Exhibit 13.1
Twelve Largest Investments - March 31, 2007
Heelys, Inc. $195,664,000
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Heelys, Inc., Carrollton, Texas, manufacturers and markets specialty
stealth skate footwear, equipment and apparel under the brand name Heelys. The
company manufactures its products in China and Korea and distributes them
through domestic and international sporting goods chains, department and
lifestyle stores and specialty footwear retailers.
During the year ended December 31, 2006, Heelys reported net income of
$29,174,000 ($1.16 per share) on net sales of $188,208,000, compared with net
income of $4,347,000 ($0.17 per share) on net sales of $43,950,000 in the
previous year. The March 30, 2007 closing Nasdaq market price of Heely's common
stock was $29.34 per share.
At March 31, 2007, the $102,490 investment in Heelys by Capital Southwest's
subsidiary was valued at $195,664,000 ($21.00 per share), consisting of
9,317,310 restricted shares of common stock, representing a fully-diluted equity
interest of 31.8%.
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The RectorSeal Corporation $98,000,000
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The RectorSeal Corporation, Houston, Texas, with facilities in Texas, New
York and Idaho, manufactures specialty chemical products including pipe thread
sealants, firestop sealants, plastic cements and other formulations for
plumbing, HVAC, electrical and industrial applications. The company also makes
special tools for plumbers and systems for containing smoke from building fires.
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 and
sells automotive chemical products. RectorSeal also owns a 20% equity interest
in The Whitmore Manufacturing Company (described on page 9).
During the year ended March 31, 2007, RectorSeal earned $10,381,000 on
revenues of $103,922,000, compared with earnings of $8,655,000 on revenues of
$95,060,000 in the previous year. RectorSeal's earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.
At March 31, 2007, Capital Southwest owned 100% of RectorSeal's common
stock having a cost of $52,600 and a value of $98,000,000.
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Palm Harbor Homes, Inc. $70,696,000
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Palm Harbor Homes, Dallas, Texas, is an integrated manufacturer and
retailer of manufactured and modular housing produced in 14 plants and sold in
27 states by 107 company-owned retail stores and builder locations and
approximately 350 independent dealers, builders and developers. The company
provides financing through its 80% owned subsidiary, CountryPlace Mortgage, and
sells insurance through its subsidiary, Standard Casualty. Palm Harbor's
traditional manufactured homes and its upscale modular homes are designed to
meet the need for attractive, affordable housing.
During the year ended March 30, 2007, Palm Harbor reported a net loss of
$11,565,000 ($0.51 per share) on net sales of $661,247,000, compared with net
income of $11,114,000 ($0.49 per share) on net sales of $710,635,000 in the
previous year. The March 30, 2007 closing Nasdaq market price of Palm Harbor's
common stock was $14.34 per share.
At March 31, 2007, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $70,696,000 ($9.00 per share),
consisting of 7,855,121 restricted shares of common stock, representing a
fully-diluted equity interest of 30.5%.
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Encore Wire Corporation $69,475,000
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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 and also armored 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, 2006, Encore reported net income of
$115,133,000 ($4.86 per share) on net sales of $1,249,330,000, compared with net
income of $50,079,000 ($2.13 per share) on net sales of $758,089,000 in the
previous year. The March 30, 2007 closing Nasdaq bid price of Encore's common
stock was $25.29 per share.
At March 31, 2007, the $5,800,000 investment in 4,086,750 shares of
Encore's restricted common stock by Capital Southwest and its subsidiary was
valued at $69,475,000 ($17.00 per share), representing a fully-diluted equity
interest of 16.9%.
1
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Alamo Group Inc. $47,962,000
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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, mobile excavators, street-sweeping and snow removal
equipment and replacement parts. Founded in 1969, Alamo Group operates 16
manufacturing facilities and serves governmental, industrial and agricultural
markets in North America, Europe, and Australia.
For the year ended December 31, 2006, Alamo reported net income of
$11,488,000 ($1.16 per share) on net sales of $456,494,000, compared with net
income of $11,291,000 ($1.14 per share) on net sales of $368,110,000 in the
previous year. The March 30, 2007 closing NYSE market price of Alamo's common
stock was $23.21 per share.
At March 31, 2007, the $2,065,047 investment in Alamo by Capital Southwest
and its subsidiary was valued at $47,962,000 ($17.00 per share), consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 26.2%.
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Media Recovery, Inc. $45,000,000
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Media Recovery, Inc., Dallas, Texas, provides datacenter supplies and
services to corporate customers through its direct sales force. Its Shockwatch
division manufactures monitoring devices used to detect mishandled shipments and
devices for monitoring material handling equipment. 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, 2006, Media Recovery reported net
income of $5,164,000 on net sales of $137,040,000, compared with net income of
$5,028,000 on net sales of $142,574,000 in the previous year.
At March 31, 2007, the $5,415,000 investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $45,000,000, consisting of 800,000
shares of Series A convertible preferred stock and 4,000,000 shares of common
stock, representing a fully-diluted equity interest of 96.5%.
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Lifemark Group $40,000,000
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Lifemark Group, Hayward, California, owns and operates cemeteries,
mausoleums and mortuaries. Lifemark's operations, all of which are in
California, include a major cemetery and funeral home in San Mateo, a mausoleum
and an adjacent mortuary in Oakland and cemeteries, mausoleums and mortuaries in
Hayward and Sacramento. The company also owns a funeral home in San Bruno. Its
funeral and cemetery trusts enable Lifemark's clients to make pre-need
arrangements. The company's assets also include excess real estate holdings.
For the fiscal year ended March 31, 2007, Lifemark reported earnings of
$2,239,000 on revenues of $28,727,000, compared with earnings of $2,457,000 on
revenues of $27,178,000 in the previous year.
At March 31, 2007, Capital Southwest owned 100% of Lifemark Group's common
stock, which had a cost of $4,510,400 and was valued at $40,000,000.
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The Whitmore Manufacturing Company $26,000,000
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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 Air Sentry division manufactures fluid
contamination control devices. The company's assets also include several
commercial real estate tracts.
During the year ended March 31, 2007, Whitmore reported net income of
$2,848,000 on net sales of $20,863,000, compared with net income of $1,776,000
on net sales of $18,010,000 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 8).
At March 31, 2007, the direct investment in 80% of Whitmore by Capital
Southwest was valued at $26,000,000 and had a cost of $1,600,000.
2
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Hologic, Inc. $18,228,380
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Hologic, Inc., Bedford, Massachusetts, is a leading developer, manufacturer
and supplier of bone densitometers, mammography and breast biopsy devices,
direct-to-digital x-ray systems and other x-ray based imaging systems. These
products are generally targeted to address women's healthcare and general
radiographic applications.
For the year ended September 30, 2006, Hologic reported net income of
$27,423,000 ($0.56 per share) on net sales of $462,680,000, compared with net
income of $28,256,000 ($0.63 per share) on net sales of $287,684,000 in the
previous year. The March 30, 2007 closing Nasdaq bid price of Hologic's common
stock was $57.61 per share.
At March 31, 2007, Capital Southwest and its subsidiary owned 316,410
unrestricted shares of common stock, having a cost of $220,000 and a market
value of $18,228,380 ($57.61 per share).
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Texas Capital Bancshares, Inc. $10,013,465
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Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has total
assets of approximately $3.7 billion. With branch banks in Austin, Dallas, Fort
Worth, Houston, Plano and San Antonio, Texas Capital Bancshares conducts its
business through its subsidiary, Texas Capital Bank, N.A., which targets middle
market commercial and wealthy private client customers in Texas. In 2006, Texas
Capital Bancshares sponsored the formation of BankCap Partners Fund I, a $109
million partnership organized to finance and launch other regional banks similar
to Texas Capital Bancshares.
For the year ended December 31, 2006, Texas Capital reported net income of
$28,924,000 ($1.09 per share), compared with net income of $27,192,000 ($1.02
per share) in the previous year. The March 30, 2007 closing Nasdaq bid price of
Texas Capital's common stock was $20.45 per share.
At March 31, 2007, Capital Southwest owned 489,656 unrestricted shares of
common stock, having a cost of $3,550,006 and a market value of $10,013,465
($20.45 per share).
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PETsMART, Inc. $9,885,000
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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 928 pet superstores in the United States and Canada, many of which offer
pet grooming services, operate PETsHOTELS and house veterinary clinics. It is
also a direct marketer of pet products through its e-commerce site and its pet
and equine catalog businesses.
For the year ended January 28, 2007, PETsMART, Inc. reported net income of
$185,069,000 ($1.33 per share) on net sales of $4.234 billion, compared with net
income of $182,490,000 ($1.25 per share) on net sales of $3.760 billion in the
previous year. The March 30, 2007 closing Nasdaq bid price of PETsMART's common
stock was $32.95 per share.
At March 31, 2007, 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 $9,885,000 ($32.95 per share).
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Extreme International, Inc. $7,273,000
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Extreme International, Inc., Sugar Land, Texas, owns Bill Young
Productions, Texas Video and Post, and Extreme Communications, which produce
radio and television commercials and corporate communications videos.
During the year ended September 30, 2006, Extreme reported net income of
$1,202,723 on net sales of $10,342,478, compared with net income of $817,121 on
net sales of $8,688,545 in the previous year.
At March 31, 2007, Capital Southwest and its subsidiary owned 39,359.18
shares of Series C convertible preferred stock, 3,750 shares of 8% Series A
convertible preferred stock and warrants to purchase 13,035 shares of common
stock at $25 per share, having a cost of $3,000,000 and a market value of
$7,273,000, representing a fully-diluted equity interest of 53.3%.
3
Portfolio of Investments - March 31, 2007
Company Equity (a) Investment (b) Cost Value (c)
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+AT&T, INC. <1% ++20,770 shares common stock
San Antonio, Texas (acquired 3-9-99) $ 12 $ 818,961
Global leader in local,
long distance, Internet
and transaction- based voice
and data services.
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+ALAMO GROUP INC. 26.2% 2,821,300 shares common stock
Seguin, Texas (acquired 4-1-73 thru 10-4-99) 2,065,047 47,962,000
Tractor-mounted mowing and mobile
excavation equipment for governmental,
industrial and agricultural markets;
street-sweeping equipment for municipalities.
