispositive power
with respect to none of such shares and shared voting and dispositive power
with respect to 378,969 shares by reasons of advisory and other
relationships with the persons who own the shares. Artisan Partners is an
investment adviser; Artisan Investment is the General Partner of Artisan
Partners; and Mr. Ziegler and Ms. Ziegler are the principal stockholders of
Artisan Investment.
(5) As reported to us by Third Avenue Management LLC, Third Avenue or Martin J.
Whitman, individually, had shared voting and dispositive power with respect
to none of such shares, sole voting power with respect to 327,453 shares
and sole dispositive power with respect to 334,773 shares by reasons of
advisory and other relationships with the persons who own the shares. Third
Avenue and Martin J. Whitman beneficially own 310,529 and 24,244,
respectively, of such shares.
7
(6) As reported to us by First Manhattan Co., First Manhattan had sole voting
and dispositive power with respect to 100 shares, shared voting power with
respect to 223,212 shares and shared dispositive power with respect to
227,387 shares by reasons of advisory and other relationships with the
persons who own the shares.
(7) Includes 1,500 shares held by a retirement trust for the benefit of Mr.
Henderson.
(8) Includes (a) the shares owned by the partnership and trusts referred to in
notes (1) and (2), respectively, to the above table, (b) 21,200 shares
subject to immediately exercisable stock options (including those referred
to in note (3) to the above table), (c) 1,500 shares held in a retirement
trust for the benefit of Mr. Henderson and (d) 75,948 shares owned by
immediate family members of Mr. Thomas.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors and persons who beneficially own more than
10% of our common stock to file reports of securities ownership and changes in
such ownership with the SEC. Officers, directors and greater than 10% beneficial
owners also are required by rules promulgated by the SEC to furnish us with
copies of all Section 16(a) forms they file with the SEC. Based solely upon a
review of the copies of such forms furnished to us, we believe that each of our
officers, directors and greater than 10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them during the fiscal year
ended March 31, 2004.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth summary information regarding the
compensation (excluding Mr. Thomas' retirement benefit described on page 12)
earned by or paid to William R. Thomas, President and Chairman of the Board, and
the next three most highly compensated executive officers who received a total
annual salary and bonus in excess of $100,000 for the fiscal year ended March
31, 2004.
Long-term
Compensation
Annual Compensation Awards
----------------------------------- ---------------------
Name and Fiscal Other Annual Securities Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options (#) Compensation(2)
- ------------------ ---- ------ ----- --------------- --------------------- ---------------
William R. Thomas 2004 $250,000 $ -- $ 20,000 6,000 $ --
President and 2003 250,000 -- 10,000 6,000 --
Chairman of the Board 2002 250,000 10,417 8,500 6,000 --
8
Long-term
Compensation
Annual Compensation Awards
----------------------------------- ---------------------
Name and Fiscal Other Annual Securities Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Options (#) Compensation(2)
- ------------------ ---- ------ ----- --------------- --------------------- ---------------
Gary L. Martin 2004 $185,000 $ 42,135 $ -- -- $ 5,600
Vice President 2003 183,750 12,135 -- 14,000 --
2002 178,800 17,077 -- 14,000 --
Patrick F. Hamner 2004 185,000 47,708 6,792 20,000 13,208
Vice President 2003 183,750 27,708 -- 34,000 10,000
2002 172,500 37,500 -- 34,000 8,500
William M. Ashbaugh 2004 177,500 47,500 6,792 15,000 13,208
Vice President 2003 167,500 27,083 -- 15,000 9,729
2002 96,410 14,222 -- 15,000 --
----------
(1) Represents amounts accrued for each executive officer in lieu of a
contribution to his account in an ESOP.
(2) Represents amounts contributed to the ESOP accounts of each executive
officer.
The aggregate amount of perquisites and other personal benefits
provided to Messrs. Thomas, Martin, Hamner and Ashbaugh was less than 10% of the
total of annual salary and bonus of such officers.
In accordance with our established policy, our officers and employees
are required to remit to us all compensation received for serving as a director
of any of our portfolio companies.
Additional Compensation Information
The following table sets forth additional compensation information for
the fiscal year ended March 31, 2004 for each of the three highest-paid
executive officers whose compensation exceeded $60,000 and for all other
directors (Graeme W. Henderson, Samuel B. Ligon and John H. Wilson), who are not
our employees.
