Exhibit 13.1
Twelve Largest Investments - March 31, 2004
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Palm Harbor Homes, Inc. $86,406,000
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Palm Harbor Homes, Dallas, Texas, is an integrated manufacturer and
retailer of manufactured and modular housing produced in 19 plants and sold in
30 states by 149 company-owned retail stores and builder locations and
approximately 275 independent dealers, builders and developers. The company
provides financing through its subsidiary, CountryPlace Mortgage, and through
its jointly-owned mortgage banking company, BSM Financial, and sells insurance
through its subsidiary, Standard Casualty. Palm Harbor's high-quality homes are
designed to meet the need for attractive, affordable housing.
During the year ended March 26, 2004, Palm Harbor reported a net loss of
$6,017,000 ($0.26 per share) on net sales of $578,465,000, compared with
earnings of $3,221,000 ($0.14 per share) on net sales of $573,130,000 in the
previous year. The March 31, 2004 closing Nasdaq bid price of Palm Harbor's
common stock was $20.99 per share.
At March 31, 2004, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $86,406,000 ($11.00 per share),
consisting of 7,855,121 restricted shares of common stock, representing a
fully-diluted equity interest of 34.4%.
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The RectorSeal Corporation $60,000,000
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The RectorSeal Corporation, Houston, Texas, with two plants in Texas and a
plant in New York, manufactures specialty chemical products including pipe
thread sealants, firestop sealants, plastic cements and other formulations for
plumbing, HVAC, electrical and industrial applications. RectorSeal's 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 produces a line of automotive chemical
products sold under the Cargo and Blue Magic trade names. RectorSeal also owns a
20% equity interest in The Whitmore Manufacturing Company (described on page 8).
During the year ended March 31, 2004, RectorSeal earned $6,235,000 on
revenues of $65,883,000, compared with earnings of $6,799,000 ($5,720,000 after
subtracting extraordinary tax credits) on revenues of $63,161,000 in the
previous year. RectorSeal's earnings do not reflect its 20% equity in The
Whitmore Manufacturing Company.
At March 31, 2004, Capital Southwest owned 100% of RectorSeal's common
stock having a cost of $52,600 and a value of $60,000,000.
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Encore Wire Corporation $59,939,000
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Encore Wire Corporation, McKinney, Texas, manufactures a broad line of
copper electrical building wire and cable including non-metallic sheathed,
underground feeder and THHN wire and 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, 2003, Encore reported net income of
$14,376,000 ($0.94 per share) on net sales of $384,750,000, compared with net
income of $5,964,000 ($0.39 per share) on net sales of $285,207,000 in the
previous year. The March 31, 2004 closing Nasdaq bid price of Encore's common
stock was $37.23 per share.
At March 31, 2004, 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 $59,939,000 ($22.00 per share), representing a fully-diluted equity
interest of 16.9%.
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Skylawn Corporation $40,000,000
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Skylawn Corporation, Hayward, California, owns and operates cemeteries,
mausoleums and mortuaries. Skylawn's operations, all of which are in California,
include a major cemetery in San Mateo, a mausoleum and an adjacent mortuary in
Oakland and cemeteries, mausoleums and mortuaries in Hayward and Sacramento. The
company recently acquired a funeral home in San Bruno and will soon begin
building a major funeral home on the grounds of its San Mateo County cemetery.
Its insurance company and funeral and cemetery trusts enable Skylawn's clients
to make pre-need arrangements.
For the fiscal year ended March 31, 2004, Skylawn reported unaudited
earnings of $2,850,000 on revenues of $25,452,000, compared with restated
earnings of $2,928,000 on revenues of $24,871,000 in the previous year.
At March 31, 2004, Capital Southwest owned 100% of Skylawn Corporation's
common stock, which had a cost of $4,510,400 and was valued at $40,000,000.
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Alamo Group Inc. $31,034,000
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Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and
distributor of heavy-duty, tractor and truck mounted mowing and other vegetation
maintenance equipment, street-sweeping equipment and replacement parts. Founded
in 1969, Alamo Group operates 15 manufacturing facilities and serves
governmental, industrial and agricultural markets in the U.S., Europe, Canada
and Australia.
For the year ended December 31, 2003, Alamo reported consolidated earnings
of $8,038,000 ($0.82 per share) on net sales of $279,078,000, compared with
earnings of $6,382,000 ($0.65 per share) on net sales of $259,435,000 in the
previous year. The March 31, 2004 closing NYSE market price of Alamo's common
stock was $17.39 per share.
At March 31, 2004, 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%.
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Media Recovery, Inc. $17,000,000
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Media Recovery, Inc., Graham, Texas, distributes computer and office
automation supplies and accessories to corporate customers through its direct
sales force with 29 offices in 22 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, 2003, Media Recovery reported net
income of $3,454,000 on net sales of $108,751,000, compared with net income of
$1,817,000 on net sales of $97,866,000 in the previous year.
At March 31, 2004, the $5,415,000 investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $17,000,000, consisting of 4,800,000
shares of Series A convertible preferred stock, representing a fully-diluted
equity interest of 71.5%.
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All Components, Inc. $14,100,000
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All Components, Inc., Farmers Branch, Texas, distributes and produces
memory and other electronic components for personal computer manufacturers,
retailers, value-added resellers and other corporate customers. 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, 2003, All Components reported net income
of $4,060,000 on net sales of $156,994,000, compared with net income of
$1,605,000 on net sales of $135,936,000 in the previous year.
At March 31, 2004, the $2,650,000 investment in All Components by Capital
Southwest and its subsidiary was valued at $14,100,000 consisting of a 12%
subordinated note valued at its cost of $2,500,000 and 150,000 shares of Series
A convertible preferred stock valued at $11,600,000, representing a 56.1%
fully-diluted equity interest.
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The Whitmore Manufacturing Company $12,000,000
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The Whitmore Manufacturing Company, Rockwall, Texas, 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, 2004, Whitmore reported net income of
$376,000 on net sales of $13,739,000, compared with net income of $149,000 on
net sales of $12,521,000 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, 2004, the direct investment in Whitmore by Capital Southwest
was valued at $12,000,000 and had a cost of $1,600,000.
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Texas Capital Bancshares, Inc. $11,110,358
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Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has total
assets of approximately $2.2 billion. With banks in Austin, Dallas, Fort Worth,
Houston, Plano and San Antonio, Texas Capital Bancshares conducts its business
through its wholly-owned subsidiary, Texas Capital Bank, N.A., which targets
middle market commercial and wealthy private client customers in Texas.
For the year ended December 31, 2003, Texas Capital reported net income of
$13,834,000 ($0.60 per share), compared with net income of $7,343,000 ($0.32 per
share) in the previous year. The March 31, 2004 closing Nasdaq bid price of
Texas Capital's common stock was $16.11 per share.
At March 31, 2004, Capital Southwest owned 689,656 unrestricted shares of
common stock, having a cost of $5,000,006 and a market value of $11,110,358
($16.11 per share).
