FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................... to .....................
Commission File Number: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
12900 Preston Road, Suite 700, Dallas, Texas
75230
(Address of principal executive offices)
(Zip Code)
(972) 233-8242
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
3,857,051 shares of Common Stock, $1 Par Value as of January 31, 2005
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
December 31, 2004 (Unaudited) and March 31, 2004.............3
Consolidated Statements of Operations (Unaudited)
For the three and nine months ended December 31, 2004 and
December 31, 2003............................................4
Consolidated Statements of Changes in Net Assets
For the nine months ended December 31, 2004 (Unaudited) and
year ended March 31, 2004....................................5
Consolidated Statements of Cash Flows (Unaudited)
For the three and nine months ended December 31, 2004 and
December 31, 2003............................................6
Notes to Consolidated Financial Statements........................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................8
ITEM 3. Quantitative and Qualitative Disclosure About
Market Risk...........................................11
ITEM 4. Controls and Procedures.......................................12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..............................12
Signatures ...............................................................13
2
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
----------------------------------------------
Assets December 31, 2004 March 31, 2004
----------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: December 31, 2004 - $23,114,865
March 31, 2004 - $23,114,865) $250,628,981 $237,095,981
Companies 5% to 25% owned
(Cost: December 31, 2004 - $19,050,000
March 31, 2004 - $30,431,224) 50,064,852 70,189,005
Companies less than 5% owned
(Cost: December 31, 2004 - $42,873,704
March 31, 2004 - $43,736,560) 110,210,468 99,663,833
------------ ------------
Total investments
(Cost: December 31, 2004- $85,038,569
March 31, 2004 - $97,282,649) 410,904,301 406,948,819
Cash and cash equivalents 2,239,413 10,150,796
Receivables 145,463 76,477
Other assets 7,037,041 6,802,767
------------ ------------
Totals $420,326,218 $423,978,859
============ ============
Liabilities and Shareholders' Equity
Note payable to bank $ 8,000,000 $ 15,500,000
Note payable to portfolio company 5,000,000 5,000,000
Accrued interest and other liabilities 1,650,778 1,815,996
Income taxes payable -- 2,726,850
Deferred income taxes 112,429,943 108,312,663
------------ ------------
Total liabilities 127,080,721 133,355,509
------------ ------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,294,416 shares
at December 31, 2004 and March 31, 2004 4,294,416 4,294,416
Additional capital 7,904,997 7,904,997
Undistributed net investment income 3,562,133 3,578,088
Undistributed net realized gain on investments 71,934,520 79,381,980
Unrealized appreciation of investments -
net of deferred income taxes 212,582,733 202,497,171
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------ ------------
Net assets at market or fair value, equivalent
to $76.03 per share at December 31, 2004,
and $75.35 per share at March 31, 2004
on the 3,857,051 shares outstanding 293,245,497 290,623,350
------------ ------------
Totals $420,326,218 $423,978,859
============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Investment income:
Interest $ 148,276 $ 45,822 $ 336,218 $ 126,491
Dividends 1,597,466 1,755,515 3,026,880 3,151,480
Management and directors' fees 155,250 154,750 479,250 476,114
----------- ----------- ------------ -----------
1,900,992 1,956,087 3,842,348 3,754,085
----------- ----------- ------------ -----------
Operating expenses:
Salaries 298,917 240,854 783,510 665,704
Net pension benefit (63,717) (68,226) (191,155) (204,686)
Other operating expenses 176,949 169,527 582,391 536,381
----------- ----------- ------------ -----------
412,149 342,155 1,174,746 997,399
----------- ----------- ------------ -----------
Income before interest expense and
income taxes 1,488,843 1,613,932 2,667,602 2,756,686
Interest expense 100,857 131,182 302,726 406,736
----------- ----------- ------------ -----------
Income before income taxes 1,387,986 1,482,750 2,364,876 2,349,950
Income tax expense 22,200 23,900 66,600 71,700
----------- ----------- ------------ -----------
Net investment income $ 1,365,786 $ 1,458,850 $ 2,298,276 $ 2,278,250