Pension or Retirement Estimated Annual
Aggregate Benefits Accrued Corporation's
Name and Position Compensation as Part of Expenses Retirement
- ----------------- ------------ --------------------- ----------------
William R. Thomas $270,000 (1) (3) (4)
Director, President
and Chairman
9
Pension or Retirement Estimated Annual
Aggregate Benefits Accrued Corporation's
Name and Position Compensation as Part of Expenses Retirement
- ----------------- ------------ --------------------- ----------------
Gary L. Martin $232,735 (1) (3) (4)
Director and Vice
President
Patrick F. Hamner 252,708 (1) (3) (4)
Vice President
Graeme W. Henderson 28,000 (2) None None
Director
Samuel B. Ligon 11,000 (2) None None
Director
John H. Wilson 26,500 (2) None None
Director
- ----------
(1) See "Option Exercises and Fiscal Year End Values" for information regarding
stock options exercised during or held at the end of the fiscal year ended
March 31, 2004. See "Retirement Plans" for information on our Retirement
Plan and Retirement Restoration Plan. See "Stock Ownership Plan" for a
description of our ESOP and "Summary Compensation Table" for amounts
contributed to each officer's ESOP account.
(2) Directors who are not our employees are compensated as described under
"Compensation of Directors" and are not participants in our retirement plan
or ESOP.
(3) As described in note 7 to our Consolidated Financial Statements, the
Retirement Plan was overfunded and therefore generated a benefit for the
year ended March 31, 2004. After deducting the expense of the unfunded
Retirement Restoration Plan, our net benefit attributable to both plans was
$272,912 for the year ended March 31, 2004. Our net benefit is not
allocated to individual plan participants.
(4) Individual retirement benefits are based on formulas relating benefits to
average final compensation and years of credited service. See "Retirement
Plans" which includes both a table of estimated annual retirement benefits
and a description of the retirement benefits currently payable to Mr.
Thomas.
Option Grants
No common stock options were granted during the fiscal year ended March
31, 2004.
Option Exercises and Fiscal Year End Values
The following table discloses, for the named executive officers,
information regarding stock options exercised during, or held at the end of,
fiscal 2004.
10
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at 3/31/04 at 3/31/04(2)
Acquired on Value ------------------------------------- -------------------------------------
Name Exercise (#) Realized (1) Exercisable (#) Unexercisable (#) Exercisable Unexercisable
- ---- ------------ ------------ ----------------- ----------------- ----------------- -----------------
William R. Thomas -- $ -- 6,000 -- $ -- $ --
Gary L. Martin 14,000 297,150 -- -- -- --
Patrick F. Hamner 14,000 323,470 9,000 11,000 41,880 62,820
William M. Ashbaugh -- -- 3,000 12,000 29,310 117,240
_____________________
(1) Value realized is calculated as the fair market value on the date of
exercise, net of the option exercise price, but before any tax liabilities
or transaction costs.
(2) Value of unexercised options is calculated at the closing market price on
March 31, 2004 ($75.47), net of the option exercise price, but before any
tax liabilities or transaction costs.
Retirement Plans
The foregoing Summary Compensation Table does not include any
contribution, payment or accrual under a qualified non-contributory retirement
plan (retirement plan maintained by us and certain of our wholly-owned portfolio
companies), as such amounts cannot readily be separately or individually
calculated. Messrs. Ashbaugh, Hamner and Martin now participate in the
retirement plan, and Mr. Thomas is currently receiving retirement benefit
payments. An eligible employee or his survivor will be entitled under the
retirement plan to receive, upon retirement, death or disability, monthly
payments based upon formulas relating benefits to salary and years of credited
service, which is generally determined by averaging the five consecutive years
of highest compensation prior to retirement. Salaries and bonuses (excluding
other annual compensation) reported in the foregoing Summary Compensation Table
are substantially identical to compensation covered by the retirement plan
(covered compensation). Payment of benefits is funded by the company.
The following table sets forth, for purposes of illustration, the
estimated annual retirement benefit payable under the retirement plan as a
straight life annuity upon retirement to participants of specified covered
compensation and years of credited service who are fully vested (five years of
service). Messrs. Ashbaugh, Hamner and Martin had 2, 22, and 31 years,
respectively, of credited service under the plan as of May 1, 2004. All
calculations assume retirement in 2004 at age 65 (normal retirement age).