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ALL COMPONENTS, INC. 57.0% 10% subordinated note due 2008
Addison, Texas (acquired 10-28-03 thru 10-3-05) 3,000,00 3,000,000
Electronics contract manufacturing; 150,000 shares Series A convertible
distribution and productionof memory preferred stock, convertible
and other components for computer into 600,000 shares of common
manufacturers, retailers and stock at $0.25 per share
value-added resellers. (acquired 9-16-94) 150,000 1,000,000
--------- ---------
3,150,000 4,000,000
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+ALLTEL CORPORATION <1% ++8,880 shares common stock
Little Rock, Arkansas (acquired 7-1-98) 88,699 550,560
Owner and operator of the
nation's largest wireless network.
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BALCO, INC. 88.5% 445,000 shares common stock and
Wichita, Kansas 60,920 shares Class B non-voting
Specialty architectural products used common stock
in the construction and remodeling of (acquired 10-25-83 and 5-30-02) 624,920 2,500,000
commercial and institutional buildings.
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BOXX TECHNOLOGIES, INC. 15.2% 3,125,354 shares Series B convertible
Austin, Texas preferred stock,convertible into
Workstations for computer graphics 3,125,354 shares of common stock
imaging and design. at $0.50 per share
(acquired 8-20-99 thru 8-8-01) 1,500,000 300,000
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CMI HOLDING COMPANY, INC. 18.2% 10% convertible subordinated notes,
Richardson, Texas convertible into 720,350 shares
Owns Chase Medical, which develops and of common stock at $1.32 per share,
sells devices used in cardiac surgery due 2007
to relieve congestive heart failure; (acquired 4-16-04 thru 12-17-04) 750,000 750,000
develops and supports cardiac imaging 2,327,658 shares Series A convertible
systems. preferred stock, convertible into
2,327,658 shares of common stock at
$1.72 per share
(acquired 8-21-02 and 6-4-03) 4,000,000 2,000,000
Warrants to purchase 109,012 shares
of common stock at$1.72 per share,
expiring 2012 (acquired 4-16-04) - -
--------- ---------
4,750,000 2,750,000
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
4
Company Equity (a) Investment (b) Cost Value (c)
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+COMCAST CORPORATION <1% ++64,656 shares common stock $ 21 $ 1,675,884
Philadelphia, Pennsylvania (acquired 11-18-02)
Leading provider of cable,
entertainment and communications
products and services.
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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 stock at $48.25 per share
mining 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 2
--------- ---------
3,329,944 999,983
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+DISCOVERY HOLDING COMPANY <1% ++70,501 shares Series A common stock
Englewood, Colorado (acquired 7-21-05) 220,262 1,347,274
Provider of creative content, media
management and network services
worldwide.
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+EMBARQ CORPORATION <1% ++4,500 shares common stock
Overland Park, Kansas (acquired 5-17-06) 46,532 253,575
Local exchange carrier that provides
voice and data services, including
high-speed Internet.
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+ENCORE WIRE CORPORATION 16.9% 4,086,750 shares common stock
McKinney, Texas (acquired 7-16-92 thru 10-7-98) 5,800,000 69,475,000
Electric wire and cable
for residential and commercial use.
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EXTREME INTERNATIONAL, INC. 53.3% 39,359.18 shares Series C convertible
Sugar Land, Texas preferred stock, convertible into
Owns Bill Young Productions, Texas Video and Post, 157,436.72 shares of common stock at
and Extreme Communications, which produce radio $25.00 per share
and television commercials and corporate (acquired 9-30-03) 2,625,000 6,449,000
communications videos. 3,750 shares 8% Series A convertible
preferred stock, convertible into
15,000 shares of common stock at
$25.00 per share
(acquired 9-30-03) 375,000 614,000
Warrants to purchase 13,035 shares
of common stock at $25.00 per
share, expiring 2008
(acquired 8-11-98 thru 9-30-03) - 210,000
--------- ---------
3,000,000 7,273,000
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+FMC CORPORATION <1% ++6,430 shares common stock
Philadelphia, Pennsylvania (acquired 6-6-86) 66,726 485,015
Chemicals for agricultural,
industrial and consumer markets.
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+FMC TECHNOLOGIES, INC. <1% ++11,057 shares common stock
Houston, Texas (acquired 1-2-02) 57,051 771,336
Equipment and systems for the energy,
food processing and air transportation
industries.
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
5
Company Equity (a) Investment (b) Cost Value (c)
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+HEELYS, INC. 31.8% 9,317,310 shares common stock $ 102,490 $195,664,000
Carrollton, Texas (acquired 5-26-00)
Heelys stealth skate shoes, equipment
and apparel sold through sporting goods
chains, department stores and
footwear retailers.
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HIC-STAR CORPORATION 34.9% 10% subordinated note due 2007
Dallas, Texas (acquired 10-19-04 and 1-13-05) 352,646 -
Holding company previously engaged in 12% subordinated notes due 2008
mortgage banking operations, which (acquired 3-25-05 thru 2-27-06) 717,523 354,738
have now been sold. 12% demand note (acquired 12-15-06) 4,500 4,500
Warrants to purchase 463,162 shares
of Series A common stock at $1.00
per share, expiring 2014
(acquired 3-31-04 thru 1-13-05) - -
--------- ---------
1,074,669 359,238
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+HOLOGIC, INC. <1% ++316,410 shares common stock
Bedford, Massachusetts (acquired 8-27-99) 220,000 18,228,380
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) 2,358,518 5,286,058
Manufacturer of tissue, personal
care and health care products.
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+LIBERTY GLOBAL, INC. <1% ++42,463 shares Series A common stock
Englewood, Colorado (acquired 6-15-05) 106,553 1,397,033
Owns interests in broadband, ++42,463 shares Series C common stock
distribution and content companies. (acquired 9-6-05) 100,870 1,299,368
--------- ---------
207,423 2,696,401
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+LIBERTY MEDIA CORPORATION <1% ++35,250 shares Liberty Capital Series
Englewood, Colorado A common stock(acquired 5-9-06) 51,829 3,897,593
Holding company owning interests in ++176,252 shares Liberty Interactive
electronic retailing, media, Series A common stock
communications and entertainment (acquired 5-9-06) 66,424 4,196,560
businesses. --------- ---------
118,253 8,094,153
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LIFEMARK GROUP 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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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
6
Company Equity (a) Investment (b) Cost Value (c)
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MEDIA RECOVERY, INC. 96.5% 800,000 shares Series A convertible
Dallas, Texas preferred stock, convertible into
Computer datacenter and office automation 800,000 shares of common stock at
supplies and accessories; impact, tilt $1.00 per share
monitoring and temperature sensing devices (acquired 11-4-97) $ 800,000 $ 7,500,000
to detect mishandled shipments; dunnage 4,000,000 shares common stock
for protecting shipments. (acquired 11-4-97) 4,615,000 37,500,000
--------- ----------
5,415,000 45,000,000
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PALLETONE, INC. 8.8% 12.3% senior subordinated notes due 2012
Bartow, Florida (acquired 9-25-06) 1,553,150 2,000,000
Manufacturer of wooden pallets 150,000 shares common stock
and pressure-treated lumber. (acquired 10-18-01) 150,000 1,714,000
Warrant to purchase 15,294 shares share,
of common stock at $1.00 per
expiring 2011 (acquired 2-17-06) 45,746 159,000
--------- ---------
1,748,896 3,873,000
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+PALM HARBOR HOMES, INC. 30.5% 7,855,121 shares common stock
Dallas, Texas (acquired 1-3-85 thru 7-31-95) 10,931,955 70,696,000
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 9,885,000
Retail chain of more than 928 stores
selling pet foods, supplies and
services.
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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 98,000,000
Specialty chemicals for plumbing, HVAC,
electrical, construction, industrial,
oil field and automotive applications;
smoke containment systems for building
fires; also owns 20% of The Whitmore
Manufacturing Company.
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+SPRINT NEXTEL CORPORATION <1% ++90,000 shares common stock
Reston, Virginia (acquired 6-20-84) 457,113 1,706,400
Diversified telecommunications company.
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TCI HOLDINGS, INC. - 21 shares 12% Series C cumulative
Denver, Colorado compounding preferred stock
Cable television systems and (acquired 1-30-90) - 677,250
microwave relay systems.
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+TEXAS CAPITAL BANCSHARES, INC. 1.6% ++489,656 shares common stock
Dallas, Texas (acquired 5-1-00) 3,550,006 10,013,465
Regional bank holding company with
banking operations in six Texas cities.
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
7
Company Equity (a) Investment (b) Cost Value (c)
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VIA HOLDINGS, INC. 28.2% 9,118 shares Series B preferred stock
Sparks, Nevada (acquired 9-19-05) $4,559,000 $ 2
Designer, manufacturer and distributor
of high-quality office seating.
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WELLOGIX, INC. 19.3% 4,478,673 shares Series A-1
Houston, Texas convertible participating preferred
Developer and supporter of software stock, convertible into 4,478,673
used by the oil and gas industry to shares of common stock at $1.1164
control drilling and maintenance expenses. per share
(acquired 8-19-05 thru 9-15-06) 5,000,000 2
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THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock
Rockwall, Texas (acquired 8-31-79) 1,600,000 26,000,000
Specialized mining, railroad and
industrial lubricants; coatings for
automobiles and primary metals;
fluid contamination control devices.
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+WINDSTREAM CORPORATION <1% ++9,181 shares common stock
Little Rock, Arkansas (acquired 7-17-06) 19,656 134,869
Provider of voice, broadband and
entertainment services.
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MISCELLANEOUS - BankCap Partners Fund, L.P.
-6.0% limited partnership
interest (acquired 7-14-06
and 1/8-07) 565,619 595,619
- Diamond State Ventures, L.P.
- 1.9% limited partnership
interest (acquired 10-12-99
thru 8-26-05) 146,000 146,000
- First Capital Group of Texas III,
L.P. - 3.3% limited partnership
interest (acquired 12-26-00 thru
8-12-05) 964,604 964,604
100.0% Humac Company - 1,041,000 shares
common stock (acquired 1-31-75
and 12-31-75) -- 172,000
- PharmaFab, Inc. - contingent
payment agreement (acquired
2-15-07) 2 2
- STARTech Seed Fund I - 12.1%
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 2-23-05) 950,000 1
- Sterling Group Partners I, L.P.