=========== =========== ============ ===========
Proceeds from disposition of investments $ 664,307 $ 51,245 $ 1,428,701 $ 3,705,584
Cost of investments sold 6,580,338 193,182 13,666,331 873,615
----------- ----------- ------------ -----------
Realized gain (loss) on investments
before income taxes (5,916,031) (141,937) (12,237,630) 2,831,969
Income tax expense (benefit) (2,494,319) (49,678) (4,790,170) 991,189
----------- ----------- ------------ -----------
Net realized gain (loss) on investments (3,421,712) (92,259) (7,447,460) 1,840,780
----------- ----------- ------------ -----------
Increase in unrealized appreciation
of investments before income taxes 23,672,237 19,944,577 16,199,562 52,875,847
Increase in deferred income taxes
on appreciation of investments 8,647,000 6,980,000 6,114,000 17,942,000
----------- ----------- ------------ -----------
Net increase in unrealized
appreciation of investments 15,025,237 12,964,577 10,085,562 34,933,847
----------- ----------- ------------ -----------
Net realized and unrealized gain
on investments $11,603,525 $12,872,318 $ 2,638,102 $36,774,627
=========== =========== ============ ===========
Increase in net assets from operations $12,969,311 $14,331,168 $ 4,936,378 $39,052,877
=========== =========== ============ ===========
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Net Assets
------------------------------------------------
Nine Months Ended Year Ended
December 31, 2004 March 31, 2004
----------------- ---------------
(Unaudited)
Operations
Net investment income $ 2,298,276 $ 2,587,060
Net realized gain (loss) on investments (7,447,460) 8,191,872
Net increase in unrealized
appreciation of investments 10,085,562 74,688,574
------------ ------------
Increase in net assets from operations 4,936,378 85,467,506
Distributions from:
Undistributed net investment income (2,314,231) (2,308,631)
Capital share transactions
Exercise of employee stock options -- 997,500
------------ ------------
Increase in net assets 2,622,147 84,156,375
Net assets, beginning of period 290,623,350 206,466,975
------------ ------------
Net assets, end of period $293,245,497 $290,623,350
============ ============
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ----------- -------------
Cash flows from operating activities
Increase in net assets from operations $ 12,969,311 $ 14,331,168 $ 4,936,378 $ 39,052,877
Adjustments to reconcile increase in net
assets from operations to net cash
provided by (used in) operating activities:
Proceeds from disposition of investments 664,307 51,245 1,374,121 3,705,584
Purchases of securities (814,537) (2,204,263) (1,761,940) (9,131,903)
Maturities of securities 166,269 900,000 394,269 1,800,000
Depreciation and amortization 4,183 4,776 12,074 14,313
Net pension benefit (63,717) (68,226) (191,155) (204,686)
Net realized and unrealized gain
on investments (11,603,525) (12,872,318) (2,638,102) (36,774,627)
(Increase) decrease in receivables (56,542) 232,740 (68,986) 209,352
(Increase) decrease in other assets 1,496 19,993 (3,050) 12,761
Increase (decrease) in accrued interest
and other liabilities 15,622 63,145 (91,900) 108,813
Decrease in accrued pension cost (41,821) (41,821) (125,461) (125,461)
Deferred income taxes 22,200 23,900 66,600 71,700
------------ ------------ ----------- ------------
Net cash provided by (used in) operating
activities 1,263,246 440,339 1,902,848 (1,261,277)
------------ ------------ ----------- ------------
Cash flows from financing activities
Decrease in note payable to bank -- -- (7,500,000) --
Distributions from undistributed net
investment income (1,542,821) (1,542,821) (2,314,231) (2,308,631)
Proceeds from exercise of employee stock
options -- -- -- 997,500
------------ ------------ ----------- ------------
Net cash used in financing activities (1,542,821) (1,542,821) (9,814,231) (1,311,131)
------------ ------------ ----------- ------------
Net decrease in cash and cash
equivalents (279,575) (1,102,482) (7,911,383) (2,572,408)
Cash and cash equivalents at beginning
of period 2,518,988 3,180,462 10,150,796 4,650,388
------------ ------------ ----------- ------------
Cash and cash equivalents at end of period $ 2,239,413 $ 2,077,980 $ 2,239,413 $ 2,077,980
============ ============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $100,764 $131,182 $302,964 $406,639
Income taxes $ -- $ -- $ -- $ --
Note:
- -----
On September 29, 2004, CSC received 2,936 shares of Tekelec valued at $54,580
($18.59 per share) related to the sale of VocalData, Inc.
