CAPITAL SOUTHWEST CORPORATION
1999 STOCK OPTION PLAN
1. Objective of the Plan.
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The 1999 Stock Option Plan (the "Plan") is intended to further the
established policy of Capital Southwest Corporation (the "Corporation") of
encouraging ownership of its Common Stock, $1.00 par value per share (the
"Common Stock"), by key employees of the Corporation and its management company
subsidiary, Capital Southwest Management Corporation, and by its officers who
are employees of its subsidiaries and of providing incentives for them to
enhance the value of the Corporation's stock. By extending to key employees the
opportunity to acquire proprietary interests in the Corporation and to
participate in its success, the Plan may be expected to benefit the Corporation
and its shareholders and to be in their best interests by making it possible for
the Corporation to attract and retain the best available talent.
2. Stock Reserved for the Plan.
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One hundred forty thousand (140,000) shares of the authorized but
unissued Common Stock are reserved for issuance and may be issued upon the
exercise of options granted under the Plan. In lieu of such unissued shares, the
Corporation may, in its discretion, transfer upon the exercise of options,
reacquired shares or shares bought in the market for the purposes of the Plan
provided that (subject to the provisions of Section 14) the total number of
shares which may be sold pursuant to the exercise of options granted under the
Plan shall not exceed one hundred forty thousand (140,000). If any options
granted under the Plan shall for any reason terminate or expire without having
been exercised in full, the Common Stock not purchased under such options shall
again be available for the purposes of the Plan.
3. Administration of the Plan.
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The Plan shall be administered by the Board of Directors of the
Corporation through actions approved by the "required majority" as defined in
Section 57(o) of the Investment Company Act of 1940, as amended (the "Investment
Company Act"). The Board of Directors shall have plenary authority in its
discretion, but subject to the express provisions of the Plan, to determine the
employees to whom, and the time or times at which, options shall be granted, the
term of each such option, and the number of shares to be covered by each option;
to determine whether an option shall be an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or a non-qualified stock option; to interpret the Plan; to prescribe,
amend and rescind rules and regulations relating to the Plan; to determine the
employees to whom, and the time or times at which, dividend equivalent rights
shall be granted, and the terms of such dividend equivalent rights; to determine
the terms (which need not be identical) of option agreements and dividend
equivalent right agreements executed and delivered under the Plan; and to make
all other determinations deemed necessary or advisable for the administration of
the Plan.
4. Eligibility Factors to be Considered in Making Grants.
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An option and/or dividend equivalent right may be granted to any person
who, at the time of grant, is either (i) a regular salaried employee of the
Corporation or its management company subsidiary, Capital Southwest Management
Corporation; or (ii) an officer of the Corporation who is a regular salaried
employee of one of its subsidiaries (such person or persons referred to in
clauses (i) and (ii) above being singularly hereinafter referred to as "Key
Employee," or, if more than one, as "Key Employees"). No incentive stock option
may be granted to an individual who immediately after such option is granted
owns, within the meaning of Section 422(b) of the Code, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Corporation (or its subsidiaries) (hereinafter called a "l0% Holder"), except in
compliance with the provisions of Sections 6 and 7 hereof. In determining the
Key Employees to whom options and/or dividend equivalent rights shall be granted
and the number of shares to be covered by each option, the Board of Directors
shall take into account the duties of the respective Key Employees, their
present and potential contributions to the success of the Corporation (or one of
its subsidiaries), the anticipated number of years of service remaining and such
other factors as they shall deem relevant in connection with accomplishing the
purpose of the Plan. Subject to the provisions of Section 5, a Key Employee who
has been granted an option may be granted an additional option or options if the
Board of Directors shall so determine.
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5. Types of Options; Maximum Allotment of Options.
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The Board of Directors may grant either incentive stock options or
non-qualified stock options under the Plan. In addition, the aggregate fair
market value (determined at the time of grant in accordance with Section 6
hereof) of the shares of Common Stock which any Key Employee is first eligible
to purchase in any calendar year by exercise of incentive stock options granted
under the Plan and all incentive stock option plans of the Corporation or its
subsidiaries shall not exceed $100,000. For this purpose, the fair market value
(determined at the respective date of grant of each option) of the stock
purchasable by exercise of an incentive stock option (or an installment thereof)
shall be counted against the $100,000 annual limitation for a Key Employee only
for the calendar year such stock is first purchasable under the terms of the
option.