Total Covered Estimated Annual Benefits
Compensation Based on Service of
- -------------- -------------------------------------------------------------
15 Years 20 Years 25 Years 30 Years 35 Years
-------- -------- -------- -------- --------
$125,000......... $ 31,112 $ 41,483 $ 51,854 $ 62,225 72,595
150,000......... 38,237 50,983 63,729 76,475 89,220
175,000......... 45,362 60,483 75,604 90,725 105,845
200,000......... 52,487 69,983 87,479 104,975 122,470
11
Total Covered Estimated Annual Benefits
Compensation Based on Service of
- -------------- -------------------------------------------------------------
15 Years 20 Years 25 Years 30 Years 35 Years
-------- -------- -------- -------- --------
$225,000......... $ 59,612 $ 79,483 $ 99,354 $119,225 $139,095
250,000......... 66,737 88,983 111,229 133,475 155,720
300,000........ 80,987 107,983 134,979 161,975 188,970
350,000......... 95,237 126,983 158,729 190,475 222,220
400,000......... 109,487 145,983 182,479 218,975 255,470
Certain of the amounts in the above table are subject to reduction
because applicable federal regulations limit the amount of annual benefits
payable to certain higher-paid participants under a tax-qualified retirement
plan, such as the retirement plan. The extent of such reductions will vary in
individual cases according to circumstances existing at the time pension
payments commence. Consequently, we and certain of our wholly-owned portfolio
companies have adopted an unfunded benefit equalization plan (the retirement
restoration plan) to compensate our employees and chief executive officers of
certain of our wholly-owned portfolio companies for the loss of retirement
benefits resulting from such limitations. This retirement restoration plan
provides for the payment, upon retirement, of the difference between the maximum
annual payment permissible under the retirement plan pursuant to federal
limitations and the amount which would otherwise have been payable.
Mr. Thomas is entitled to a substantially increased annual retirement
benefit as a result of his service beyond the normal retirement age and to an
additional annual retirement benefit as a result of his credited service prior
to April 1972 under a retirement benefit formula of our retirement plan which
was modified for credited service subsequent to April 1972. Although Mr. Thomas
is a full-time employee, Section 401(a)(9) of the Internal Revenue Code required
that he begin receiving monthly retirement benefit payments on April 1, 2000
because of his age and ownership of more than 5% of our common stock. Retirement
benefits payable (for life only) to Mr. Thomas under the retirement plan and
retirement restoration plan total $440,342 per annum.
Stock Ownership Plan
We maintain an Employee Stock Ownership Plan ("ESOP") for our employees
and one of our wholly-owned portfolio companies in which Messrs. Ashbaugh and
Hamner participate. The Whitmore Manufacturing Company maintains an ESOP for its
employees, in which Mr. Martin participates. Employees who have completed one
year of credited service, as defined in the plan, are eligible to participate in
the ESOP. Contributions to the ESOP are discretionary, within limits established
by the Internal Revenue Code. Funds contributed to the trust established under
the ESOP are applied by the trustees to the purchase, in the open market at
prevailing market prices, of our common stock. A participant's interest in
contributions to the ESOP fully vests after five years of credited service, and
such vested interest is distributed to a participant at retirement, death or
total disability, or after a one year break in service resulting from
termination of employment for any other reason. See note (2) to the table under
"Stock Ownership of Certain Beneficial Owners".
12
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee (1) discharges the Board's responsibilities
to establish the compensation of our executives; (2) produces a report on
executive compensation for inclusion in our annual proxy statement; and (3)
provides general oversight of our compensation structure, including our equity
compensation plans and benefits programs. Other specific duties and
responsibilities of the committee include reviewing and approving objectives
relative to executive officers' compensation and approving and amending our
incentive compensation and stock option programs (subject to shareholder
approval if required). The Committee, which consists of three independent
directors, met two times in the fiscal year ended March 31, 2004.
The goals of our compensation program are to attract, retain and
motivate competent executive officers who have the experience and ability to
contribute to the success of the company's investment management activities. The
individual judgments made by the Compensation Committee are subjective and are
based largely on the recommendations of the chief executive officer and the
Compensation Committee's perception of each executive's contribution to both the
company's past performance and long-term growth potential. The principal
elements of compensation for executive officers are base salary, discretionary
bonus payments, stock options granted under the stock option plan and
contributions pursuant to the ESOP.
Base salaries were determined by the Compensation Committee in July
2003 for each of the executive officers on an individual basis, taking into
consideration individual contributions to performance, length of tenure,
compensation levels for comparable positions and internal equities among
positions. In addition to base salaries, certain executive officers received
bonus payments in March 2004, the amounts of which were determined by the
Compensation Committee on a discretionary basis.
In July 2003, the Compensation Committee established the base salary of
our chief executive officer, William R. Thomas, at $250,000 per annum, a
continuation of the level established in July 1993. At Mr. Thomas' request, he
was not awarded a year-end bonus in March 2004 or in the four preceding years.
No stock options were granted during the fiscal year ended March 31,
2004. On that date, options to purchase a total of 54,500 shares were
outstanding, representing a 1.4% fully-diluted equity interest.