- 1.7% limited partnership
interest (acquired 4-20-01 thru
1-24-05) 1,064,042 1,800,000
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TOTAL INVESTMENTS $71,642,297 $681,155,033
=========== ============
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
8
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, 2007, restricted securities represented
approximately 90.9% 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, 2007 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, Lifemark
Group 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 registered public accounting firm. Acquisition dates indicated are
the dates specific securities were acquired, which may differ from the original
investment dates. Certain securities were received in exchange for or upon
conversion or exercise of other securities previously acquired.
9
Portfolio Changes During the Year
New Investments and Additions to Previous Investments
Amount
------
BankCap Partners Fund I, L.P.............................. $595,619
Hic-Star Corporation...................................... 4,500
PalletOne, Inc............................................ 203,150
---------
$803,269
Dispositions
Amount
Cost Received
---- --------
Cenveo, Inc. ........................... $ 712,318 $ 9,597,254
Diamond State Ventures, L.P............. 64,000 64,000
Exopack, Inc............................ - 230,035
Heelys, Inc............................. 17,510 31,087,659
Hic-Star Corporation.................... 6,529,167 -
PharmaFab, Inc.......................... 9,499,998 -
StarTech Seed Fund II................... 50,000 50,000
Sterling Group Partners I, L.P.......... - 601,081
Texas Shredder, Inc..................... - 1,289,959
----------- -----------
$16,872,993 $42,919,988
Repayments Received..................... $884,935
========
10
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Financial Condition
March 31
---------------------------
2007 2006
------------ ------------
Assets as restated as restated
Investments at market or fair value
Companies more than 25% owned
(Cost: 2007 - $28,632,356,
2006 - $23,114,866)................... $526,993,983 $298,481,983
Companies 5% to 25% owned
(Cost: 2007 - $18,798,896,
2006 - $18,595,746)................... 76,398,002 92,070,852
Companies less than 5% owned
(Cost: 2007 - $24,211,045,
2006 - $46,886,344)................... 77,763,048 159,875,248
------------- ------------
Total investments
(Cost: 2007 - $71,642,297,
2006 - $88,596,956)................... 681,155,033 550,428,083
Cash and cash equivalents.................. 38,844,203 11,503,866
Receivables................................ 337,892 135,887
Other assets............................... 9,170,185 7,300,297
------------- ------------
Totals.................................. $729,507,313 $569,368,133
============ ============
March 31
2007 2006
------------ ------------
Liabilities and Shareholders' Equity as restated as restated
Note payable to bank....................... $ - $ 8,000,000
Other liabilities.......................... 1,457,847 1,697,086
Deferred income taxes................ 2,317,777 1,635,057
------------- --------------
Total liabilities ..... 3,775,624 11,332,143
------------- --------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,323,416
shares at March 31, 2007 and 4,297,616
shares at March 31, 2006.............. 4,323,416 4,297,616
Additional capital...................... 116,373,960 92,410,082
Undistributed net investment
income................................ 5,655,020 3,744,830
Undistributed net realized gain (loss) on
investments........................... (3,100,142) 2,785,636
Unrealized appreciation of investments . 609,512,737 461,831,128
Treasury stock - at cost
(437,365 shares)...................... (7,033,302) (7,033,302)
-------------- ---------------
Net assets at market or fair value, equivalent
to $186.75 per share at March 31, 2007 on
the 3,886,051 shares outstanding and
$144.56 per share at March 31, 2006 on the
3,860,251 shares outstanding.......... 725,731,689 558,035,990
------------- -------------
Totals.................................. $729,507,313 $569,368,133
============ ============
See Notes to Consolidated Financial Statements
11
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended March 31
-----------------------------------------------
2007 2006 2005
------------- ------------- -------------
as restated as restated as restated
Investment income:
Interest .................................................................... $ 2,308,660 $ 505,536 $ 437,753
Dividends ................................................................... 3,954,875 3,485,430 3,778,190
Management and directors' fees .............................................. 708,900 848,070 637,000
------------- ------------- -------------
6,972,435 4,839,036 4,852,943
------------- ------------- -------------
Operating expenses:
Salaries .................................................................... 1,356,062 1,211,584 1,132,510
Net pension benefit ......................................................... (144,945) (116,747) (254,872)
Other operating expenses .................................................... 1,014,255 859,702 1,068,313
------------- ------------- -------------
2,225,372 1,954,539 1,945,951
------------- ------------- -------------
Income before interest expense and income taxes ................................ 4,747,063 2,884,497 2,906,992
Interest expense ............................................................... 460,399 436,021 420,351
------------- ------------- -------------
Income before income taxes ..................................................... 4,286,664 2,448,476 2,486,641
Income tax expense ............................................................. 53,324 59,220 80,693
------------- ------------- -------------
Net investment income .......................................................... $ 4,233,340 $ 2,389,256 $ 2,405,948
============= ============= =============
Proceeds from disposition of investments ....................................... $ 42,919,988 $ 30,802,552 $ 4,565,232
Cost of investments sold ....................................................... 16,872,993 10,523,986 14,677,252
------------- ------------- -------------
Realized gain (loss) on investments before income taxes ........................ 26,046,995 20,278,566 (10,112,020)
Income tax expense ............................................................. 11,080,699 4,827,663 --
------------- ------------- -------------
Net realized gain (loss) on investments ........................................ 14,966,296 15,450,903 (10,112,020)
------------- ------------- -------------
Net increase in unrealized appreciation of investments ......................... 147,681,609 124,355,303 27,809,654
------------- ------------- -------------
Net realized and unrealized gain on investments ................................ $ 162,647,905 $ 139,806,206 $ 17,697,634
============= ============= =============
Increase in net assets from operations ......................................... $ 166,881,245 $ 142,195,462 $ 20,103,582
============= ============= =============
See Notes to Consolidated Financial Statements
12
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
Years Ended March 31
-----------------------------------------------
2007 2006 2005
------------- ------------- -------------
as restated as restated as restated
Operations:
Net investment income ........................................................ $ 4,233,340 $ 2,389,256 $ 2,405,948
Net realized gain (loss) on investments ...................................... 14,966,296 15,450,903 (10,112,020)
Net increase in unrealized appreciation of investments ....................... 147,681,609 124,355,303 27,809,654
------------- ------------- -------------
Increase in net assets from operations ....................................... 166,881,245 142,195,462 20,103,582
Distributions from:
Undistributed net investment income .......................................... (2,323,150) (2,314,231) (2,314,231)
Net realized gains deemed distributed to shareholders ........................ (11,417,283) (13,573,139) --
Capital share transactions:
Allocated increase in share value for deemed distribution .................... 11,417,283 13,573,139 --
Exercise of employee stock options ........................................... 1,794,850 208,000 --
Adjustment to initially apply FASB No. 158, net of tax ....................... 1,173,751 -- --
Stock option expense ......................................................... 169,003 -- --
------------- ------------- -------------
Increase in net assets ..................................................... 167,695,699 140,089,231 17,789,351
Net assets, beginning of year .................................................. 558,035,990 417,946,759 400,157,408
------------- ------------- -------------
Net assets, end of year ........................................................ $ 725,731,689 $ 558,035,990 $ 417,946,759
============= ============= =============
See Notes to Consolidated Financial Statements
13
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended March 31
-----------------------------------------------
2007 2006 2005
------------- ------------- -------------
as restated as restated as restated
Cash flows from operating activities
Increase in net assets from operations ........................................... $ 166,881,245 $ 142,195,462 $ 20,103,582
Adjustments to reconcile increase in net assets from operations
to net cash provided by operating activities:
Proceeds from disposition of investments .................................... 42,919,988 30,802,552 4,510,652
Purchases of securities ..................................................... (803,269) (15,054,741) (2,280,690)
Maturities of securities .................................................... 884,935 480,197 394,269
Depreciation and amortization ............................................... 16,808 16,136 17,597
Net pension benefit ......................................................... (144,945) (116,747) (254,872)
Realized (gain) loss on investments after income taxes ...................... (14,966,296) (15,450,905) 10,112,020
Net increase in unrealized appreciation of investments ...................... (147,681,609) (124,355,303) (27,809,654)
Stock option expense ........................................................ 169,003 -- --
(Increase) decrease in receivables .......................................... (202,005) 514 (59,924)
Increase in other assets .................................................... (39,982) (3,226) (10,477)
Increase (decrease) in other liabilities .................................... 8,934 (67,245) 121,196
Decrease in accrued pension cost ............................................ (144,171) (154,673) (164,129)
Increase in deferred income taxes ........................................... 50,700 40,800 88,800
------------- ------------- -------------
Net cash provided by operating activities ........................................ 49,949,336 18,332,821 4,768,370
------------- ------------- -------------
Cash flows from financing activities
Decrease in note payable to bank ................................................. (8,000,000) -- (7,500,000)
Decrease in note payable to portfolio company .................................... -- (5,000,000) --
Distributions from undistributed net investment income ........................... (2,323,150) (2,314,231) (2,314,231)
Proceeds from exercise of employee stock options ................................. 1,794,850 208,000 --
Payment of federal income tax for deemed capital gains distribution .............. (11,080,699) (4,827,659) --
------------- ------------- -------------
Net cash used in financing activities ............................................ (19,608,999) (11,933,890) (9,814,231)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ............................. 27,340,337 6,398,931 (5,045,861)
Cash and cash equivalents at beginning of year ................................... 11,503,866 5,104,935 10,150,796
------------- ------------- -------------
Cash and cash equivalents at end of year ......................................... $ 38,844,203 $ 11,503,866 $ 5,104,935
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest ....................................... $ 460,399 $ 436,920 $ 420,446
Income taxes ....................................... $ 20,000 $ 18,420 $ --
See Notes to Consolidated Financial Statements
14
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 in accordance with accounting principles generally accepted in the
United States of America for investment companies. Under rules and regulations
applicable to investment companies, we are precluded from consolidating any
entity other than another investment company. An exception to this general
principle occurs if the investment company has an investment in an operating
company that provides services to the investment company. Our consolidated
financial statements include our management company, CSMC.
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 3 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.
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.