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Mail-Well, Inc. $9,371,748
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Mail-Well, Inc., Englewood, Colorado, is one of the largest printers in
North America, serving the commercial printing and envelope market segments. It
is the world's largest manufacturer of envelopes, the leading printer of
envelopes in the U.S. and Canada, and the premier high impact color printer in
the U.S.
For the year ended December 31, 2003, Mail-Well reported net income of
$5,150,000 ($0.11 per share) on net sales of $1.672 billion, compared with a net
loss of $202,104,000 ($4.24 per share) on net sales of $1.729 billion in the
previous year. The March 31, 2004 closing NYSE market price of Mail-Well's
common stock was $4.47 per share.
At March 31, 2004, the $2,986,870 investment in Mail-Well by Capital
Southwest was valued at $9,371,748 ($4.47 per share), consisting of 2,096,588
unrestricted shares of common stock, representing a fully-diluted equity
interest of 3.8%.
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PETsMART, Inc. $8,115,000
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PETsMART, Inc., Phoenix, Arizona, is the largest specialty retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 600 pet superstores in the United States and Canada and is a leading direct
marketer of pet products through its e-commerce site and its pet and equine
catalog business.
For the year ended February 1, 2004, PETsMART, Inc. reported net income of
$139,549,000 ($0.95 per share) on net sales of $2.996 billion, compared with net
income of $88,855,000 ($0.63 per share) on net sales of $2.695 billion in the
previous year. The March 31, 2004 closing Nasdaq market price of PETsMART's
common stock was $27.05 per share.
At March 31, 2004, Capital Southwest and its subsidiary owned 300,000
unrestricted shares of common stock, having a cost of $1,318,771 and a market
value of $8,115,000 ($27.05 per share).
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Liberty Media Corporation $7,719,860
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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, 2003, Liberty Media reported a net loss of
$1.222 billion ($0.44 per share) on net sales of $4.028 billion, compared with a
net loss of $5.330 billion ($2.06 per share) on net sales of $2.084 billion in
the previous year. The March 31, 2004 closing NYSE market price of Series A
common stock was $10.95 per share.
At March 31, 2004, Capital Southwest owned 705,010 unrestricted shares of
Series A common stock, having a cost of $165,613 and a market value of
$7,719,860 ($10.95 per share).
Portfolio of Investments - March 31, 2004
Company Equity (a) Investment (b) Cost Value (c)
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+AT&T CORP. <1% ++26,649 shares common
New York, New York stock (acquired 3-9-99) $ 12 $ 521,521
Major provider of voice
and data communications services
including business and consumer long
distance and Internet.
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+AT&T WIRELESS SERVICES, INC. <1% ++42,878 shares common
Redmond, Washington stock (acquired 7-9-01) 10 583,570
Provider of wireless voice and data
services and products in the cellular
and PCS markets.
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+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.
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ALL COMPONENTS, INC. 56.1% 12% subordinated notedue 2008
Farmers Branch, Texas (acquired 10-28-03 and 1-06-04) 2,500,000 2,500,000
Distribution and production of memory 150,000 shares Series A convertible
and other components for personal computer preferred stock, convertible
manufacturers, retailers and value-added into 600,000 shares of common
resellers; electronics contract manufacturing. stock at $0.25 per share
(acquired 9-16-94) 150,000 11,600,000
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2,650,000 14,100,000
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+ALLTEL CORPORATION <1% ++8,880 shares common stock
Little Rock, Arkansas (acquired 7-1-98) 108,355 443,023
Wireline and wireless communications
and information services.
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AMPRO MORTGAGE CORPORATION 34.8% 5,000 shares Series A
Dallas, Texas cumulative preferred stock
Originator and banker of (acquired 2-28-03) 5,000,000 2,500,000
residential mortgage loans. 1,500 shares Series B
cumulative preferred stock
(acquired 3-31-04) 1,500,000 1,500,000
29,167 shares Series A
common stock (acquired
2-28-03) 29,167 --
Warrant to purchase 375,000
shares of common stock at
$1.00 per share, expiring 2014
(acquired 3-31-04) -- --
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6,529,167 4,000,000
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BALCO, INC. 88.5% 445,000 shares common stock
Wichita, Kansas and 60,920 shares Class B
Specialty architectural products used non-voting common stock
in the construction and remodeling of (acquired 10-25-83 and 5-30-02) 624,920 5,000,000
commercial and institutional buildings.
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
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BOXX TECHNOLOGIES, INC. 15.4% 3,125,354 shares Series B
Austin, Texas convertible preferred stock,
Workstations for computer graphics convertible into 3,125,354
imaging and design. shares of common stock at
$0.50 per share (acquired
8-20-99 thru 8-8-01) $ 1,500,000 $ 2
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
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CMI HOLDING COMPANY, INC. 16.2% 2,327,658 shares Series A
Richardson, Texas preferred stock (acquired
Owns Chase Medical, which develops 8-21-02 and 6-04-03) 4,000,000 4,000,000
and sells devices used in cardiac surgery
including proprietary devices for surgical
intervention to relieve congestive
heart failure.
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+COMCAST CORPORATION <1% ++43,104 shares common stock
Philadelphia, Pennsylvania (acquired 11-18-02) 21 1,239,240
Development, management and operation of
broadband cable networks, electronic
retailing and programming.
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+CONCERT INDUSTRIES LTD. 6.7% 2,833,485 shares common stock
Vancouver, British Columbia (acquired 5-31-00 thru 6-1-01) 9,131,224 2
Manufacture and sale of latex, thermal
and multi-bonded air-laid nonwoven fabrics
having superabsorbent properties.
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DENNIS TOOL COMPANY 67.4% 20,725 shares 5% convertible
Houston, Texas preferred stock, convertible
Polycrystalline diamond compacts (PDCs) into 20,725 shares of common
used in oil field drill bits and in mining stock at $48.25 per share
and industrial applications. (acquired 8-10-98) 999,981 999,981
140,137 shares common stock
(acquired 3-7-94 and 8-10-98) 2,329,963 1,500,000
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3,329,944 2,499,981
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+ENCORE WIRE CORPORATION 16.9% 2,724,500 shares common stock
McKinney, Texas (acquired 7-16-92 thru
Electric wire and cable for residential 10-7-98) 5,800,000 59,939,000
and commercial use.
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EXOPACK HOLDING CORP. 1.4% 5,925 shares common stock
Spartanburg, South Carolina (acquired 7-27-01 thru 9-29-03) 623,790 805,800
Paper and plastic flexible packaging
for products such as pet food, building
materials, chemicals and other commodities.
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EXTREME INTERNATIONAL, INC. 52.8% 12% subordinated notes due
Sugar Land, Texas 2008, $2,229,493 principal
Owns Bill Young Productions, Texas amount (acquired 9-30-03) 1,551,750 2,229,493
Video and Post, and Extreme Communications, 3,935,918 shares Series C
which produce radio and television convertible preferred stock,
commercials and corporate communications videos. convertible into 15,743,672
shares of common stock at
$0.25 per share
(acquired 9-30-03) 2,625,000 3,935,918
375,000 shares 8% Series A
convertible preferred stock,
convertible into 1,500,000
shares of common stock at
$0.25 per share (acquired
9-30-03) 375,000 --
Warrants to purchase 1,303,500
shares of common stock at $0.25
per share, expiring 2008 (acquired
8-11-98 thru 9-30-03) -- --
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4,551,750 6,165,411
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
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+FMC CORPORATION <1% ++6,430 shares common stock
Chicago, Illinois (acquired 6-6-86) $ 66,726 $ 275,332
Chemicals for agricultural,
industrial and consumer markets.