6. Option Prices.
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The purchase price of Common Stock covered by each option shall be 100%
of the fair market value of the Common Stock at the time the option is granted,
except with respect to incentive stock options granted to any 10% Holder, the
purchase price shall be not less than 110% of the fair market value. The fair
market value shall be (i) if the Common Stock is listed on a national securities
exchange (which term shall include the Nasdaq Stock Market), the last reported
sale price of the Common Stock on such exchange on the date on which the option
is granted (or if there shall be no trading on such date, then on the next
previous date on which there shall have been trading of the Common Stock); (ii)
if the Common Stock is not listed on a national securities exchange, the average
of the highest bid and the lowest ask prices at the close of business in the
over-the-counter market on the date on which the option is granted; or (iii) if
the Common Stock is neither listed on a national securities exchange nor traded
in the over-the-counter market, as determined by the Board of Directors of the
Corporation in good faith on the basis of financial information and information
regarding recent sales of Common Stock available to it, using any reasonable
valuation method. The Board's determination of the fair market value shall be
conclusive and the purchase price of shares of Common Stock under each option
shall be set forth in the minutes of the meeting of the Board of Directors.
7. Term of Option.
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The term of each option shall be for such period as the Board of
Directors shall determine, but not more than ten (10) years from the date of
granting thereof, except that in the case of incentive stock options granted to
10% Holders, the term of each option shall not exceed five (5) years, and each
option shall be subject to earlier termination as hereinafter provided.
8. Exercise of Options and Withholding Taxes.
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(a) Unless otherwise determined by the Board of Directors, each option
shall be exercisable on and after the first anniversary of the date of grant in
five (5) equal annual installments of 20% of the shares subject to such option
and, except as may be so specified, any annual installment of an option not
exercised shall accumulate and thereafter may be exercised as to all, or from
time to time any part of, the shares then currently exercisable prior to the
expiration of the option. Fractional shares will not be issued. The purchase
price of the shares as to which an option shall be exercised shall be paid in
full in cash in currency of the United States of America at the time of
exercise, except that, subject to the receipt of appropriate orders of the
Securities and Exchange Commission which may be required pursuant to the
Investment Company Act, the Board of Directors may, in its discretion, provide
that payment of the purchase price of such shares may be made with shares of the
Corporation's Common Stock. Except as provided in Sections 11 and 12 hereof, no
option may be exercised at any time unless the holder thereof is then an
employee of the Corporation or one of its subsidiaries. The holder of an option
shall not have any of the rights of a shareholder with respect to the shares
covered by his option until such shares shall be issued to him upon the due
exercise of the option. Proceeds from the sale of stock pursuant to the Plan
shall be used for general corporate purposes.
(b) At the time of exercise of a non-qualified stock option or a
disqualifying disposition of shares issued under an incentive stock option, the
employee shall remit to the Corporation in cash all applicable federal and state
withholding taxes.
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9. Non-Transferability.
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An option granted under the Plan shall not be transferable otherwise
than by a will or the laws of descent and distribution, and an option may be
exercised during the lifetime of the holder only by him. A dividend equivalent
right granted under the Plan shall not be transferable unless otherwise
expressly provided by the Board of Directors.
10. Dividend Equivalent Rights.
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Upon the declaration of any capital gain dividend, the Board shall have
the authority to grant dividend equivalent rights with respect to such dividend
to eligible employees upon such terms and conditions as it shall establish,
subject in all events to the following limitations and provisions of general
application set forth in the Plan. Each dividend equivalent right shall entitle
a holder to receive a payment (cash or otherwise) equal to the market value on
the dividend payment date of any specified capital gain dividend declared and
paid by the Corporation on one share of Common Stock. The Corporation shall make
payments pursuant to each right within five (5) business days after the payment
of the specified capital gain dividend to holders of Common Stock.
Each dividend equivalent right shall be granted independent of any
option.
In the event of termination of employment for any reason, any dividend
equivalent right held by such employee on the date of termination shall be
forfeited, unless otherwise expressly provided by the Board of Directors.