Federal Income Taxes. CSC and CSVC intend to comply with the requirements
of the Internal Revenue Code necessary to qualify as regulated investment
companies. By meeting these requirements, they will not be subject to corporate
federal income taxes on ordinary income distributed to shareholders. The
Company's policy is to retain and pay the 35% corporate tax on realized
long-term capital gains. For investment companies that qualify as RIC's under
the IRC, federal income taxes payable on security gains that the company elects
to retain are accrued only on the last day of the tax year, December 31.
Therefore, CSC and CSVC made no provision for federal income taxes on such gains
and net investment income in their financial statements.
CSMC, a wholly owned subsidiary of CSC, is not a RIC and is required to pay
taxes at the current corporate rate.
Deferred Taxes. The Company sponsors a qualified defined benefit pension
plan which covers its employees and employees of certain of its wholly-owned
portfolio companies. Deferred taxes related to the qualified defined benefit
pension plan are recorded as incurred.
Stock-Based Compensation. In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which revised SFAS 123. SFAS 123R also supersedes APB 25 and amends
SFAS No. 95, Statement of Cash Flows. SFAS 123R eliminates the alternative to
account for employee stock options under APB 25 and requires the fair value of
all share-based payments to employees, including the fair value of grants of
employee stock options, be recognized in the income statement, generally over
the vesting period.
In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 107, which provides additional implementation
15
guidance for SFAS 123R. Among other things, SAB 107 provides guidance on
share-based payment valuations, income statement classification and
presentation, capitalization of costs and related income tax accounting.
Effective April 1, 2006, the Company adopted SFAS 123R using the modified
prospective transition method. The Company recognizes compensation cost over the
straight-line method for all share-based payments granted on or after that date
and for all awards granted to employees prior to April 1, 2006 that remain
unvested on that date. The fair value of stock options are determined on the
date of grant using the Black-Scholes pricing model and are expensed over the
vesting period of the related stock options. Accordingly, for the year ended
March 31, 2007, the Company recognized compensation expense of $169,003.
The following table illustrates the effect on net asset value and net asset
value per share for the years ended March 31, 2006 and 2005 if the Company had
applied the fair value recognition provisions to stock-based compensation for
options.
Years Ended March 31
-------------------------------
2006 2005
------------ ------------
as restated as restated
Net asset value, as reported $558,035,990 $417,946,757
Deduct: Total fair value computed
stock-based compensation 150,936 160,764
------------ ------------
Pro forma net asset value $557,885,054 $417,785,993
============ ============
Net asset value per share:
Basic - as reported $144.56 $108.36
======= =======
Basic - pro forma $144.52 $108.32
======= =======
Diluted - as reported $144.20 $108.28
======= =======
Diluted- pro forma $144.16 $108.24
======= =======
As of March 31, 2007, the total remaining unrecognized compensation cost
related to non-vested stock options was $1,171,452 which will be amortized over
the weighted-average service period of approximately 7.53 years.
Defined Pension Benefits and Other Postretirement Plans
- -------------------------------------------------------
Effective March 31, 2007, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements Nos. 87,
88, 106 and 132R (SFAS 158). SFAS 158 is required to be adopted on a prospective
basis and prior year financial statements and related disclosures are not
permitted to be restated. SFAS 158 requires an employer that sponsors one or
more postretirement defined benefit plan(s) to:
o Recognize the funded status of postretirement defined benefit plans -
measured as the difference between the fair value of plan assets and the
benefit obligations - in its balance sheet.
o Recognize changes in the funded status of postretirement defined benefit
plans in shareholder's equity in the year in which the changes occur.
o Measure postretirement defined benefit plan assets and obligations as of
the date of the employer's fiscal year-end. The Company presently uses
March 31 as the measurement date for all of its postretirement defined
benefit plans.
Recent Accounting Pronouncements
- --------------------------------
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN48), which clarifies the accounting for uncertainty in
income taxes recognized in an entity's financial statements in accordance with
FASB Statement 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for our Company April 1, 2007. The Company has
evaluated the positions in the tax returns it has filed and does not believe
that FIN 48 will have a material impact on the Company's financial statements.
The State of Texas recently passed House Bill 3 (HB3), which revises the
existing franchise tax system to create a new tax on virtually all Texas
businesses. Starting in the fiscal year 2007, HB3 changes the franchise tax
16
base, lowers the tax rate and extends coverage to active businesses receiving
state law liability protection. The Company has been subject to an immaterial
amount of Texas franchise taxes and expects the future effect of HB3 to also be
immaterial.
In September 2006, the FASB issued Statement of Financial Accounting
Standard No. 157, "Fair Value Measurements" (SFAS 157). The standard defines
fair value, outlines a framework for measuring fair value, and details the
required disclosures about fair value measurements. The standard is effective
for years beginning after November 15, 2007, therefore the Company will adopt
SFAS 157 effective April 1, 2008. The Company is evaluating the impact of SFAS
157.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 clarifies
the SEC staff's beliefs regarding the process of quantifying financial statement
misstatements and is effective for fiscal years ending after November 15, 2006.
The Company applied SAB 108 during the year and was not required to record an
adjustment as a result of the application of SAB 108.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value and establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective
for our Company beginning April 1, 2008. The impact, if any, from the adoption
of SFAS 159 has not been determined.
2. Restatement
As previously announced in a Current Report on Form 8-K filed with the SEC
on November 20, 2007, the Company determined that its long-standing practice of
recording deferred taxes on unrealized appreciation of investments was not in
conformity with GAAP, and its previously issued financial statements, including
the Company's annual report on Form 10-K for the fiscal year ended March 31,
2007 and the Company's quarterly report on Form 10-Q for the quarter ended June
30, 2007, as well as all prior period data included within these reports,
required restatement. The effects of these changes on the consolidated
statements of financial condition as of March 31, 2007 and 2006; the
consolidated statements of operations, statements of cash flow and changes in
net assets for the three years ended March 31, 2007, 2006 and 2005 are
summarized as follows and shown in the tables below:
(A) A Regulated Investment Company (RIC) is required to record
deferred taxes when it is probable the RIC will not qualify under
Subchapter M of the Internal Revenue Code for a period longer that one
year. Historically, management believed it was probable the Company would
not maintain its qualifying status as a RIC in future years and recorded a
deferred tax liability on the unrealized appreciation of investments.
However, upon further analysis, the Company determined it was only
reasonably possible, but not probable, the Company would not maintain its
qualifying status as a RIC. Thus the deferred tax liability consistently
recorded and disclosed should not have been recognized.
(B) The Company historically has accrued income taxes payable on its
investment gains as they have been incurred, as it has been the Company's
practice to retain its investment gains. However, RICs are required to
accrue federal income taxes on investment gains that are retained only on
the last day of the tax year. The Company incorrectly recorded the tax
impact of its investment gains in periods other than the last day of its
tax year, December 31. Therefore, the income taxes payable recorded at
times other than the tax year end should not have been recognized.
(C) The Company incorrectly classified its' return of capital
contributions cumulatively as "undistributed net realized gains on
investments." RICs are required to classify return of capital contributions
as "additional capital" in the period in which tax basis amounts become
permanent; and reflect undistributed amounts remaining since its' previous
tax year end adjusted for temporary tax basis differences as "undistributed
net realized gains on investments."
The restatement will eliminate the accrual for deferred taxes on unrealized
appreciation of investments, and income taxes payable and related tax
carryforwards on realized gains, increasing the net asset value per share and
net assets from operations for the periods restated; and reclassify return of
capital contributions to "additional capital."
Our prior accounting treatments resulted in an understatement of our net
asset value, and overstatement of our deferred tax liability. This resulted in
an understatement of the Company's net asset value in an aggregate amount of
$211,388,177 and $161,417,881 as of March 31, 2007 and 2006, respectively. The
impact on undistributed net realized gains, undistributed appreciation of
investments and additional capital as of April 1, 2005, is $115,412,852 in the
aggregate; ($76,531,825) in undistributed net realized losses, $117,094,000 in
undistributed appreciation of investments, and $74,850,675 in additional
capital.