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+FMC TECHNOLOGIES, INC. <1% ++11,057 shares common stock
Chicago, Illinois (acquired 1-2-02) 57,051 298,871
Equipment and systems for the energy,
food processing and air transportation
industries.
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HEELING, INC. 43.0% 1,745,455 shares Series A
Carrollton, Texas preferred stock (acquired
Heelys stealth skate shoes sold through 5-26-00) 480,000 480,000
specialty skate, lifestyle and sporting 436,364 shares Series B
goods stores, footwear chains, department convertible preferred stock,
stores and over the Internet at Heelys.com. convertible into 436,364 shares
of common stock at $0.275
per share (acquired 5-26-00) 120,000 1,600,000
----------- ------------
600,000 2,080,000
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+HOLOGIC, INC. <1% ++158,205 shares common stock
Bedford, Massachusetts (acquired 8-27-99) 220,000 3,203,651
Medical instruments including bone
densitometers, mammography devices and
digital radiography systems.
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+KIMBERLY-CLARK CORPORATION <1% ++77,180 shares common stock
Dallas, Texas (acquired 12-18-97) 2,396,926 4,870,058
Manufacturer of tissue, personal
care and health care products.
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+LIBERTY MEDIA CORPORATION <1% ++705,010 shares Series A
Englewood, Colorado common stock (acquired
Global media and entertainment company 3-9-99 thru 12-12-02) 165,613 7,719,860
owning interests in video programming and
communications businesses.
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+MAIL-WELL, INC. 3.8% ++2,096,588 shares common stock
Englewood, Colorado (acquired 2-18-94 thru 11-10-98) 2,986,870 9,371,748
Envelopes and commercial printing.
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MEDIA RECOVERY, INC. 71.5% 4,800,000 shares Series A
Graham, Texas convertible preferred stock,
Computer and office automation supplies convertible into 4,800,000
and accessories; impact and tilt monitoring shares of common stock at
devices to detect mishandled shipments; $1.00 per share
dunnage for protecting shipments. (acquired 11-4-97) 5,415,000 17,000,000
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ORGANIZED LIVING, INC. 4.6% 3,333,335 shares Series D
Lenexa, Kansas convertible preferred stock,
Specialty retailer of products designed convertible into 3,333,335 shares
to provide home and office storage of common stock at $1.80 per
and organization solutions. share (acquired 1-7-00 and
10-30-00) 6,000,000 1
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
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PALLET ONE, INC. 8.8% 1,633,500 shares Series A
Bartow, Florida preferred stock (acquired
Wood pallet manufacturer with 12 10-18-01) $ 1,350,000 $ 750,000
manufacturing facilities. 150,000 shares common stock
(acquired 10-18-01) 150,000 --
----------- ------------
1,500,000 750,000
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+PALM HARBOR HOMES, INC. 34.4% 7,855,121 shares common stock
Dallas, Texas (acquired 1-3-85 thru 7-31-95) 10,931,955 86,406,000
Integrated manufacturing, retailing,
financing and insuring of manufactured
housing and modular homes.
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+PETSMART, INC. <1% ++300,000 shares common stock
Phoenix, Arizona (acquired 6-1-95) 1,318,771 8,115,000
Retail chain of more than 600 stores
selling pet foods, supplies and services.
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PHARMAFAB, INC. 28.6% 35,000 shares Series A
Grand Prairie, Texas convertible preferred stock,
Value-added contract manufacturer of convertible into 129,506 shares
branded and generic pharmaceutical drugs. common stock at $27.0259 per
share (acquired 8-1-03) 3,500,000 3,500,000
20,000 shares Series B convertible
preferred stock, convertible
into 74,004 shares common stock
at $27.0259 per share
(acquired 8-1-03) 2,000,000 2,000,000
----------- ------------
5,500,000 5,500,000
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THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock
Houston, Texas (acquired 1-5-73 and 3-31-73) 52,600 60,000,000
Specialty chemical products for plumbing,
HVAC, electrical, construction, industrial,
oil field and automotive applications;
owns 20% of Whitmore Manufacturing Company.
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SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock
Hayward, California (acquired 7-16-69) 4,510,400 40,000,000
Cemeteries, mausoleums and mortuaries located
in northern California.
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+SPRINT CORPORATION - FON Group <1% ++72,000 shares common stock
Westwood, Kansas (acquired 6-20-84) 449,654 1,326,960
Diversified telecommunications company.
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+SPRINT CORPORATION - PCS Group <1% ++36,000 shares common stock
Overland Park, Kansas (acquired 11-23-98) 53,991 331,200
Domestic wireless telephony services.
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
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TCI HOLDINGS, INC. - 21 shares 12% Series C
Denver, Colorado cumulative compounding
Cable television systems and microwave preferred stock (acquired
relay systems. 1-30-90) $ -- $ 677,250
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+TEXAS CAPITAL BANCSHARES, INC. 2.4% ++689,656 shares common stock
Dallas, Texas (acquired 5-1-00) 5,000,006 11,110,358
Regional bank holding company with banking
operations in six Texas cities.
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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.
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TEXAS SHREDDER, INC. 53.3% 750 shares Series B convertible
San Antonio, Texas preferred stock, convertible
Design and manufacture of heavy-duty into 750,000 shares of common
shredder systems for recycling steel and stock at $0.10 per share
other materials from junk automobiles. (acquired 3-6-91) 75,000 3,525,000
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VOCALDATA, INC. 1.0% 650,001 shares Series A
Richardson, Texas convertible preferred stock,
Hardware and software for customer premises convertible into 703,899 shares
telephony equipment based on Voice Over of common stock at $0.808 per
Internet Protocol. share (acquired 11-4-99 and
12-3-99) 568,750 1
100,143 shares Series B
convertible preferred stock,
convertible into 123,184 shares
of common stock at $1.43 per
share (acquired 10-26-00) 176,153 1
827,083 shares common stock
(acquired 10-24-03) 744,902 --
----------- ------------
1,489,805 2
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THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock
Rockwall, Texas (acquired 8-31-79) 1,600,000 12,000,000
Specialized mining, industrial and
railroad lubricants; automotive transit
coatings.
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MISCELLANEOUS - Diamond State Ventures, L.P. -
1.9% limited partnership interest
(acquired 10-12-99 thru 12-4-03) 196,875 196,875
- First Capital Group of Texas III,
L.P. - 3.3% limited partnership
interest (acquired 12-26-00
thru 8-28-03) 640,000 640,000
100.0% Humac Company - 1,041,000 shares
common stock (acquired 1-31-75
and 12-31-75) -- 156,000
- STARTech Seed Fund I - 12.6%
limited partnership interest
(acquired 4-17-98 thru 1-5-00) 178,066 1
- STARTech Seed Fund II - 3.2%
limited partnership interest
(acquired 4-28-00 thru 3-21-04) 900,000 1
- Sterling Group Partners I, L.P. -
1.7% limited partnership interest
(acquired 4-20-01 thru 11-21-03) 1,063,100 1,063,100
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TOTAL INVESTMENTS $97,282,649 $406,948,819
=========== ============
- ------------------------------------------------------------------------------------------------------------------------------------
+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 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, 2004, restricted securities represented
approximately 87.9% 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 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.