(See Notes to Consolidated Financial Statements)
6
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements, which include our
accounts and the accounts of our wholly-owned small business investment company
subsidiary and our wholly-owned management company, have been prepared on the
value method of accounting in accordance with accounting principles generally
accepted in the United States for investment companies. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 2003 balances to conform with
the 2004 financial statement presentation.
The financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Article
6 of Regulation S-X. The financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended March 31, 2004. Certain information and
footnotes normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted, although we believe that the disclosures are adequate for
a fair presentation. The information reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the interim periods.
2. Indemnification
We enter into agreements that contain customary indemnification
provisions. The maximum exposure under these indemnification agreements is
unknown, but we have had no previous claims or losses and expect the risk of
losses to be remote.
3. Stock-Based Compensation
Effective April 1, 2003, we adopted the fair value method of recording
compensation expense related to all stock options granted after March 31, 2003,
in accordance with FASB Statement Nos. 123 and 148. Accordingly, the fair value
of stock options as determined on the date of grant using the Black-Scholes
pricing model will be expensed over the vesting period of the related stock
options. On July 19, 2004, 7,500 stock options were granted to a new investment
associate who terminated December 31, 2004 with no options vested.
The following table illustrates the effect on net asset value and net
asset value per share if we had applied the fair value recognition provisions of
FASB Statement No. 123 to stock-based compensation.
December 31 December 31
2004 2003
------------ ------------
Net asset value, as reported $293,245,497 $244,208,721
Deduct: Total fair value computed
stock-based compensation 120,573 134,580
------------ ------------
Pro forma net asset value $293,124,924 $244,074,141
============ ============
Net asset value per share:
Basic - as reported $ 76.03 $63.31
======= ======
Basic - pro forma $ 76.00 $63.28
======= ======
Diluted - as reported $ 76.00 $63.31
======= ======
Diluted - pro forma $ 75.96 $63.28
======= ======
7
Notes to Consolidated Financial Statements
(continued)
The diluted net asset value per share calculation assumes all vested
outstanding options for which the market price exceeds the exercise price have
been exercised.
4. Summary of Per Share Information
Three Months Ended Nine Months Ended
December 31 December 31
------------------ -----------------
2004 2003 2004 2003
------ ------ ------ ------
Investment income $ .49 $ .51 $ .99 $ .97
Operating expenses (.10) (.09) (.30) (.26)
Interest expense (.03) (.03) (.08) (.10)
Income taxes (.01) (.01) (.02) (.02)
------ ------ ------ ------
Net investment income .35 .38 .59 .59
Distributions from undistributed
net investment income (.40) (.40) (.60) (.60)
Net realized gain (loss) on investments (.89) (.02) (1.93) .48
Net increase in unrealized appreciation
of investments after deferred taxes 3.90 3.35 2.62 9.06
Exercise of employee stock options (1) -- -- -- (.14)
------ ------ ------ ------
Increase in net asset value 2.96 3.31 .68 9.39
Net asset value:
Beginning of period 73.07 60.00 75.35 53.92
------ ------ ------ ------
End of period $76.03 $63.31 $76.03 $63.31
====== ====== ====== ======
Increase in deferred taxes on
unrealized appreciation $ 2.24 $ 1.81 $ 1.58 $ 4.53
Deferred taxes on unrealized appreciation:
Beginning of period 27.13 20.42 27.79 17.70
------ ------ ------ ------
End of period $29.37 $22.23 $29.37 $22.23
====== ====== ====== ======
Shares outstanding at end of period
(000s omitted) 3,857 3,857 3,857 3,857
(1) Net decrease is due to the exercise of employee stock options at
prices less than beginning of period net asset value.