11. Termination of Employment.
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In the event that the employment of any employee of the Corporation or
one of its subsidiaries to whom an option has been granted under the Plan shall
be terminated (otherwise than by reason of death or for "cause" as defined
below) such option may be exercised, to the extent that the holder of the option
was entitled to do so at the termination of his employment, at any time within
one (1) month after such termination (six (6) months in the case of termination
of employment at a time when the employee is "disabled" within the meaning of
Section 105 (d)(4) of the Code) but in no event after the expiration of the term
of the option. As used herein, "cause" shall mean gross negligence, dishonesty
or breach of fiduciary obligations to the Corporation or its subsidiaries. In
the event of termination of the employment of any option holder for cause, all
outstanding options held by such terminated employee shall terminate effective
as of the date of notice of termination. Options granted under the Plan shall
not be affected by any change of duties or position so long as the holder
continues to be an employee of the Corporation or one of its subsidiaries or is
employed by a corporation (or a related corporation of such corporation) issuing
or assuming an option in a transaction to which Section 424(a) of the Code
applies. Retirement pursuant to any pension plan provided by the Corporation and
its subsidiaries shall be deemed to be a termination of employment for the
purposes of this Section 11. Nothing in the Plan or in any option or dividend
equivalent right granted pursuant to the Plan shall confer upon any employee any
right to continue in the employ of the Corporation or of the subsidiary by which
he is employed.
12. Death of Employee.
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If an employee of the Corporation or one of its subsidiaries to whom an
option has been granted under the Plan shall die while he is employed by the
Corporation or one of its subsidiaries or within one (1) month after termination
of his employment, such option may be exercised to the extent that the employee
was entitled to do so at the date of his death by his executor or administrator
or other person at the time entitled by law to the employee's rights under the
option, at any time within such period not exceeding six (6) months after the
date of the termination of his employment by death or otherwise, as shall be
prescribed in the option agreement, but in no event after the expiration of the
term of the option.
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13. Definitions.
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For purposes of the Plan, a "subsidiary" of the Corporation shall mean
a corporation, whether domestic or foreign, in which the Corporation shall own,
directly or indirectly, 50% or more of the issued and outstanding capital stock
thereof, and "Corporation" shall mean Capital Southwest Corporation and any
division thereof.
For purposes of the Plan, employment with the Corporation or one of its
subsidiaries shall mean continuous regular employment as an employee, or an
uninterrupted chain of continuous regular employment as an employee or by a
corporation (or a related corporation of such corporation) issuing or assuming
an option in a transaction to which Section 424(a) of the Code applies.
Military, sick leave, or other bona fide leave of absence, such as
temporary employment by the government, shall not be considered a termination of
employment nor an interruption of employment with the Corporation or one of its
subsidiaries hereunder if the period of such leave does not exceed 90 days, or,
if longer, so long as the employee's right to re-employment is guaranteed either
by statute or by contract.
14. Change in Control; Antidilution.
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(a) Notwithstanding any provision of the Plan to the contrary,
each outstanding option granted hereunder shall become and
remain exercisable in full and each dividend equivalent right
granted hereunder shall immediately vest and remain in full
force and effect for its term,
(i) on the date 10 days prior to the record date for a
meeting of shareholders of the Corporation called for
the purpose of voting upon any transaction or series
of transactions (other than a transaction to which
only the Corporation and one or more of its
subsidiaries are parties) pursuant to which the
Corporation would become a subsidiary of another
corporation or would be merged or consolidated with
or into another corporation, or would engage in an
exchange of shares with another corporation, or
substantially all of the assets of the Corporation
would be sold to or acquired by another person,
corporation or group of associated persons acting in
concert; or
(ii) on the date upon which any person, corporation or
group of associated persons acting in concert,
excluding any persons who have then been owners of
10% or more of the Common Stock of the Corporation
for a continuous period of at least ten (10) years,
becomes a direct or indirect beneficial owner of
shares of stock of the Corporation representing an
aggregate of more than 25% of the votes then entitled
to be cast at a meeting for the purpose of electing
Directors of the Corporation; or
(iii) on the date upon which the persons who were members
of the Board of Directors of the Corporation as of
March 31, 1999 (the "Original Directors"), cease to
constitute a majority of the Board of Directors,
provided, however, that any new Director whose
nomination or selection has been approved by the
affirmative vote of at least three of the Original
Directors then in office shall also be deemed an
Original Director for all purposes of this Section
14(a)(iii).
The Corporation shall use its best efforts to notify each holder of an
option and/or dividend equivalent right of his rights under this
Section 14(a) within a reasonable period of time prior to the date or
effective date of any transaction or event described above.