17
As of March 31, 2007
Consolidated -------------------------------------------------------
Statement of Previously Adjustment As
Financial Condition Reported (1) Restated (2)
- ---------------- ------------- --------------- ------------------
Total assets 729,507,313 -- 729,507,313
============ ============ ============
Income taxes
payable 231,274 (231,274) -- (B)
Deferred
income tax 213,474,680 (211,156,903) 2,317,777 (A)(B)
------------ ------------ ------------
Total
liabilities 215,163,801 (211,388,177) 3,775,624
------------ ------------ ------------
Additional capital 11,221,601 105,152,359 116,373,960 (C)
Undistributed
net realized
gain (loss) on
investment 102,766,040 (105,152,359) (3,100,142)(B)(C)
Net
unrealized
appreciation
of investments 397,410,737 212,102,000 609,512,737 (A)
Net assets at
market or fair
value 514,343,512 211,388,177 725,731,689
------------ ------------ ------------
Total
liabilities and
shareholders'
equity 729,507,313 -- 729,507,313
============ ============ ============
As of March 31, 2006
Consolidated -------------------------------------------------------
Statement of Previously Adjustment As
Financial Condition Reported (1) Restated (2)
- ---------------- ------------- --------------- ------------------
Total assets 569,368,133 -- 569,368,133
============ ============ ============
Income taxes
payable 982,653 (982,653) -- (B)
Deferred
income tax 162,070,285 (160,435,228) 1,635,057 (A)(B)
------------ ------------ ------------
Total
liabilities 172,750,024 (161,417,881) 11,332,143
------------ ------------ ------------
Additional capital 8,109,797 84,300,285 92,410,082 (C)
Undistributed
net realized
gain on
investments 86,432,040 (83,646,404) 2,785,636 (B)(C)
Net unrealized
appreciation
of investments 301,067,128 160,764,000 461,831,128 (A)
Net assets at
market or fair
value 396,618,109 161,417,881 558,035,990
------------ ------------ ------------
Total
liabilities
and
shareholders'
equity 569,368,133 -- 569,368,133
============ ============ ============
18
Year Ended March 31, 2007
-------------------------------------------------------
Consolidated
Statement of Previously As
Operations Reported (1) Adjustment Restated (2)
- ---------------- ------------- --------------- ------------------
Net investment
income 4,233,340 -- 4,233,340
Net realized
gain on
investments 16,334,000 (1,367,704) 14,966,296 (B)
Net increase
in unrealized
appreciation
of investments 96,343,609 51,338,000 147,681,609 (A)
----------- ----------- -----------
Net realized
and unrealized
gain on
investments 112,677,609 49,970,296 162,647,905
----------- ----------- -----------
Increase in
net assets
from operations 116,910,949 49,970,296 166,881,245
=========== =========== ===========
Year Ended March 31, 2006
-------------------------------------------------------
Consolidated
Statement of Previously As
Operations Reported (1) Adjustment Restated (2)
- ------------------ ------------- ---------------- ------------------
Net investment
income 2,389,256 -- 2,389,256
Net realized gain
on investments 13,115,874 2,335,029 15,450,903 (B)
Net increase
in unrealized
appreciation of
investments 80,685,303 43,670,000 124,355,303 (A)
----------- ----------- -----------
Net realized and
unrealized gain on
investments 93,801,177 46,005,029 139,806,206
----------- ----------- -----------
Increase in net
assets from
operations 96,190,433 46,005,029 142,195,462
=========== =========== ===========
19
Year Ended March 31, 2005
-------------------------------------------------------
Consolidated
Statement of Previously As
Operations Reported (1) Adjustment Restated (2)
- ---------------- ------------- --------------- ------------------
Net investment
income 2,405,948 -- 2,405,948
Net realized
loss on
investments (6,065,814) (4,046,206) (10,112,020) (B)
Net increase
in unrealized
appreciation
of investments 17,884,654 9,925,000 27,809,654 (A)
----------- ----------- -----------
Net realized
and unrealized
gain on
investments 11,818,840 5,878,794 17,697,634
----------- ----------- -----------
Increase in
net assets
from operations 14,224,788 5,878,794 20,103,582
=========== =========== ===========
Year Ended March 31, 2007
-------------------------------------------------------
Consolidated
Statement of
Changes in Net Previously As
Assets Reported (1) Adjustment Restated (2)
- ----------------- ------------- ---------------- -----------------
Net investment
income 4,233,340 -- 4,233,340
Net realized gain
on investments 16,334,000 (1,367,704) 14,966,296 (B)
Net increase
on unrealized
appreciation
before
distributions 96,343,609 51,338,000 147,681,609 (A)
------------ ------------ ------------
Increase
in net
assets from
operations before
distributions 116,910,949 49,970,296 166,881,245
Undistributed net
investment income (2,323,150) -- (2,323,150)
Net realized gains
deemed distributed
to shareholders -- (11,417,283) (11,417,283) (C)
Allocated increase
in share value for
deemed distribution -- 11,417,283 11,417,283 (C)
Employee stock
options exercised 1,794,850 -- 1,794,850
Stock option
expense 1,173,751 -- 1,173,751
Adjustment to
initially apply
FASB Statement No.
158, net of tax 169,003 -- 169,003
------------ ------------ ------------
Increase
in net
assets 117,725,403 49,970,296 167,695,699
Net assets,
beginning of year 396,618,109 161,417,881 558,035,990
------------ ------------ ------------
Net assets, end of
year 514,343,512 211,388,177 725,731,689
============ ============ ============
Net asset
value, per share $ 132.36 $ 54.40 $ 186.75
============ ============ ============
20
Year Ended March 31, 2006
------------------------------------------------------
Consolidated
Statement of
Changes in Net Previously As
Assets Reported (1) Adjustment Restated (2)
- ------------------- ------------- ---------------- -----------------
Net investment
income 2,389,256 -- 2,389,256
Net realized gain
on investments 13,115,874 2,335,029 15,450,903 (B)
Net increase
on unrealized
appreciation
before
distributions 80,685,303 43,670,000 124,355,303 (A)
------------ ------------ ------------
Increase
in net
assets from
operations before
distributions 96,190,433 46,005,029 142,195,462
Undistributed net
investment income (2,314,231) -- (2,314,231)
Net realized gains
deemed distributed
to shareholders -- (13,573,139) (13,573,139)(C)
Allocated increase
in share value for
deemed distribution -- 13,573,139 13,573,139 (C)
Employee stock
options exercised 208,000 -- 208,000
Stock option
expense -- -- --
Adjustment to
initially apply
FASB Statement
No. 158, net of
tax -- -- --
------------ ------------ ------------
Increase
in net
assets 94,084,202 46,005,029 140,089,231
Net assets,
beginning of year 302,533,907 115,412,852 417,946,759
------------ ------------ ------------
Net assets, end
of year 396,618,109 161,417,881 558,035,990
============ ============ ============
Net asset
value, per share $ 102.74 $ 41.82 $ 144.56
============ ============ ============
21
Year Ended March 31, 2005
-------------------------------------------------------
Consolidated
Statement of
Changes in Net Previously As
Assets Reported (1) Adjustment Restated (2)
- ------------------- ------------- ---------------- -----------------
Net investment
income 2,405,948 -- 2,405,948
Net realized
loss on
investments (6,065,814) (4,046,206) (10,112,020) (B)
Net increase
on unrealized
appreciation
before
distributions 17,884,654 9,925,000 27,809,654 (A)
------------ ------------ ------------
Increase
(decrease) in net
assets from
operations before
distributions 14,224,788 5,878,794 20,103,582
Undistributed net
investment income (2,314,231) -- (2,314,231)
Employee stock
options exercised -- -- --
Stock option
expense -- -- --
Adjustment to
initially apply
FASB Statement
No. 158, net of
tax -- -- --
------------ ------------ ------------
Increase
in net
assets 11,910,557 5,878,794 17,789,351
Net assets,
beginning of year 290,623,350 109,534,058 400,157,408
------------ ------------ ------------
Net assets, end
of year 302,533,907 115,412,852 417,946,759
============ ============ ============
Net asset
value, per share $ 78.44 $ 29.92 $ 108.36
============ ============ ============
Year Ended March 31, 2007
---------------------------------------------------
Consolidated
Statement of Cash Previously As
Flow Reported (1) Adjustment Restated (2)
- ---------------------- ------------------ ------------- -------------
Net Cash provided by
(used in):
Operating activities 35,868,637 11,080,699 46,949,336 (B)
Financing activities (8,528,300) (11,080,699) (19,608,999)(B)
------------------ ------------- -------------
Net increase in cash
and cash equivalents 27,340,337 -- 27,340,337
================== ============= =============
22
Year Ended March 31, 2006
Consolidated ----------------------------------------------------
Statement of Cash Previously As
Flow Reported (1) Adjustment Restated (2)
- ---------------------- ------------------ ------------- -------------
Net Cash provided by
(used in):
Operating activities 13,505,162 4,827,659 18,332,821 (B)
Financing activities (7,106,231) (4,827,659) (11,933,890)(B)
------------------ ------------- -------------
Net increase in cash
and cash equivalents 6,398,931 -- 6,398,931
================== ============= =============
Year Ended March 31, 2005
Consolidated ----------------------------------------------------
Statement of Cash Previously Adjustment As
Flow Reported (1) Restated (2)
- ---------------------- ------------------ ------------- -------------
Net Cash provided by
(used in):
Operating activities 4,768,370 -- 4,768,370
Financing activities (9,814,231) -- (9,814,231)
------------------ ------------- -------------
Net decrease in cash
and cash equivalents (5,045,861) -- (5,045,861)
================== ============= =============
- ------------
(1) As presented in the Company's original Form 10-K for the fiscal year ended
March 31, 2007.
(2) Adjusted to reflect the restatement described above.
(A), (B) and (C) are described in detail above.
3. Valuation of Investments
The consolidated financial statements as of March 31, 2007 and 2006 include
restricted securities valued at $619,207,702 (90.9% of the value of the
consolidated investment portfolio) and $485,924,522 (88.3% 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.
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.
4. Income Taxes
For the tax years ended December 31, 2006, 2005 and 2004, 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). To the extent that we retain
capital gains and declare a deemed dividend to shareholders, at the corporate
rate, on the distribution, and the shareholders would receive a tax credit equal
to their proportionate share of the tax paid. 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, 2006, CSC and CSVC had net investment
income for book and tax purposes of $2,323,150 and $394,124, respectively, all
of which has been distributed. During 2006, CSC and CSVC had a net capital gain
for book purposes of $31,932,775 and $28,697,723, respectively, and a net
capital gain for tax purposes of $31,659,140 and $28,697,723, respectively.
The aggregate cost of investments for federal income tax purposes as of
March 31, 2007 was $75,147,983. Such investments had unrealized appreciation of
$626,445,188 and unrealized depreciation of $16,932,452 for book purposes, or
net unrealized appreciation of $609,512,736. They had unrealized appreciation of
23
$623,584,608 and unrealized depreciation of $17,577,558 for tax purposes, or net
unrealized appreciation of $606,007,050 at March 31, 2007. The difference
between book basis and tax basis net unrealized appreciation is attributable
primarily to interest income that was accrued for tax purposes, but not for book
purposes.
CSMC, a wholly owned subsidiary of CSC, is not a RIC and is required to pay
taxes at the current corporate rate. The Company sponsors a qualified defined
benefit pension plan which covers its employees and employees of certain of its
wholly-owned portfolio companies. Deferred taxes related to the qualified
defined benefit pension plan are recorded as incurred.
5. Undistributed Net Realized Gains (Losses) on Investments
Distributions made by RICs often differ from aggregate GAAP-basis
undistributed net investment income and accumulated net realized gains (total
GAAP-basis net realized gains). The principal cause is that required minimum
fund distributions are based on income and gain amounts determined in accordance
with federal income tax regulations, rather than GAAP. The differences created
can be temporary, meaning that they will reverse in the future, or they can be
permanent. In subsequent periods when all or a portion of a temporary difference
becomes a permanent difference, the amount of the permanent difference will be
reclassified to "additional capital".
For income tax purposes, the $11,417,283 and $13,573,139 are treated as
deemed distributions to our shareholders for the tax years ended December 31,
2006 and 2005. We reclassified the deemed distribution, net of tax, from our
undistributed net realized earnings capital in excess of par value. For the tax
year ended December 31, 2004 to the extent we had capital gains, they were fully
offset by either capital losses or capital loss carry forwards.