(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
cover common stocks owned at March 31, 2004 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks. They 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
-----------
All Components, Inc. ............................ $ 2,500,000
AmPro Mortgage Corporation ...................... 1,500,000
CMI Holding Company, Inc. ....................... 1,000,000
CashWorks, Inc. ................................. 954,945
Diamond State Ventures, L.P. .................... 12,500
Exopack Holding Corp. ........................... 99,960
First Capital Group of Texas III, L.P............ 240,000
PharmaFab, Inc. ................................. 5,500,000
Sterling Group Partners I, L.P. ................. 484,000
StarTech Seed Fund II ........................... 150,000
Miscellaneous ................................... 17,435
-----------
$12,458,840
===========
Dispositions
Amount
Cost Received
----------- -----------
CashWorks, Inc. ................................. $ 3,000,100 $12,780,483
Concert Industries Ltd........................... 188,900 --
PTS Holdings, Inc. .............................. -- 51,245
PETsMART, Inc. .................................. 676,753 3,654,339
Miscellaneous ................................... 17,435 --
----------- -----------
$ 3,883,188 $16,486,067
=========== ===========
Repayments Received.............................. $ 2,754,845
===========
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Financial Condition
March 31
---------------------------
Assets 2004 2003
------------ ------------
Investments at market or fair value (Notes
1 and 2)
Companies more than 25% owned
(Cost: 2004 - $23,114,865,
2003 - $23,114,865) ................. $237,095,981 $202,893,981
Companies 5% to 25% owned
(Cost: 2004 - $30,431,224,
2003 - $30,120,124) ................. 70,189,005 18,566,004
Companies less than 5% owned
(Cost: 2004 - $43,736,560,
2003 - $38,226,853) ................. 99,663,833 65,600,452
------------ ------------
Total investments
(Cost: 2004 - $97,282,649,
2003 - $91,461,842) ................. 406,948,819 287,060,437
Cash and cash equivalents ................ 10,150,796 4,650,388
Receivables .............................. 76,477 297,664
Other assets (Note 7) .................... 6,802,767 6,481,383
------------ ------------
Totals ................................ $423,978,859 $298,489,872
============ ============
March 31
------------------------------
Liabilities and Shareholders' Equity 2004 2003
------------- -------------
Note payable to bank (Note 4) ................... $ 15,500,000 $ 15,500,000
Notes payable to portfolio company (Note 4) ..... 5,000,000 7,500,000
Accrued interest and other liabilities (Note 7) . 1,815,996 1,868,991
Income taxes payable ............................ 2,726,850 --
Deferred income taxes (Note 3) .................. 108,312,663 67,153,906
------------- -------------
Total liabilities ........... 133,355,509 92,022,897
------------- -------------
Shareholders' equity (Notes 3 and 5)
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,294,416
shares at March 31, 2004 and 4,266,416
shares at March 31, 2003 ................. 4,294,416 4,266,416
Additional capital ........................... 7,904,997 6,935,497
Undistributed net investment
income ..................................... 3,578,088 3,299,659
Undistributed net realized gain on
investments ................................ 79,381,980 71,190,108
Unrealized appreciation of investments -
net of deferred income taxes ............... 202,497,171 127,808,597
Treasury stock - at cost
(437,365 shares) ........................... (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $75.35 per share on the 3,857,051 shares
outstanding at March 31, 2004, and $53.92
per share on the 3,829,051 shares
outstanding at March 31, 2003 .............. 290,623,350 206,466,975
------------- -------------
Totals ....................................... $ 423,978,859 $ 298,489,872
============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended March 31
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Investment income (Note 9):
Interest ........................................................................ $ 213,987 $ 204,490 $ 322,521
Dividends ....................................................................... 3,860,937 3,360,990 3,293,633
Management and directors' fees .................................................. 632,864 495,900 530,400
------------ ------------ ------------
4,707,788 4,061,380 4,146,554
------------ ------------ ------------
Operating expenses:
Salaries ........................................................................ 997,079 911,671 894,612
Net pension benefit (Note 7) .................................................... (272,912) (387,923) (504,536)
Other operating expenses (Notes 6 and 8) ........................................ 775,847 626,106 633,254
------------ ------------ ------------
1,500,014 1,149,854 1,023,330
------------ ------------ ------------
Income before interest expense and income taxes .................................... 3,207,774 2,911,526 3,123,224
Interest expense ................................................................... 531,068 476,761 929,372
------------ ------------ ------------
Income before income taxes ......................................................... 2,676,706 2,434,765 2,193,852
Income tax expense (Note 3) ........................................................ 89,646 135,513 151,956
------------ ------------ ------------
Net investment income .............................................................. $ 2,587,060 $ 2,299,252 $ 2,041,896
============ ============ ============
Proceeds from disposition of investments ........................................... $ 16,486,067 $ 4,563,763 $ 5,923,165
Cost of investments sold (Note 1) .................................................. 3,883,188 2,556,651 6,685,279
------------ ------------ ------------
Realized gain (loss) on investments before income taxes (Note 9) ................... 12,602,879 2,007,112 (762,114)
Income tax expense (benefit) ....................................................... 4,411,007 661,384 (224,180)
------------ ------------ ------------
Net realized gain (loss) on investments ............................................ 8,191,872 1,345,728 (537,934)
------------ ------------ ------------
Increase (decrease) in unrealized appreciation of investments before income taxes .. 114,067,574 (69,688,616) 36,971,348
Increase (decrease) in deferred income taxes on appreciation of investments (Note 3) (39,379,000) (24,317,000) 12,797,000
------------ ------------ ------------
Net increase (decrease) in unrealized appreciation of investments .................. 74,688,574 (45,371,616) 24,174,348
------------ ------------ ------------
Net realized and unrealized gain (loss) on investments ............................. $ 82,880,446 $(44,025,888) $ 23,636,414
============ ============ ============
Increase (decrease) in net assets from operations .................................. $ 85,467,506 $(41,726,636) $ 25,678,310
============ ============ ============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
Years Ended March 31
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Operations
Net investment income ........................................... $ 2,587,060 $ 2,299,252 $ 2,041,896
Net realized gain (loss) on investments ......................... 8,191,872 1,345,728 (537,934)
Net increase (decrease) in unrealized appreciation of investments 74,688,574 (45,371,616) 24,174,348
------------- ------------- -------------
Increase (decrease) in net assets from operations ............... 85,467,506 (41,726,636) 25,678,310
Distributions from:
Undistributed net investment income ............................. (2,308,631) (2,297,431) (2,294,631)
Capital share transactions
Exercise of employee stock options .............................. 997,500 -- 498,750
------------- ------------- -------------
Increase (decrease) in net assets ............................... 84,156,375 (44,024,067) 23,882,429
Net assets, beginning of year ..................................... 206,466,975 250,491,042 226,608,613
------------- ------------- -------------
Net assets, end of year ........................................... $ 290,623,350 $ 206,466,975 $ 250,491,042