An additional equity incentive is provided by the ESOP, to which the
Compensation Committee authorized a contribution equivalent to 10% of each
participating employee's covered compensation for the fiscal year ended March
31, 2004 subject to limits imposed by the Internal Revenue Service ("IRS"). To
conform to IRS limits, a maximum of 6.604% of each participating employee's
covered compensation was contributed to the ESOP and 3.396% was paid in cash to
each employee in lieu of an ESOP contribution.
Compensation Committee
John H. Wilson, Chairman
Graeme W. Henderson
Samuel B. Ligon
13
PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return
during the last five years (based on the market price of our common stock and
assuming reinvestment of all dividends and tax credits on retained long-term
capital gains) with the Total Return Index for the Nasdaq Stock Market (U.S.
Companies) and with the Total Return Index for Nasdaq Financial Stocks, both of
which indices have been prepared by the Center for Research in Security Prices
at the University of Chicago.
Comparison of Five Year Cumulative Total Returns
[Graph omitted]
Nasdaq Total Return (U.S.) Nasdaq Financial Stocks Capital Southwest Corporation
1999 100.000 100.000 100.000
2000 185.806 94.771 76.973
2001 74.390 104.923 92.416
2002 74.968 130.564 98.680
2003 55.027 121.161 69.804
2004 81.207 174.233 107.588
14
REPORT OF THE AUDIT COMMITTEE
The Audit Committee consists of three members of the Corporation's
Board of Directors. Each member is an independent director as required by
Sarbanes-Oxley and Nasdaq. In addition, the Board of Directors has determined
that Graeme W. Henderson is an Audit Committee Financial Expert as defined by
SEC rules. The duties and responsibilities of the Audit Committee are set forth
in the Amended and Restated Audit Committee Charter, which the Board of
Directors adopted on May 27, 2003. A copy of the Amended and Restated Audit
Committee Charter is available on our website at www.capitalsouthwest.com.
The Audit Committee oversees the Corporation's financial reporting
process on behalf of the Board of Directors. Management has the primary
responsibility for the financial statements and the reporting process, including
the Corporation's system of internal control. In fulfilling its oversight
responsibilities, the Audit Committee reviewed the audited consolidated
financial statements in the Annual Report with management, including a
discussion of the quality, not just the acceptability, of the accounting
principles; the reasonableness of the valuation of restricted securities and
other significant judgments; and the clarity of disclosures in the financial
statements.
The Audit Committee reviewed with Ernst & Young LLP, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of the Corporation's
accounting principles and such other matters as are required to be discussed
with the Audit Committee under generally accepted auditing standards. The Audit
Committee discussed with Ernst &Young LLP the matters required to be discussed
by Statement on Auditing Standards No. 61, as amended, Statement on Auditing
Standards No. 99, and SEC Rules discussed in Final Release Nos. 33-8183 and
33-8183a. In addition, the Audit Committee discussed with the independent
auditors the auditors' independence from management and the Corporation,
including the matters in the written disclosures and letter we received from the
independent auditors as required by the Independence Standards Board Standard
No. 1, and considered the compatibility of non-audit services with the auditors'
independence.
The Audit Committee discussed with Ernst & Young LLP the overall scope
and plans for their audit. The Audit Committee also met with Ernst & Young LLP,
with and without management present, to discuss the results of their audit,
their evaluation of the Corporation's internal controls and the overall quality
of the Corporation's financial reporting.
Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the board has approved)
that the audited consolidated financial statements be included in the Annual
Report on Form 10-K for the fiscal year ended March 31, 2004 for filing with the
SEC.
Audit Committee
Graeme W. Henderson, Chairman
Samuel B. Ligon
John H. Wilson
15
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
On May 2, 2003, KPMG LLP was dismissed as our independent accountant
and on April 24, 2003, the Audit Committee unanimously voted in favor of the
appointment of Ernst & Young LLP to serve as our independent accountant for the
fiscal year ending March 31, 2004. The Audit Committee has appointed the firm of
Ernst & Young LLP as independent auditors for the fiscal year ending March 31,
2005.
In connection with its audits of the two most recent fiscal years ended
March 31, 2003 and during the subsequent interim period ended May 9, 2003, there
were no disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement. Also, during the two most recent fiscal years and through May 9,
2003, we did not consult Ernst & Young LLP regarding any of the events described
in Item 304 (a) (2) (i) - (ii) of Regulation S-K. The reports of KPMG LLP on the
financial statements for the years ended March 31, 2003 and 2002 contained no
adverse opinion or disclaimer of opinion.