As of March 31, 2007 and 2006, our undistributed net realized gains
(losses) on investments determined in accordance with generally accepted
accounting principles as reflected on our consolidated statement of financial
condition were comprised of the following:
As of March 31, 2007 2006
- ----------------------------------------- ------------ ------------
(as restated) (as restated)
Undistributed net realized gains (losses)
on investments ($3,100,142) $2,785,636
6. Note Payable
The note payable to bank at March 31, 2007 and 2006 was from an unsecured
revolving line of credit of $25,000,000 of which $0 and $8,000,000 had been
drawn at March 31, 2007 and 2006, respectively. The revolving line of credit
bears interest at the bank's base rate less .50% or LIBOR plus 1.25% and matures
on August 31, 2007. The average interest rates during the years ended March 31,
2007 and 2006 were 6.46% and 5.05% respectively.
7. Employee Stock Option Plan
On July 19, 1999, shareholders approved the 1999 Stock Option Plan
("Plan"), which provided for the granting of stock options to employees and
officers of the Company and authorized the issuance of common stock upon
exercise of such options for up to 140,000 shares. All options are granted at or
above market price, 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, 2007, there were 58,500 shares available for grant under the
Plan. The per share weighted-average fair value of the stock options granted on
May 15, 2006 was $31.276 per option using the Black-Scholes pricing model with
the following assumptions: expected dividend yield of 0.64%, risk-free interest
rate of 5.08%, expected volatility of 21.1%, and expected life of 7 years. The
per share weighted-average fair value of the stock options granted on July 17,
2006 was $33.045 per option using the Black-Scholes pricing model with the
following assumptions: expected dividend yield of 0.61%, risk-free interest rate
of 5.04%, expected volatility of 21.2%, and expected life of 7 years.
The following summarizes activity in the stock option plans for the years
ended March 31, 2007, 2006 and 2005:
24
Number Weighted Average
of shares Exercise Price
--------- --------------
Balance at April 1, 2004 54,500 $70.004
Granted 7,500 76.000
Exercised - -
Canceled (13,500) 79.870
------- --------
Balance at March 31, 2005 48,500 68.186
Granted - -
Exercised (3,200) 65.000
Canceled - -
----------- --------------
Balance at March 31, 2006 45,300 68.411
Granted 57,500 94.136
Exercised (25,800) 69.568
Canceled (24,500) 89.482
-------- --------
Balance at March 31, 2007 52,500 $86.184
====== =======
At March 31, 2007, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $65.00 to $98.44 and 7.78
years, respectively. The total intrinsic value of options exercised during the
year ended March 31, 2007 was $571,565, with the exercise prices ranging from
$65.00 to $77.00 per share. New shares were issued for the $1,794,850 cash
received from option exercises for the year ended March 31, 2007.
At March 31, 2007, 2006 and 2005, the number of options exercisable was
8,515, 29,500 and 25,650, respectively and the weighted-average exercise price
of those options was $69.15, $69.01 and $68.98, respectively.
8. 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.
Effective April 1, 2007, the vesting period will be three years. During the
three years ended March 31, 2007, the Company made contributions to the ESOP,
which were charged against net investment income, of $84,488 in 2007, $99,167 in
2006 and $93,588 in 2005.
9. 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, 2007.
25
The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2007, 2006 and 2005:
Years Ended March 31
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year .................... $ 4,004,017 $ 3,833,411 $ 3,799,113
Service cost ..................... 103,342 95,590 92,434
Interest cost .................... 230,711 223,374 214,076
Actuarial loss ................... 68,854 228,122 94,812
Benefits paid .................... (386,982) (376,480) 367,024)
Plan change ...................... (54,842) -- --
----------- ----------- -----------
Benefit obligation at end of year $ 3,965,100 $ 4,004,017 $ 3,833,411
=========== =========== ===========
Change in plan assets
Fair value of plan assets at beginning
of year .................... $ 11,640,693 $ 9,326,254 $ 10,030,763
Actual return on plan assets ..... 1,719,581 2,690,919 (337,485)
Benefits paid .................... (386,982) (376,480) (367,024)
------------ ------------ ------------
Fair value of plan assets at end of
year ........................ $ 12,973,292 $ 11,640,693 $ 9,326,254
============ ============ ============
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
----------------------------
2007 2006
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation ............ $ (3,435,396) $ (3,475,899)
============ ============
Projected benefit obligation for service
rendered to date .......................... $ (3,965,100) $ (4,004,017)
Plan assets at fair value* ..................... 12,973,292 11,640,693
Funded status .................................. 9,008,192 7,636,676
Unrecognized net (gain)
loss from past experience
different from that assumed and effects of
changes in assumptions .................... (1,761,054) (670,478)
Unrecognized prior service costs ............... 132,904 195,281
Additional asset, FAS 158 ...................... 1,628,150 --
------------ ------------
Prepaid pension cost included in other assets .. $ 9,008,192 $ 7,161,479
============ ============
- -------------
*Primarily equities and bonds including approximately 25,000 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
-----------------------------------
2007 2006 2005
--------- --------- ---------
Service cost - benefits earned during
the year ........................... $ 103,342 $ 95,590 $ 92,434
Interest cost on projected benefit
obligation ......................... 230,711 223,374 214,076
Expected return on assets ............... (580,104) (551,026) (564,627)
Net amortization ........................ 27,487 38,897 (66,280)
--------- --------- ---------
Net pension benefit from qualified plan . $(218,564) $(193,165) $(324,397)
========= ========= =========
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.
26
The following table sets forth the Retirement Restoration Plan's benefit
obligations at March 31, 2007, 2006 and 2005:
Years Ended March 31
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ..................... $ 1,280,542 $ 1,302,368 $ 1,414,091
Service cost ...................... 20,245 19,094 10,380
Interest cost ..................... 68,937 72,886 74,711
Actuarial (gain) loss ............. (36,529) 40,867 (32,685)
Benefits paid ..................... (144,170) (154,673) (164,129)
Plan change ....................... (10,134) -- --
----------- ----------- -----------
Benefit obligation at end of year . $ 1,178,891 $ 1,280,542 $ 1,302,368
=========== =========== ===========
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
--------------------------
2007 2006
----------- -----------
Projected benefit obligation ....................... $(1,178,891) $(1,280,542)
Unrecognized net loss from past ex-
perience different from that assumed
and effects of changes in assumptions ......... 56,523 93,049
Unrecognized prior service costs ................... (234,144) (239,573)
Additional asset, FAS 158 .......................... 177,621 --
----------- -----------
Accrued pension cost included in other liabilities . $(1,178,891) $(1,427,066)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 2007, 2006 and 2005 of $73,619, $76,417 and $69,528, respectively, are
offset against the net pension benefit from the qualified plan.
The following assumptions were used in estimating the actuarial present
value of the projected benefit obligations:
Years Ended March 31
------------------------------------
2007 2006 2005
--------- ---------- ----------
Discount rate...................... 6.0% 5.75% 5.75%
Rate of compensation increases..... 5.0% 5.0% 5.0%
The following assumptions were used in estimating the net periodic
(income)/expense:
Years Ended March 31
------------------------------------
2007 2006 2005
--------- ---------- ----------
Discount rate...................... 5.75% 5.75% 5.75%
Expected return on plan assets..... 6.0% 6.0% 6.0%
Rate of compensation increases..... 5.0% 5.0% 5.0%
The expected rate of return on assets assumption was determined based on
the anticipated performance of the various asset classes in the plan's portfolio
and the allocation of assets to each class. The anticipated asset class return
is developed using historical and predicted asset return performance,
considering the investments underlying each asset class and expected investment
performance based on forecasts of inflation, interest rates and market indices
for fixed income and equity securities.
The Company's pension plan asset allocations are as follows:
Percentage of plan assets
at March 31
-------------------
Asset Category 2007 2006
- -------------- -------- --------
Equity securities........................... 79.1% 83.6%
Debt securities............................. 11.4% 12.9%
Cash ....................................... 9.5% 3.5%
-------- --------
100.0% 100.0%
27
The Company's pension plan is administered by a board-appointed committee
that has fiduciary responsibility for the plan's management. The trustee of the
plan is JPMorgan Asset Management. Currently, approximately 18% of the assets
are selected and managed by the trustee and the remainder of the assets are
managed by the committee, invested mostly in equity securities, including the
Company's stock.
Following are the expected benefit payments for the next five years and in
the aggregate for the years 2013-2017:
Years Ended March 31
---------------------------------------
2013-
(In Thousands) 2008 2009 2010 2011 2012 2017
---- ---- ---- ---- ---- ----
$357 $337 $316 $294 $281 $1,136
25
Incremental effect of applying FASB Statement No. 158 on individual line
items in the Statement of Financial Condition:
March 31, 2007
-------------------------------------------------------
Before Application After application
Of Statement 158 Adjustments of Statement 158
---------------- ----------- ----------------
Other assets ....................... $ 7,542,035 $ 1,628,150 $ 9,170,185
Other liabilities .................. 1,635,468 (177,621) 1,457,847
Deferred income taxes .............. 212,842,660 632,020 213,474,680
Additional capital ................. 10,047,850 1,173,751 11,221,601
Net assets at market or fair value . 513,169,761 1,173,751 514,343,512
10. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$9,891,281 in three portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $80,000 through February, 2008. For the
three years ended March 31, total rental expense charged to investment income
was $79,979 in 2007, $76,877 in 2006 and $75,248 in 2005.