============= ============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended March 31
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities
Increase (decrease) in net assets from operations ........................ $ 85,467,506 $(41,726,636) $ 25,678,310
Adjustments to reconcile increase (decrease) in net assets from operations
to net cash provided by (used in) operating activities:
Proceeds from disposition of investments ............................ 16,486,067 4,563,763 5,923,165
Purchases of securities ............................................. (12,458,840) (11,904,639) (3,545,458)
Maturities of securities ............................................ 2,754,845 80,000 2,267,970
Depreciation and amortization ....................................... 19,089 21,668 26,258
Net pension benefit ................................................. (272,912) (387,923) (504,536)
Net realized and unrealized loss (gain) on investments .............. (82,880,446) 44,025,888 (23,636,414)
Decrease (increase) in receivables .................................. 221,187 1,455,633 (1,488,920)
Decrease (increase) in other assets ................................. 5,023 (29,447) (17,922)
Increase (decrease) in accrued interest and other liabilities ....... 41,701 (96,188) (44,479)
Decrease in accrued pension cost .................................... (167,281) (167,280) (199,280)
Deferred income taxes ............................................... 95,600 135,800 176,600
------------ ------------ ------------
Net cash provided by (used in) operating activities ...................... 9,311,539 (4,029,361) 4,635,294
------------ ------------ ------------
Cash flows from financing activities
Increase in note payable to bank ......................................... -- 9,000,000 1,500,000
Increase (decrease) in notes payable to portfolio company ................ (2,500,000) 5,000,000 (3,500,000)
Decrease in subordinated debenture ....................................... -- (5,000,000) --
Distributions from undistributed net investment income ................... (2,308,631) (2,297,431) (2,294,631)
Proceeds from exercise of employee stock options ......................... 997,500 -- 498,750
------------ ------------ ------------
Net cash provided by (used in) financing activities ...................... (3,811,131) 6,702,569 (3,795,881)
------------ ------------ ------------
Net increase in cash and cash equivalents ................................ 5,500,408 2,673,208 839,413
Cash and cash equivalents at beginning of year ........................... 4,650,388 1,977,180 1,137,767
------------ ------------ ------------
Cash and cash equivalents at end of year ................................. $ 10,150,796 $ 4,650,388 $ 1,977,180
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest ................................. $ 531,194 $ 606,722 $ 922,011
Income taxes ............................. $ -- $ -- $ 287
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. Capital
Southwest Management Corporation ("CSMC"), a wholly-owned subsidiary of CSC, is
the management company for CSC and CSVC. The following is a summary of
significant accounting policies followed in the preparation of the consolidated
financial statements of CSC, CSVC and CSMC (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.
Indemnification. The Company enters into agreements that contain customary
indemnification provisions. The maximum exposure under these indemnification
agreements is unknown, but the Company has had no previous claims or losses and
expects the risk of losses to be remote.
Related Parties. Several of the Company's directors, officers and employees
serve on the boards of various portfolio companies.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Stock-Based Compensation. Effective April 1, 2003, the Company adopted the
fair value method of recording compensation expense related to all stock options
granted after March 31, 2003, in accordance with FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123". Accordingly, the fair value of stock options as determined
on the date of grant using the Black-Scholes option-pricing model will be
expensed over the vesting period of the related stock options. No stock options
were granted during the fiscal year ended March 31, 2004.
Prior to April 1, 2003, the Company accounted for its stock-based
compensation under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". No
stock-based compensation cost is reflected in net asset value, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The following table illustrates the effect on net asset value and net asset
value per share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123 to stock-based compensation.
Years Ended March 31
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net asset value, as reported $290,623,350 $206,466,975 $250,491,042
Deduct: Total fair value computed
stock-based compensation 179,440 179,440 59,216
------------ ------------ ------------
Pro forma net asset value $290,443,910 $206,287,535 $250,431,826
============ ============ ============
Net asset value per share:
Basic - as reported $75.35 $53.92 $65.42
====== ====== ======
Basic - pro forma $75.30 $53.87 $65.40
====== ====== ======
Diluted - as reported $75.32 $53.79 $65.20
====== ====== ======
Diluted- pro forma $75.27 $53.74 $65.19
====== ====== ======
The diluted net asset value per share calculation assumes all vested
outstanding options for which the market price exceeds the exercise price have
been exercised.
2. Valuation of Investments
The consolidated financial statements as of March 31, 2004 and 2003 include
securities valued at $357,538,427 (87.9% of the value of the consolidated
investment portfolio) and $261,680,466 (91.2% 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, 2003, 2002 and 2001, 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.
For the year ended December 31, 2003, CSC and CSVC had net investment
income for book and tax purposes of $2,308,631 and $693,569, respectively, all
of which has been distributed. During 2003, CSC and CSVC had a net capital gain
for book purposes of $2,638,095 and $2,676,859, respectively, and a net capital
gain for tax purposes of $2,579,248 and $2,669,314, respectively, which were
offset by a capital loss carryforward of $4,792,370 and $2,758,084,
respectively. As of December 31, 2003, CSC and CSVC had capital loss
carryforwards of $2,213,122 (expires 2009-2010) and $88,770 (expires 2009),
respectively, which may be used to offset future taxable capital gains.
The aggregate cost of investments for federal income tax purposes as of
March 31, 2004 was $100,752,741. Such investments had unrealized appreciation of
$335,974,385 and unrealized depreciation of $26,308,215 for book purposes, or
net unrealized appreciation of $309,666,170. They had unrealized appreciation of
$333,617,078 and unrealized depreciation of $27,420,999 for tax purposes, or net
unrealized appreciation of $306,196,079 at March 31, 2004. The difference
between book basis and tax basis unrealized appreciation is attributable
primarily to interest income that was accrued for tax purposes, but not for book
purposes.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $107,169,000 and
$67,790,000 have been provided on net unrealized appreciation of investments of
$309,666,170 and $195,598,595 at March 31, 2004 and 2003, 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, 2004 and 2003.
4. Notes Payable
The note payable to bank at March 31, 2004 and 2003 was from an unsecured
revolving line of credit of $25,000,000 of which $15,500,000 had been drawn at
both March 31, 2004 and 2003. 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, 2004.
The notes payable to portfolio company were demand promissory notes to
Skylawn Corporation with interest payable at the greater of prime minus 2.0% or
the Applicable Federal Rate established by the Internal Revenue Service.
Interest expense on these portfolio company notes was $151,089 in 2004, $75,531
in 2003 and $216,280 in 2002.
5. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase -0-, 28,000
and 28,000 shares of common stock at $35.625 per share (the market price at the
time of grant) were outstanding and exercisable at March 31, 2004, 2003 and
2002, respectively. During the three years ended March 31, 28,000 options were
exercised in 2004, -0- were exercised in 2003 and 14,000 were exercised in 2002.