We are asking the shareholders to ratify the appointment of Ernst &
Young LLP as our independent auditors for the fiscal year ending March 31, 2005.
Ernst & Young LLP was appointed by the Audit Committee in accordance with its
charter. In order to ratify the appointment of Ernst & Young LLP as our
independent auditors for the year ending March 31, 2005, the proposal must
receive the favorable vote of a majority of the shares entitled to vote and
represented at the annual meeting. If shareholders fail to ratify the
appointment, the Audit Committee may reconsider the appointment.
A representative of Ernst & Young LLP for the fiscal year ended March
31, 2004, will be present at the annual meeting, will have the opportunity to
make a statement, and will be available to respond to appropriate questions you
may ask.
The board recommends that you vote "For" the ratification of the
appointment of Ernst & Young LLP as our independent auditors.
AUDIT AND OTHER FEES
The following table sets forth fees for services rendered by Ernst &
Young LLP for the fiscal year ended March 31, 2004 and by KPMG LLP for the
fiscal year ended March 31, 2003.
2004 2003
-------- --------
Audit Fees(1) $ 62,000 $ 53,000
Audit-Related Fees(2) -0- -0-
Tax Fees(3) 5,500 4,000
All Other Fees -0- -0-
-------- --------
Total Fees $ 67,500 $ 57,000
======== ========
16
- ----------
(1) Represents fees for professional services provided in connection with the
audit of our annual financial statements and review of our quarterly
financial statements, advice on accounting matters that arose during the
audit and audit services provided in connection with other statutory or
regulatory filings.
(2) Represents fees for assurance services related to the audit of our
financial statements and for services in connection with audits of our
benefit plans.
(3) Represents fees for services provided in connection with tax compliance,
tax advice and tax planning.
The Audit Committee has determined that the provision of non-audit services by
Ernst & Young LLP is compatible with maintaining Ernst & Young LLP's
independence. In accordance with its charter, the Audit Committee approves in
advance all audit and tax services to be provided by Ernst & Young LLP. In other
cases, the chairman of the Audit Committee has the delegated authority from the
committee to pre-approve certain additional services, and such pre-approvals are
communicated to the full committee at its next meeting. During the fiscal year
2004, all services were pre-approved by the Audit Committee in accordance with
this policy.
OTHER MATTERS
As of the mailing date of this proxy statement, the Board of Directors
knows of no other matters to be presented at the meeting. Should any of the
matters requiring a vote of the shareholders arise at the meeting, the persons
named in the proxy will vote the proxies in accordance with their best judgment.
SHAREHOLDER PROPOSALS FOR 2005 ANNUAL MEETING
Any shareholder who intends to present a proposal at the annual meeting
in the year 2005, and who wishes to have the proposal included in our proxy
statement for that meeting, must deliver the proposal to our corporate
secretary, Susan K. Hodgson, at 12900 Preston Road, Suite 700, Dallas, Texas
75230, no later than February 4, 2005. All proposals must meet the requirements
set forth in the rules and regulations of the SEC in order to be eligible for
inclusion in the proxy statement for that meeting.
Any shareholder who intends to bring business to the annual meeting in
the year 2005, but not include the proposal in our proxy statement, or to
nominate a person to the board of directors, must also give written notice to
our corporate secretary, Susan K. Hodgson at the address set forth in the
preceding paragraph, by February 4, 2005.
17
EXPENSES OF SOLICITATION OF PROXIES
In addition to the use of the mails, proxies may be solicited by
personal interview and telephone by our directors, officers and employees, who
will not receive additional compensation for such services. We will request
brokerage houses, nominees, custodians and fiduciaries to forward soliciting
materials to the beneficial owners of stock held of record by them and will
reimburse such persons for forwarding materials. The cost of soliciting proxies
will be borne by us.
ANNUAL REPORT
The Annual Report to Shareholders covering the fiscal year ended March
31, 2004 accompanies this proxy statement, but is not deemed a part of the proxy
soliciting material.
A copy of the fiscal 2004 Form 10-K report filed with the SEC will be
mailed to shareholders without charge upon written request to Susan K. Hodgson,
Secretary, Capital Southwest Corporation, 12900 Preston Road, Suite 700, Dallas,
Texas 75230.
A copy of the Form 10-K will be available via the Internet at our
website (www.capitalsouthwest.com) and the EDGAR version of such report will be
available at the SEC's website (www.sec.gov).
Any complaint regarding accounting, internal accounting controls or
auditing matters should be mailed to John H. Wilson, independent director and
Audit Committee member, at 1500 Three Lincoln Centre, 5430 LBJ Freeway, Dallas,
TX 75240. Written complaints may be submitted anonymously.
18