11. Sources of Income
Income was derived from the following sources:
Investment Income
------------------------------------------ Realized Gain
(Loss) on
Years Ended Investments
March 31 Other Before Income
2007 Interest Dividends Income Taxes
- ---- ------------ ------------ ------------ ------------
Companies more than
25% owned ........... $ -- $ 3,449,558 $ 659,500 $ 31,070,149
Companies 5% to 25%
owned ............... 125,733 171,578 20,000 --
Companies less than
5% owned ............ 938,761 333,739 29,400 (5,023,154)
Other sources,
including temporary
investments ......... 1,244,166 -- -- --
------------ ------------ ------------ ------------
$ 2,308,660 $ 3,954,875 $ 708,900 $ 26,046,995
============ ============ ============ ============
Investment Income
------------------------------------------- Realized Gain
(Loss) on
Years Ended Investments
March 31 Other Before Income
2006 Interest Dividends Income Taxes
- ---- ------------ ------------ ------------ ------------
Companies more than
25% owned ........... $ -- $ 2,926,964 $ 642,500 $ --
Companies 5% to 25%
owned ............... (55,236) 188,233 10,000 --
Companies less than
5% owned ............ 302,622 370,233 195,570 20,278,566
Other sources,
including temporary
investments ......... 258,150 -- -- --
------------ ------------ ------------ ------------
$ 505,536 $ 3,485,430 $ 848,070 $ 20,278,566
============ ============ ============ ============
28
2005
- ----
Companies more than
25% owned ........... $ -- $ 3,361,345 $ 637,000 $ --
Companies 5% to 25
owned ............... 55,236 80,858 -- (12,097,124)
Companies less than
5% owned ............ 346,396 335,987 -- 1,985,104
Other sources,
including temporary
investments ......... 36,121 -- -- --
------------ ------------ ------------ ------------
$ 437,753 $ 3,778,190 $ 637,000 $(10,112,020)
============ ============ ============ ============
12. Subsequent Events
In July 2007, William R. Thomas, retired from his role as President and
Chief Executive Officer, but has continued in capacity as Chairman of the Board.
Gary L Martin was named President and Chief Executive Officer.
In August 2007, Susan K. Hodgson resigned from her position as
Secretary-Treasurer and Chief Financial Officer. Tracy L. Morris was hired in
September 2007, as Controller and Chief Financial Officer.
On August 27, 2007, Capital Southwest Corporation and Capital Southwest Venture
Corporation, were named in a lawsuit filed in the United States District Court
of the Northern District of Texas, Dallas Division, against Heelys, Inc and its
Chief Executive Officer, Chief Financial Officer and the directors who signed
its registration statement with the Securities and Exchange Commission in
connection with its December 7, 2006 initial public offering ("IPO"), and its
underwriters for the IPO. The complaint alleges violations of Sections 11 and 15
of the Securities Act of 1933 and the plaintiffs are seeking compensatory
damages in an unspecified amount, as well as reasonable costs and expenses
incurred in the action, including counsel fees and expert fees. We believe that
the plaintiffs' claims are without merit, we deny the allegations in the
complaints, and we intend to vigorously defend the lawsuits.
In September and October 2007 four similar suits were also filed in the United
States District Court of the Northern District of Texas making substantially
similar allegations under Sections 11, 12 and 15 of the Securities Act of 1933,
and seeking substantially similar damages. These lawsuits have been transferred
to a single judge, and we expect that all the cases will be consolidated into a
single action, with a consolidated complaint filed shortly thereafter. We
believe that the plaintiffs' claims are without merit, we deny the allegations
in the complaints, and we intend to vigorously defend the lawsuits.
On November 15, 2007, the Company received a Staff Determination Letter
from NASDAQ, stating that we were delinquent in our SEC filings for the quarter
ended September 30, 2007 and in violation of NASDAQ rules. On November 20, 2007,
the Company requested a written hearing with NASDAQ. The hearing date is set for
January 10, 2008 at 4:00 PM.
29
Selected Per Share Data and Ratios
Years Ended March
---------------------------------------------------------
Per Share Data 2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
as restated as restated as restated as restated as restated
Investment income $ 1.79 $ 1.25 $ 1.26 $ 1.22 $ 1.06
Operating expenses (.57) (.51) (.51) (.39) (.30)
Interest expense (.12) (.11) (.11) (.14) (.12)
Income taxes (.01) (.01) (.02) (.02) (.04)
--------- --------- --------- --------- ---------
Net investment income 1.09 .62 .62 .67 .60
Distributions from undistributed net investment income (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments 3.85 4.00 (2.62) 3.27 .52
Net increase (decrease) in unrealized appreciation of investments 38.00 32.22 7.21 29.57 (18.20)
Exercise of employee stock options* (.49) (.04) -- (.25) --
Stock option expense .04 -- -- -- --
Adjustment to initially apply FASB No. 158, net of tax .30 -- -- -- --
--------- --------- --------- --------- ---------
Increase (decrease) in net asset value 42.19 36.20 5.21 32.66 (17.68)
Net asset value
Beginning of year 144.56 108.36 103.75 71.09 88.77
--------- --------- --------- --------- ---------
End of year $ 186.75 $ 144.56 $ 108.36 $ 103.75 $ 71.09
========= ========= ========= ========= =========
Ratios and Supplemental Data
Ratio of operating expenses to average net assets .36% .42% .49% .47% .39%
Ratio of net investment income to average net assets .68% .51% .60% .81% .78%
Portfolio turnover rate 0.13% 2.36% .56% 3.74% 1.53%
Net asset value total return 29.85% 34.31% 5.25% 47.42% (19.11)%
Shares outstanding at end of period (000s omitted) 3,886 3,860 3,857 3,857 3,829
- -------------
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
30
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting ("ICFR"), as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States. With the
participation of the Chief Executive Officer and the Chief Financial Officer,
our management conducted an evaluation of the effectiveness of our internal
control over financial reporting as of March 31, 2007 based on the criteria
established in Internal Control - Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
In the company's Annual Report on Form 10-K for the year ended March 31,
2007 filed on May 15, 2007, management concluded that our internal control over
financial reporting was effective as of March 31, 2007. Subsequently, management
identified the following material weakness in internal control over financial
reporting with respect to accounting for taxes:
Under the supervision and with the participation of our management,
including our President and Controller, we conducted an evaluation of the
effectiveness of our internal control over financial reporting in connection
with preparation of the Amended Annual Report on Form 10-K/A for the year ended
March 31, 2007. As a result of the assessments, a material weakness was
identified. The following material weakness is the basis for our conclusion:
o We did not maintain an adequate process to assess and determine the
probability of the Company maintaining its qualifying status as a RIC
subject to subchapter M of the IRC over the next twelve months at any given
quarter.
This material weakness has caused us to amend our Annual Report on Form
10-K for the year ended March 31, 2007, in order to restate the financial
statements and our selected per share data and ratios for the years ended March
31, 2007, 2006 and 2005, and our selected per share data and ratios for the
years ended March 31, 2004 and 2003. Additionally, we have amended our Form 10-Q
for the quarter ended June 30, 2007.
As a result of this material weakness, our Management has revised its
earlier assessment and has now concluded that our internal control over
financial reporting was not effective as of March 31, 2007.
Grant Thornton LLP has issued its opinion that the Company had not
maintained effective internal control over financial reporting as of March 31,
2007 based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organzations of the Treadway Commission.
This opinion appears on the next page.
Date: January 9, 2008
/s/ Gary L. Martin
- ------------------
Gary L. Martin
President & Chief Executive Officer
/s/ Tracy L. Morris
- -------------------
Tracy L. Morris
Controller
(chief financial/accounting officer)
31
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Capital Southwest Corporation
We have audited Capital Southwest Corporation (a Texas Corporation) and
subsidiaries (the "Company") internal control over financial reporting as of
March 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying management's report on internal control over financial reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely
basis. The following material weakness has been identified and included in
management's assessment.
o The Company did not maintain an adequate process to assess and
determine the probability of the Company maintaining its qualifying
status as a RIC subject to subchapter M of the IRC over the next
twelve months at any given quarter end.
In our opinion, because of the effect of the material weakness described
above on the achievement of the objectives of the control criteria, the Company
has not maintained effective internal control over financial reporting as of
March 31, 2007, based on criteria established in Internal Control--Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statement
of financial condition of the Company as of March 31, 2007 and 2006, including
the portfolio of investments as of March 31, 2007, and the related consolidated
statements of operations, changes in net assets, cash flows, and the selected
per share data and ratios for each of the three years in the period ended March
31, 2007. The material weakness identified above was considered in determining
the nature, timing, and extent of audit tests applied in our audit of the 2007
financial statements, and this report does not affect our report dated, January
9, 2008, which expressed an unqualified opinion on those financial statements
and the selected per share data and ratios.
/s/ GRANT THORNTON LLP
Dallas, Texas
January 9, 2008
32
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Capital Southwest Corporation
We have audited the accompanying consolidated statements of financial
condition of Capital Southwest Corporation (a Texas Corporation) and
subsidiaries (the "Company") as of March 31, 2007 and 2006, including the
portfolio of investments as of March 31, 2007, and the related consolidated
statements of operations, changes in net assets, cash flows, and the selected
per share data and ratios for each of the three years in the period ended March
31, 2007. These financial statements and per share data and ratios are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and per share data and ratios based on our
audits. The selected per share data and ratios for the year ended March 31,
2004, were audited by another independent registered public accounting firm
whose report dated May 12, 2004, except for Note 2, which is as of January 9,
2008 expressed an unqualified opinion. The selected per share data and ratios
for the year ended March 31, 2003, were audited by another independent
registered public accounting firm whose report dated April 25, 2003, except for
Note 2, which is as of January 9, 2008 expressed an unqualified opinion.
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. Our procedures included verification by examination of
securities held by the custodian as of March 31, 2007 and 2006, 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 audits provide 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 as of March 31, 2007 and 2006, and the consolidated results of
operations, changes in net assets, cash flows, and the selected per share data
and ratios for each of the three years in the period ended March 31, 2007, in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 6 to the consolidated financial statements, the
Company adopted the provisions of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, effective April 1, 2006. As described in Note 8 to the consolidated
financial statements, the Company also adopted the provisions of FASB Statement
of Financial Accounting Standards No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans: An Amendment of FASB Statements
No. 87, 88, 106, and 132(R), effective March 31, 2007.
As described in Note 2 to the consolidated financial statements, the
Company restated its consolidated financial statements and the selected per
share data and ratios for each of the fiscal years ended March 31, 2007, 2006
and 2005 and the selected per share data and ratios for the years ended March
31, 2004 and 2003 by eliminating the accrual for deferred taxes on unrealized
appreciation of investments, and income taxes payable and related tax carry
forwards on realized gains, which increased the net asset value per share and
net assets from operations for the periods restated, and reclassified return of
capital contributions to "additional capital".
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Capital Southwest
Corporation and subsidiaries' internal control over financial reporting as of
March 31, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our accompanying report dated January 9, 2008, expressed an
adverse opinion on the effective operation of the Company's internal control
over financial reporting.