5. New Accounting Pronouncements
On December 15, 2004, the FASB issued a revised SFAS No. 123(R),
"Share-Based Payment." It requires us to measure all employee stock-based
compensation awards using a fair value method and record such expense in our
consolidated financial statements. In addition, it requires additional
accounting and disclosure related to the cash flow effects resulting from
share-based payment arrangements. It is effective beginning as of the first
interim period beginning after June 15, 2005. We are in the process of
determining the effect on our consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at December 31, 2004 was $293,245,497, equivalent to
$76.03 per share after deducting an allowance of $29.37 per share for deferred
taxes on net unrealized appreciation of investments. Assuming reinvestment of
dividends, the December 31, 2004 net asset value reflects an increase of 4.6%
during the preceding three months and an increase of 21.0% during the past
twelve months.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(continued)
December 31, December 31,
2004 2003
------------ ------------
Net assets $293,245,497 $244,208,721
Shares outstanding 3,857,051 3,857,051
Net assets per share $76.03 $63.31
Results of Operations
The composite measure of our 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 our income from interest, dividends and fees and our
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 or
benefit. The third element is the "Net increase in unrealized appreciation of
investments", which is the net change in the market or fair value of our
investment portfolio, compared with stated cost, net of an increase in deferred
income taxes which would become payable if the unrealized appreciation were
realized through the sale or other disposition of the investment portfolio. It
should be noted that the "Net realized gain (loss) on investments" and "Net
increase 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
Interest income of $336,218 in the nine months ended December 31, 2004
increased from $126,491 in the year-ago period primarily because of an increase
in loans to portfolio companies. During the nine months ended December 31, 2004
and 2003, we recorded dividend income from the following sources:
Nine Months Ended
December 31
-----------------------
2004 2003
---------- ----------
Alamo Group Inc. $ 507,834 $ 507,834
Balco, Inc. 252,960 252,960
Dennis Tool Company 25,000 37,499
Kimberly-Clark Corporation 92,616 78,723
PalletOne, Inc. 35,937 --
The RectorSeal Corporation 720,000 1,167,729
Skylawn Corporation 450,000 800,000
TCI Holdings, Inc 60,953 60,953
Sprint Corporation 33,750 27,000
The Whitmore Manufacturing Company 786,273 180,000
Other 61,557 38,782
---------- ----------
$3,026,880 $3,151,480
========== ==========
Operating expenses totaled $1,174,746 in the nine months ended December
31, 2004 versus $997,399 in the nine months ended December 31, 2003. The
increase was due mainly to the addition of an investment associate in July 2004,
employee raises and an increase in audit and legal fees for ordinary business
operations.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(continued)
Interest expense of $302,726 in the nine months ended December 31, 2004
decreased from $406,736 in the corresponding period ended December 31, 2003
primarily due to a decrease in notes payable.
Net Realized Gain or Loss on Investments
During the nine months ended December 31, 2004, we reported a realized
loss before income taxes of $12,237,630 which included a loss of $9,097,124 on
our investment in Concert Industries Ltd., a loss of $3,000,000 on our
investment in Texas Petrochemical Holdings, Inc. and a loss of $1,346,891 on our
sale of VocalData, Inc. to Tekelec.
Net Increase in Unrealized Appreciation of Investments
Set forth in the following table are the significant increases and
decreases in unrealized appreciation (before the related change in deferred
taxes and excluding the effect of gains or losses realized during the periods)
by portfolio company:
Three Months Ended Nine Months Ended
December 31 December 31
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Alamo Group Inc. $14,106,000 $ 1,410,000 $ 19,749,000 $ 4,232,000
CMI Holding Company, Inc. -- -- (3,000,000) --
Cenveo, Inc. (formerly Mail-Well) (838,635) 2,327,213 (2,872,325) 5,409,197
Encore Wire Corporation -- 10,898,000 (19,071,000) 19,071,000
Extreme International Inc. -- -- 375,000 4,613,661
Media Recovery, Inc. 3,000,000 -- 3,000,000 3,000,000
Palm Harbor Homes, Inc. (7,855,000) -- (15,710,000) --
PETsMART, Inc. 2,154,000 312,000 2,541,000 3,360,000
The RectorSeal Corporation -- -- 4,000,000 --
Texas Capital Bancshares, Inc. 2,427,589 1,380,000 3,772,418 3,965,994
The Whitmore Manufacturing
Company 1,600,000 -- 4,000,000 --
As reflected in the above table, at December 31, 2004, the value of our
investment in Alamo Group Inc. was increased from our March 31, 2004 value by
$19,749,000 due to the escalation in sales and earnings during 2004 which
reflected the favorable performance of Alamo's European operations and an
improved U.S. climate for industrial mowers and agricultural equipment.
During the nine months ended December 31, 2004, the value of our
investment in Encore Wire Corporation was reduced by $19,071,000 due to the
cyclical variations in Encore's profitability and the effect of copper price
fluctuations on Encore's earnings. In the same period a year ago, we increased
our value of Encore by $19,071,000 reflecting increases in the company's sales
and earnings which stemmed partly from higher copper prices.