The 1984 Incentive Stock Option Plan expired in 1994.
On July 19, 1999, shareholders approved the 1999 Stock Option Plan
("Plan"), which provides for the granting of stock options to employees and
officers of the Company and authorizes the issuance of common stock upon the
exercise of such options for up to 140,000 shares of common stock. All options
are granted at or above market price and generally 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, 2004, there were 85,500 additional shares available for grant
under the Plan. The per share weighted average fair value of stock options
granted during 2002 was $20.76 on the date of grant using the Black Scholes
option-pricing model with the following assumptions: expected dividend yield of
..92%, risk-free interest rate of 5.14%, expected volatility of 20.6%, and
expected life of 7 years.
The following summarizes activity in the stock option plans for the years
ended March 31, 2004, 2003 and 2002:
Number Weighted Average
of shares Exercise Price
--------- --------------
Balance at April 1, 2001 80,000 $55.856
Granted 44,000 65.239
Exercised (14,000) 35.625
Forfeited (27,500) 65.000
Expired -- --
------- -------
Balance at March 31, 2002 82,500 58.336
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
------- -------
Balance at March 31, 2003 82,500 58.336
Granted -- --
Exercised (28,000) 35.625
Forfeited -- --
Expired -- --
------- -------
Balance at March 31, 2004 54,500 $70.004
======= =======
At March 31, 2004, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $65.00 - $84.70 and 6.12
years, respectively.
At March 31, 2004, 2003 and 2002, the number of options exercisable was
24,200, 44,750 and 36,100, respectively and the weighted average exercise price
of those options was $73.24, $50.61, $45.93, respectively.
6. 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, 2004, the Company made contributions to the
ESOP, which were charged against net investment income, of $88,937 in 2004,
$44,417 in 2003 and $28,322 in 2002.
7. 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, 2004.
The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2004, 2003 and 2002:
Years Ended March 31
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Change in benefit obligation
Benefit obligation at beginning
of year ........................ $ 3,676,599 $ 3,284,463 $ 3,255,669
Service cost ......................... 81,309 41,142 58,428
Interest cost ........................ 215,511 202,424 207,940
Amendments ........................... -- 346,882 --
Actuarial loss ....................... 189,566 165,560 94,298
Benefits paid ........................ (363,872) (363,872) (331,872)
------------ ------------ ------------
Benefit obligation at end of year .... $ 3,799,113 $ 3,676,599 $ 3,284,463
============ ============ ============
Change in plan assets
Fair value of plan assets at beginning
of year ........................ $ 6,881,723 $ 9,410,320 $ 8,758,035
Actual return on plan assets ......... 3,512,912 (2,164,725) 984,157
Benefits paid ........................ (363,872) (363,872) (331,872)
------------ ------------ ------------
Fair value of plan assets at end of
year ............................ $ 10,030,763 $ 6,881,723 $ 9,410,320
============ ============ ============
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
----------------------------
2004 2003
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................ $ (3,403,639) $ (3,346,711)
============ ============
Projected benefit obligation for service rendered to
date .......................................... $ (3,799,113) $ (3,676,599)
Plan assets at fair value* ......................... 10,030,763 6,881,723
------------ ------------
Excess of plan assets over the projected benefit
obligation .................................... 6,231,650 3,205,124
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions ........................ 275,731 3,023,057
Unrecognized prior service costs ................... 210,351 217,886
Unrecognized net assets being amortized over
20 years ...................................... (73,815) (147,646)
------------ ------------
Prepaid pension cost included in other assets ...... $ 6,643,917 $ 6,298,421
============ ============
- -----------------
*Primarily equities and bonds including approximately 28,000 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Service cost - benefits earned during
the year ......................... $ 81,309 $ 41,142 $ 58,428
Interest cost on projected benefit
obligation ....................... 215,511 202,424 207,940
Expected return on assets ............. (576,020) (641,722) (783,467)
Net amortization and deferral ......... (66,296) (104,087) (114,284)
------------ ------------ ------------
Net pension benefit from qualified plan $ (345,496) $ (502,243) $ (631,383)
============ ============ ============
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, 2004, 2003 and 2002:
Years Ended March 31
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ................... $ 1,353,386 $ 1,778,496 $ 1,758,214
Service cost .................... 5,464 5,389 8,573
Interest cost ................... 82,683 104,436 113,779
Amendments ...................... -- (347,147) --
Actuarial (gain) loss ........... 139,839 (20,507) 97,210
Benefits paid ................... (167,281) (167,281) (199,280)
----------- ----------- -----------
Benefit obligation at end of year $ 1,414,091 $ 1,353,386 $ 1,778,496
=========== =========== ===========
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
--------------------------
2004 2003
----------- -----------
Projected benefit obligation ..................... $(1,414,091) $(1,353,386)
Unrecognized net gain from past ex-
perience different from that assumed
and effects of changes in assumptions ....... 84,867 (54,972)
Unrecognized prior service costs ................. (270,699) (286,262)
----------- -----------
Accrued pension cost included in other liabilities $(1,599,923) $(1,694,620)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 2004, 2003 and 2002 of $72,584, $114,320 and $126,847, 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 5.75% and 5.0%, respectively, at March 31,
2004, 6.0% and 5.0%, respectively, at March 31, 2003 and 6.5% and 5.0%,
respectively, at March 31, 2002. The expected long-term rate of return used to
project estimated earnings on plan assets for the qualified plan was 6.0% for
the years ended March 31, 2004 and March 31, 2003 and 7.5% for the year ended
March 31, 2002. The calculations also assume retirement at age 65, the normal
retirement age.
8. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$2,700,025 in six portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $75,000 through February, 2008. For the
three years ended March 31, total rental expense charged to investment income
was $74,122 in 2004, $60,482 in 2003 and $58,984 in 2002.