/s/ Grant Thornton LLP
Dallas, Texas
January 9, 2008
33
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 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 based on the Company's tax year. The third element is the
"Net increase 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. It should be noted that the "Net realized gain (loss)
on investments" and "Net increase 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 $1,187,676 in 2007, $257,374 in 2006 and $35,048 in 2005. The
Company also receives management fees primarily from its wholly-owned portfolio
companies which aggregated $626,400 in 2007, $792,570 in 2006 and $597,000 in
2005. During the three years ended March 31, 2007, the Company recorded dividend
income from the following sources:
Years Ended March 31
2007 2006 2005
---------- --------- ----------
Alamo Group Inc. ................... $ 677,112 $ 677,112 $ 677,112
Balco, Inc.......................... - 252,960 252,960
Dennis Tool Company................. 62,499 49,999 25,000
Kimberly-Clark Corporation.......... 154,360 142,011 127,347
Lifemark Group...................... 600,000 600,000 600,000
PalletOne, Inc...................... 89,842 179,685 80,858
The RectorSeal Corporation.......... 1,869,947 1,106,893 960,000
Sprint Nextel Corporation........... 9,000 18,000 45,000
TCI Holdings, Inc................... 81,270 81,270 81,270
The Whitmore Manufacturing Company.. 240,000 240,000 846,273
Other............................... 170,845 137,500 82,370
--------------------------------------
$3,954,875 $3,485,430 $3,778,190
Total operating expenses, excluding interest expense, increased by $270,833
or 13.9% during the year ended March 31, 2007. 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.
Net Realized Gain (Loss) on Investments
Net realized gain on investments was $14,966,296 (after income tax expense
of $11,080,699) during the year ended March 31, 2007, compared with a gain of
$15,450,903 (after income tax expense of $4,827,663) during 2006 and a loss of
$10,112,020 during 2005. 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 in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded an increase in
unrealized appreciation of investments of $147,681,609, $124,355,303 and
$27,809,654 in 2007, 2006 and 2005, 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
34
investments. Set forth in the following table are the significant increases and
decreases in unrealized appreciation 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
2007 2006 2005
----------- ----------- -----------
Alamo Group Inc. .............. $2,821,000 $ (5,642,000) $19,749,000
Encore Wire Corporation....... (12,260,000) 49,041,000 (27,245,000)
Heelys, Inc.................... 170,040,908 27,000,000 1,400,000
Hologic, Inc................... 715,086 12,472,883 1,836,760
Media Recovery, Inc............ 3,000,000 15,744,000 9,256,000
Palm Harbor Homes, Inc......... (27,493,000) 27,493,000 (15,710,000)
The RectorSeal Corporation..... 10,500,000 15,000,000 12,500,000
On December 8, 2006, the Company realized a significant gain on the sale of
a small fraction of its Heelys investment, and during the year ended March 31,
2007, the value of our remaining Heelys stock increased from the March 31, 2006
value by $170,040,908. This was attributable to the increases in Heelys sales
and earnings during 2006 and the market interest in the initial public offering
of Heelys common stock on December 8, 2006. The offering totaled 7,393,750
shares at $21.00 per share. A total of 4,268,750 shares were sold by selling
stockholders including 1,591,790 shares sold by our Company.
Offsetting part of the major increase in Heelys' value during the year
ended March 31, 2007 was a decrease of $27,493,000 in the value of the
restricted stock of Palm Harbor Homes, Inc., which experienced an earnings
decline in the face of unfavorable industry conditions.
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, 2007."
Portfolio Investments
During the year ended March 31, 2007, the Company invested $803,269 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 2006 and 2005 fiscal years, the Company invested a total
of $15,054,741 and $2,280,690, respectively.
Financial Liquidity and Capital Resources
At March 31, 2007, the Company had cash and cash equivalents of
approximately $38.8 million. Pursuant to Small Business Administration (SBA)
regulations, cash and cash equivalents of $3.1 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 $16.4 million. The Company also has an unsecured
$25.0 million revolving line of credit from a commercial bank, of which $25.0
million was available at March 31, 2007. 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 39 years. Retention of future gains is
viewed as an important source of funds to sustain the Company's investment
activity. Approximately $61.9 million of the Company's investment portfolio is
represented by unrestricted publicly-traded securities and represent a source of
liquidity.
Funds to be used by the Company for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Lifemark
Group, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies of the Company, to the extent of their
available cash reserves and borrowing capacities.
Management believes that the Company's cash and cash equivalents and cash
available from other sources described above are adequate to meet its expected
requirements. Consistent with the long-term strategy of the Company, the
disposition of investments from time to time may also be an important source of
funds for future investment activities.
35
Contractual Obligations
As shown below, the Company had the following contractual obligations as of
March 31, 2007. For further information see Note 5 and Note 9 of the
Consolidated Financial Statements.
Payments Due By Period ($ in Thousands)
---------------------------------------
Less than 1-3 3-5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
- -----------------------------------------------------------------------------
Long-term debt obligations $ - - $ - - -
Capital lease obligations - - - - -
Operating lease obligations 80 - 80 - -
Purchase obligations - - - - -
Other long-term liabilities
reflected on the Company's
balance sheet under GAAP - - - - -
------------------------------------------------
Total $80 - $ 80 - -
------------------------------------------------
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.
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.
36
Selected Consolidated Financial Data
(all figures in thousands except per share data)
1997 1998 1999 2000 2001
Financial Position --------- --------- --------- --------- ---------
(as of March 31) as restated as restated as restated as restated as restated
Investments at cost ............ $ 59,908 $ 61,154 $ 73,580 $ 85,002 $ 87,602
Unrealized appreciation ........ 233,383 340,132 276,698 238,627 228,316
--------- --------- --------- --------- ---------
Investments at market or
fair value .................. 293,291 401,286 350,278 323,629 315,918
Total assets ................... 310,760 522,324 360,786 392,586 322,668
Notes payable * ................ 5,000 5,000 5,000 10,000 16,000
Net assets ..................... 303,469 414,697 352,974 319,438 303,436
Shares outstanding ............. 3,767 3,788 3,815 3,815 3,815
--------- --------- --------- --------- ---------
Changes in Net Assets (years ended March 31)
Net investment income .......... $ 2,574 $ 2,726 $ 1,762 $ 1,663 $ 1,723
Net realized gain (loss) on
investments ................. 4,290 3,301 1,264 5,162 (5,126)
Net increase (decrease) in
unrealized appreciation
before distributions ........ 34,996 106,749 (63,4334) (38,072) (10,311)
--------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions ........ 41,860 112,776 (60,408) (31,247) (13,714)
Cash dividends paid ............ (2,260) (2,268) (2,280) (2,289) (2,289)
Employee stock options
exercised ................... -- 720 965 -- --
Stock option expense ........... -- -- -- -- --
Adjustment to initially apply FASB
Statement No. 158, net of tax -- -- -- -- --
--------- --------- --------- --------- ---------
Increase (decrease) in net assets 39,600 111,228 (61,723) (33,536) (16,003)
Per Share Data (as of March 31)
Net assets ..................... $ 80.56 $ 109.48 $ 92.52 $ 83.73 $ 79.54
Closing market price ........... 67.88 94.00 73.00 54.75 65.00
Cash dividends paid ............ .60 .60 .60 .60 .60
37
2002 2003 2004 2005 2006 2007
Financial Position --------- --------- --------- --------- --------- ---------
(as of March 31) as restated as restated as restated as restated as restated as restated
Investments at cost ............ $ 82,194 $ 91,462 $ 97,283 $ 84,546 $ 88,597 $ 71,642
Unrealized appreciation ........ 265,287 195,598 309,666 337,476 461,831 609,513
--------- --------- --------- --------- --------- ---------
Investments at market or
fair value .................. 347,481 287,060 406,949 422,022 550,428 681,155
Total assets ................... 357,183 298,490 423,979 434,384 569,368 729,507
Notes payable * ................ 14,000 23,000 20,500 13,000 8,000 --
Net assets ..................... 339,891 272,211 400,157 417,947 558,036 725,732
Shares outstanding ............. 3,829 3,829 3,857 3,857 3,860 3,886
--------- --------- --------- --------- --------- ---------
Changes in Net Assets (years ended March 31)
Net investment income .......... $ 2,042 $ 2,299 $ 2,587 $ 2,406 $ 2,389 $ 4,233
Net realized gain (loss) on
investments ................. (762) 2,007 12,603 (10,112) 15,451 14,966
Net increase (decrease) in
unrealized appreciation
before distributions ........ 36,971 (69,689) 114,068 27,810 124,355 147,682
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions ........ 38,251 (65,383) 129,257 20,104 142,195 166,881
Cash dividends paid ............ (2,295) (2,297) (2,309) (2,314) (2,314) (2,323)
Employee stock options
exercised ................... 499 -- 997 -- 208 1,795
Stock option expense ........... -- -- -- -- -- 169
Adjustment to initially apply FASB
Statement No. 158, net of tax -- -- -- -- -- 1,173
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets 36,455 (67,680) 127,946 17,790 140,089 167,695
Per Share Data (as of March 31)
Net assets ..................... $ 88.77 $ 71.09 $ 103.75 $ 108.36 $ 144.56 $ 186.75
Closing market price ........... 68.75 48.15 75.47 79.10 95.50 153.67
Cash dividends paid ............ .60 .60 .60 .60 .60 .60
o Excludes quarter-end borrowing which is repaid on the first business day after
year end.
38
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, 2007. This total does not include an estimated 4,000 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 Global 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, 2005.................................... $89.68 $74.98
September 30, 2005............................... 95.18 81.84
December 31, 2005................................ 92.71 82.10
March 31, 2006................................... 99.01 89.24
Quarter Ended High Low
- -------------------------------------------------------------------------
June 30, 2006.................................... $104.45 $ 90.65
September 30, 2006............................... 121.00 96.47
December 31, 2006............................... 154.36 115.33
March 31, 2007................................... 155.99 122.05
Dividends
The payment dates and amounts of cash dividends per share since April 1, 2005
are as follows:
Payment Date Cash Dividend
- -----------------------------------------------------------------------
May 31, 2005.............................................. $0.20
November 30, 2005......................................... 0.40
May 31, 2006.............................................. 0.20
November 30, 2006......................................... 0.40
May 31, 2007.............................................. 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 was
held on Monday, July 16, 2007, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (second floor), 12900 Preston Road, Dallas, Texas.
39