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(b) In the event that the Common Stock of the Corporation subject
to options granted hereunder is hereafter changed into or
exchanged for a different number or kind of shares or other
securities of the Corporation or of another corporation by
reason of merger, consolidation, exchange of shares, other
reorganization, recapitalization, reclassification,
combination of shares, stock split-ups or stock dividends,
(i) the aggregate number and kind of shares subject to
outstanding options and dividend equivalent rights
granted hereunder shall be adjusted appropriately;
(ii) rights under outstanding options and dividend
equivalent rights granted hereunder, both as to the
number of subject shares, and with respect to
options, the option price, shall be adjusted
appropriately;
(iii) where dissolution or liquidation of the Corporation
is involved, each dividend equivalent right and
outstanding option granted hereunder shall terminate,
but the holder of an option shall have the right,
immediately prior to such dissolution or liquidation
to exercise his option in full, notwithstanding the
provisions of Section 8 (but subject to the other
terms and conditions of this Plan) and the
Corporation shall notify each holder of an option of
such right within a reasonable period of time prior
to any such dissolution or liquidation; and
(iv) where any merger, consolidation or exchange of shares
is involved from and after the effective time of such
merger, consolidation or exchange of shares, each
dividend equivalent right shall remain in full force
and effect and become the obligation of any successor
entity and each holder of an option shall be
entitled, upon exercise of his option in accordance
with all of the terms and conditions of this Plan, to
receive in lieu of Common Stock of the Corporation,
shares of such stock or other securities or
consideration as the holders of Common Stock of the
Corporation received pursuant to the terms of the
merger, consolidation or exchange of shares.
The adjustments contained in clauses (i), (ii), (iii) and (iv) of this
subsection (b) and the manner of application of such provisions shall
be determined solely by the Board of Directors and any such adjustment
may provide for the elimination of fractional share interests.
15. Time of Grant.
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Nothing contained in the Plan or in any resolution to be adopted by the
Board of Directors or the holders of Common Stock of the Corporation shall
constitute the granting of any option or dividend equivalent right hereunder. An
option or dividend equivalent right pursuant to the Plan shall be deemed to have
been granted on the date on which the name of the recipient and the terms of the
option or dividend equivalent right, as applicable, are determined by the Board
of Directors in accordance with Section 3.
16. Termination and Amendment of the Plan.
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Unless the Plan shall theretofore have been terminated as hereinafter
provided in this Section 16, no option or dividend equivalent right shall be
granted hereunder after April 19, 2009. The Board of Directors of the
Corporation may at any time prior to that date terminate the Plan or make such
modification or amendment of the Plan as it shall deem advisable; provided
however, that no amendment may be made which will disqualify an incentive stock
option granted hereunder as an "incentive stock option" within the meaning of
Section 422 of the Code, and provided that the Board of Directors may not,
without further approval by the holders of Common Stock, except as provided in
Section 14 hereof, increase the maximum number of shares for which options may
be granted under the Plan, either in the aggregate or to any individual, or
change the manner of determining the minimum option prices or extend the period
during which an option may be granted or exercised or amend the requirements as
to the class of employees eligible to receive options. No termination,
modification or amendment of the Plan may adversely affect the rights of an
option holder under an option previously granted to such option holder without
the consent of such option holder.
<PAGE>
17. Government Regulations.
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The Plan, the granting of dividend equivalent rights, the granting and
exercise of options thereunder, and the obligation of the Corporation to sell
and deliver shares under such options shall be subject to all applicable laws,
rules and regulations.
18. Shareholder Approval.
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The Plan shall be submitted to the shareholders for approval at the
next annual meeting of shareholders or a special meeting of shareholders called
for the purpose of such approval, but in no event more than one (1) year after
the date of its adoption by the Board of Directors. No grants will be made under
the Plan until it is approved by the shareholders of the Corporation.
19. Severability.
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If any provision of the Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining portions of
the Plan, but such provision shall be fully severable and the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan. Such an illegal or invalid provision shall be replaced by
a revised provision that most nearly comports to the substance of the illegal or
invalid provision. If any of the terms or provisions of the Plan or any
agreement conflict with the requirements of Rule 16b-3 (as those terms or
provisions are applied to eligible persons who are subject to Section 16(b) of
the Securities Exchange Act of 1934, as amended, or Section 422 of the Code
(with respect to incentive stock options)), those conflicting terms or
provisions shall be deemed inoperative to the extent they conflict with those
requirements. With respect to incentive stock options, if the Plan does not
contain any provision required to be included in a plan under Section 422 of the
Code, that provision shall be deemed to be incorporated into the Plan with the
same force and effect as if it had been expressly set out in the Plan; provided,
however, that, to the extent any option that is intended to qualify as an
incentive stock option cannot so qualify, that option (to that extent) shall be
deemed to be a non-qualified option for all purposes of the Plan.