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
2004 Interest Dividends Income Taxes
- ---- --------------------------------------- -------------
Companies more than
25% owned ......... $ -- $ 3,577,800 $ 629,000 $ --
Companies 5% to 25%
owned ............. -- -- 3,864 (188,900)
Companies less than
5% owned .......... 203,304 283,137 -- 12,791,779
Other sources,
including temporary
investments ....... 10,683 -- -- --
---------------------------------------- ------------
$ 213,987 $ 3,860,937 $ 632,864 $ 12,602,879
======================================== ============
2003
- ----
Companies more than
25% owned ......... $ 5,600 $ 3,073,770 $494,900 $ --
Companies 5% to 25%
owned ............. -- -- -- (47,525)
Companies less than
5% owned .......... 180,000 287,220 1,000 2,054,637
Other sources,
including temporary
investments ....... 18,890 -- -- --
---------------------------------------- ------------
$ 204,490 $ 3,360,990 $ 495,900 $ 2,007,112
======================================== ============
2002
- ----
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)
======================================== ============
Selected Per Share Data and Ratios
Years Ended March
-----------------------------------------------------------------
Per Share Data 2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
Investment income .............................................. $ 1.22 $ 1.06 $ 1.08 $ 1.06 $ .86
Operating expenses ............................................. (.39) (.30) (.27) (.26) (.27)
Interest expense ............................................... (.14) (.12) (.24) (.30) (.12)
Income taxes ................................................... (.02) (.04) (.04) (.05) (.03)
--------- --------- --------- --------- ---------
Net investment income .......................................... .67 .60 .53 .45 .44
Distributions from undistributed net investment income ......... (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments ........................ 2.13 .35 (.14) (.85) 1.58
Net increase (decrease) in unrealized appreciation of
investments after deferred taxes ........................... 19.37 (11.85) 6.31 (1.69) (6.49)
Exercise of employee stock options* ............................ (.14) -- (.08) -- --
--------- --------- --------- --------- ---------
Increase (decrease) in net asset value ......................... 21.43 (11.50) 6.02 (2.69) (5.07)
Net asset value
Beginning of year ............................................ 53.92 65.42 59.40 62.09 67.16
--------- --------- --------- --------- ---------
End of year .................................................. $ 75.35 $ 53.92 $ 65.42 $ 59.40 $ 62.09
========= ========= ========= ========= =========
Increase (decrease) in deferred taxes on unrealized
appreciation ............................................... $ 10.09 $ (6.35) $ 3.26 $ (1.01) $ (3.49)
Deferred taxes on unrealized appreciation:
Beginning of year ............................................ 17.70 24.05 20.79 21.80 25.29
--------- --------- --------- --------- ---------
End of year .................................................. $ 27.79 $ 17.70 $ 24.05 $ 20.79 $ 21.80
========= ========= ========= ========= =========
Ratios and Supplemental Data
Ratio of operating expenses to average net assets .............. .63% .52% .42% .42% .42%
Ratio of operating expenses to average net assets plus average
deferred taxes on unrealized appreciation .................. .47% .39% .31% .31% .31%
Ratio of net investment income to average net assets ........... 1.09% 1.04% .85% .74% .67%
Portfolio turnover rate ........................................ 3.74% 1.53% 1.05% 2.56% 4.26%
Net asset value total return ................................... 41.16% (16.75%) 11.18% (3.25%) (5.12%)
Shares outstanding at end of period (000s omitted) ............. 3,857 3,829 3,829 3,815 3,815
- ----------------
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statement of financial
condition of Capital Southwest Corporation and subsidiaries, including the
portfolio of investments on pages 10-14, as of March 31, 2004, and the related
consolidated statements of operations, changes in net assets, and cash flows,
and the selected per share data and ratios on page 26 for the year then ended.
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 audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements 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 verification by examination of
securities held by the custodian as of March 31, 2004 and confirmation of
securities not held by the custodian by correspondence with others. 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 audit provides a reasonable basis for our
opinion.
In our opinion the consolidated financial statements and the selected per
share data and ratios referred to above present fairly, in all material
respects, the consolidated financial position of Capital Southwest Corporation
and subsidiaries at March 31, 2004, the consolidated results of its operations,
changes in its net assets, and its cash flows, and the selected per share data
and ratios for the year then ended, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
May 12, 2004
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statement of financial
condition of Capital Southwest Corporation and subsidiaries as of March 31,
2003, and the related consolidated statements of operations, changes in net
assets, and cash flows for each of the years in the two-year period ended March
31, 2003, and the selected per share data and ratios for each of the years in
the four-year period ended March 31, 2003. These consolidated 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 consolidated
financial statements and per share data and ratios based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. 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 subsidiaries as of March
31, 2003, the results of their operations, the changes in their net assets and
their cash flows for each of the years in the two-year period ended March 31,
2003, and the selected per share data and ratios for each of the years in the
four-year period ended March 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
April 25, 2003
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 $10,247 in 2004, $17,346 in 2003 and $48,877 in 2002. The Company
also receives management fees from its wholly-owned portfolio companies which
aggregated $597,000 in 2004 and $458,400 in 2003 and 2002. During the three
years ended March 31, 2004, the Company recorded dividend income from the
following sources:
Years Ended March 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
AT&T Corp. ......................... $ 23,984 $ 19,987 $ 19,987
Alamo Group Inc. ................... 677,112 677,112 677,112
Balco, Inc. ........................ 252,960 -- --
Dennis Tool Company ................ 49,999 49,999 49,999
Kimberly-Clark Corporation ......... 109,596 95,703 87,985
The RectorSeal Corporation ......... 1,407,729 960,000 960,000
Skylawn Corporation ................ 950,000 1,146,659 1,069,480
TCI Holdings, Inc. ................. 81,270 81,270 81,270
Texas Shredder, Inc. ............... 7,500 33,667 44,506
The Whitmore Manufacturing Company . 240,000 240,000 240,000
Other .............................. 60,787 56,593 63,294
---------- ---------- ----------
$3,860,937 $3,360,990 $3,293,633
========== ========== ==========
Total operating expenses, excluding interest expense, increased by $350,160
or 30.5% and by $126,524 or 12.4% during the years ended March 31, 2004 and
2003, 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 $452,611 during the year ended March 31, 2003 due to a
decrease in interest rates and the payoff of the subordinated debenture on June
3, 2002. For the year ended March 31, 2002, interest expense decreased by
$214,965 due to a decrease in interest rates.
Net Realized Gain (Loss) on Investments
Net realized gain on investments was $8,191,872 (after income tax expense
of $4,411,007) during the year ended March 31, 2004, compared with a gain of
$1,345,728 (after income tax expense of $661,384) during 2003 and a loss of
$537,934 (after income tax benefit of $224,180) during 2002. 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
$114,067,574, $(69,688,616) and $36,971,348 in 2004, 2003 and 2002,
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
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Alamo Group Inc. .............. $ 8,464,000 $ (8,464,000) $ 2,821,000
All Components, Inc. .......... 2,900,000 -- (50,000)
AmPro Mortgage Corporation .... (2,529,167) -- --
Concert Industries Ltd. ....... (442,998) (5,479,000) (3,740,000)
Encore Wire Corporation ....... 46,316,000 (10,898,000) 10,898,000
Extreme International, Inc. .. 4,613,661 551,750 --
Mail-Well, Inc. ............... 5,115,674 (2,557,926) (524,000)
Media Recovery, Inc. .......... 7,000,000 -- (8,000,000)
Organized Living, Inc. ........ -- (2,999,999) (3,000,000)
Palm Harbor Homes, Inc. ....... 15,710,000 (39,275,000) 31,420,000
PETsMART, Inc. ................ 4,335,000 (436,051) 5,298,343
The RectorSeal Corporation .... 5,000,000 5,000,000 2,500,000
Texas Capital Bancshares, Inc. 6,110,352 -- --
As shown in the above table for the year ended March 31, 2004, we sustained
a major $46,316,000 increase in the value of our investment in Encore Wire
Corporation. This was due to the significant increase in Encore's sales and
earnings which stemmed partly from higher copper prices. In the prior period, we
experienced a $10,898,000 decline in the value of our investment as overcapacity
in the electric wire and cable industry led to intense price competition and
lower profit margins. During the year ended March 31, 2004, the value of our
investment in Palm Harbor Homes, Inc. increased by $15,710,000 due to
anticipated improvement of the manufactured housing industry resulting from
substantially reduced inventories of foreclosed homes and reappearance of
sources of chattel mortgage financing. In the prior period, the value of our
investment decreased by $39,275,000 due to the unfavorable outlook for the
manufactured housing industry.
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, 2004."
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, 2004 consolidated deferred Federal income taxes of
$107,169,000 were provided on net unrealized appreciation of investments of
$309,666,170 compared with deferred taxes of $67,790,000 on net unrealized
appreciation of $195,598,595 at March 31, 2003. Deferred income taxes at March
31, 2004 and 2003 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, 2004, the Company invested $12,458,840 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 2003 and 2002 fiscal years, the Company invested a total
of $11,904,639 and $3,545,458, respectively.
Financial Liquidity and Capital Resources
At March 31, 2004, the Company had cash and cash equivalents of
approximately $10.2 million. Pursuant to Small Business Administration ("SBA")
regulations, cash and cash equivalents of $0.2 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 $64.5 million. The Company also has an unsecured
$25,000,000 revolving line of credit from a commercial bank, of which $9,500,000
was available at March 31, 2004. 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 36 years. Retention of future gains is
viewed as an important source of funds to sustain the Company's investment
activity. Approximately $49.4 million of the Company's investment portfolio is
represented by unrestricted publicly-traded securities, which have an
ascertainable market value and represent a 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. At March 31, 2004, the Company
owed $5,000,000 to Skylawn Corporation.
Management believes that the Company's cash and cash equivalents and cash
available from other sources described above are adequate to meet its expected
requirements. Consistent with the long-term strategy of the Company, the
disposition of investments from time to time may also be an important source of
funds for future investment activities.
Contractual Obligations
As shown below, the Company had the following contractual obligations as of
March 31, 2004. For further information see Note 4 and Note 8 of the
Consolidated Financial Statements.
Payments Due By Period ($ in Thousands)
---------------------------------------
Less than More Than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- -----------------------------------------------------------------------------------------
Long-Term Debt Obligations $20,500 $20,500 -- -- --
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations -- -- $75 $75 --
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities
Reflected on the Company's
Balance Sheet under GAAP -- -- -- -- --
-------------------------------------------------------
Total $20,500 $20,500 $75 $75 --
-------------------------------------------------------
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)
1994 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ............. $ 41,993 $ 49,730 $ 58,544 $ 59,908 $ 61,154 $ 73,580
Unrealized appreciation ......... 132,212 153,031 198,386 233,383 340,132 276,698
--------- --------- --------- --------- --------- ---------
Investments at market or
fair value ................... 174,205 202,761 256,930 293,291 401,286 350,278
Total assets .................... 270,874 213,811 326,972 310,760 522,324 360,786
Notes payable * ................. 15,000 11,000 11,000 5,000 5,000 5,000
Deferred taxes on
unrealized appreciation ...... 45,932 53,247 69,121 81,313 118,674 96,473
Net assets ...................... 133,053 147,370 189,048 218,972 296,023 256,232
Shares outstanding .............. 3,715 3,735 3,767 3,767 3,788 3,815
- --------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ........... $ 2,870 $ 2,447 $ 2,855 $ 2,574 $ 2,726 $ 1,762
Net realized gain (loss) on
investments .................. (475) 142 11,174 6,806 6,485 995
Net increase (decrease) in
unrealized appreciation
before distributions ......... 11,160 13,584 38,746 22,804 69,388 (41,233)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions ......... 13,555 16,173 52,775 32,184 78,599 (38,476)
Cash dividends paid ............. (2,228) (2,241) (2,270) (2,260) (2,268) (2,280)
Securities distributed .......... -- -- (9,402) -- -- --
Employee stock options
exercised .................... 272 385 575 -- 720 965
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets 11,599 14,317 41,678 29,924 77,051 (39,791)
- --------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ...... $ 12.36 $ 14.26 $ 18.35 $ 21.59 $ 31.33 $ 25.29
Net assets ...................... 35.81 39.46 50.18 58.13 78.15 67.16
Closing market price ............ 38.125 38.00 60.00 67.875 94.00 73.00
Cash dividends paid ............. .60 .60 .60 .60 .60 .60
Securities distributed .......... -- -- 2.50 -- -- --
* Excludes quarter-end borrowing which is repaid on the first business day
after year end.
Selected Consolidated Financial Data (continued)
(all figures in thousands except per share data)
2000 2001 2002 2003 2004
- -------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ............. $ 85,002 $ 87,602 $ 82,194 $ 91,462 $ 97,283
Unrealized appreciation ......... 238,627 228,316 265,287 195,598 309,666
--------- --------- --------- --------- ---------
Investments at market or
fair value ................... 323,629 315,918 347,481 287,060 406,949
Total assets .................... 392,586 322,668 357,183 298,490 423,979
Notes payable * ................. 10,000 16,000 14,000 23,000 20,500
Deferred taxes on
unrealized appreciation ...... 83,151 79,310 92,107 67,790 107,169
Net assets ...................... 236,876 226,609 250,491 206,467 290,623
Shares outstanding .............. 3,815 3,815 3,829 3,829 3,857
------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ........... $ 1,663 $ 1,723 $ 2,042 $ 2,299 $ 2,587
Net realized gain (loss) on
investments .................. 6,020 (3,231) (538) 1,346 8,192
Net increase (decrease) in
unrealized appreciation
before distributions ......... (24,750) (6,470) 24,174 (45,372) 74,689
--------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions ......... (17,067) (7,978) 25,678 (41,727) 85,468
Cash dividends paid ............. (2,289) (2,289) (2,295) (2,297) (2,309)
Securities distributed .......... -- -- -- -- --
Employee stock options
exercised .................... -- -- 499 -- 997
--------- --------- --------- --------- ---------
Increase (decrease) in net assets (19,356) (10,267) 23,882 (44,024) 84,156
- -------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ...... $ 21.80 $ 20.79 $ 24.05 $ 17.70 $ 27.79
Net assets ...................... 62.09 59.40 65.42 53.92 75.35
Closing market price ............ 54.75 65.00 68.75 48.15 75.47
Cash dividends paid ............. .60 .60 .60 .60 .60
Securities distributed .......... -- -- -- -- --
* Excludes quarter-end borrowing which is repaid on the first business day
after year end.
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 700 record holders of its common stock at
March 31, 2004. This total does not include an estimated 2,300 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, 2002.................................... $79.24 $66.31
September 30, 2002............................... 70.25 58.00
December 31, 2002................................ 60.24 45.35
March 31, 2003................................... 53.00 43.00
Quarter Ended High Low
- ------------------------------------------------------------------------
June 30, 2003.................................... $66.75 $ 47.26
September 30, 2003............................... 60.00 53.31
December 31, 2003............................... 64.75 56.35
March 31, 2004................................... 78.00 61.15
Dividends
The payment dates and amounts of cash dividends per share since April 1,
2002 are as follows:
Payment Date Cash Dividend
- -----------------------------------------------------------------------
May 31, 2002.............................................. $0.20
November 29, 2002......................................... 0.40
May 30, 2003.............................................. 0.20
November 28, 2003......................................... 0.40
May 28, 2004.............................................. 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 19, 2004, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.