During the nine months ended December 31, 2004, the value of our
investment in Palm Harbor Homes, Inc. was reduced by $15,710,000 due to the
unfavorable pattern of the company's earnings and the continuing negative
outlook for the manufactured housing industry.
During the nine months ended December 31, 2004, our unrealized
appreciation of investments before income taxes increased by $16,199,562, which
included value decreases of $43,179,510 and value increases of $46,341,608, plus
the $13,037,464 effect of net realized losses during the period.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(continued)
Portfolio Investments
During the quarter ended December 31, 2004, we made additional
investments of $814,537 in existing portfolio companies.
We have agreed, subject to certain conditions, to invest up to
$1,516,348 in six portfolio companies.
Financial Liquidity and Capital Resources
At December 31, 2004, we had cash and cash equivalents of approximately
$2.2 million. Pursuant to Small Business Administration ("SBA") regulations,
cash and cash equivalents of $221,526 held by Capital Southwest Venture
Corporation ("CSVC") may not be transferred or advanced to us without the
consent of the SBA. Under current SBA regulations and subject to SBA's approval
of its credit application, CSVC would be entitled to borrow up to $64.5 million.
We also have an unsecured $25.0 million revolving line of credit from a
commercial bank, of which $17.0 million was available at December 31, 2004. With
the exception of a capital gain distribution made in the form of a distribution
of the stock of a portfolio company in the fiscal year ended March 31, 1996, we
have elected to retain all gains realized during the past 36 years. Retention of
future gains is viewed as an important source of funds to sustain our investment
activity. Approximately $56.6 million of our investment portfolio is represented
by unrestricted publicly-traded securities, which have an ascertainable market
value and represent a source of liquidity.
Funds to be used by us for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Skylawn
Corporation, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies, to the extent of their available cash reserves
and borrowing capacities. At December 31, 2004, we owed $5,000,000 to Skylawn
Corporation.
Management believes that our cash and cash equivalents and cash
available from other sources described above are adequate to meet our expected
requirements. Consistent with our long-term strategy, the disposition of
investments from time to time may also be an important source of funds for
future investment activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in
marketable equity security prices. We do not use derivative financial
instruments to mitigate any of these risks. The return on our investments is not
materially affected by foreign currency fluctuations.
Our investment performance is a function of our portfolio companies'
profitability, which may be affected by economic cycles, competitive forces and
production costs including labor rates, raw material prices and certain basic
commodity prices. All of these factors may have an adverse effect on the value
of our investments and on our net asset value. None of the companies in our
investment portfolio hedge their exposure to raw material and commodity price
fluctuations.
Our investment in portfolio securities consists of fixed rate debt
securities which totaled $5,214,570 at December 31, 2004, equivalent to 1.3% of
the value of our total investments. Since these debt securities usually have
relatively high fixed rates of interest, minor changes in market yields of
publicly-traded debt securities have little or no effect on the values of debt
securities in our portfolio and no effect on interest income. Our investments in
debt securities are generally held to maturity and their fair values are
determined on the basis of the terms of the debt security and the financial
condition of the issuer.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(continued)
A portion of our investment portfolio consists of debt and equity
securities of private companies. We anticipate little or no effect on the values
of these investments from modest changes in public market equity valuations.
Should significant changes in market valuations of comparable publicly-owned
companies occur, there may be a corresponding effect on valuations of private
companies, which would affect the value and the amount and timing of proceeds
eventually realized from these investments. A portion of our investment
portfolio also consists of restricted common stock of publicly-owned companies.
The fair values of these restricted securities are influenced by the nature of
applicable resale restrictions, the underlying earnings and financial condition
of the issuers of such restricted securities and the market valuations of
comparable publicly-owned companies. A portion of our investment portfolio also
consists of unrestricted, freely marketable common stocks of publicly- owned
companies. These freely marketable investments, which are valued at the public
market price, are directly exposed to equity price risks, in that a change in an
issuer's public market equity price would result in an identical change in the
value of our investment in such security.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2004, an evaluation was performed under the
supervision and with the participation of our management, including the
President and Chairman of the Board and Secretary-Treasurer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the President
and Chairman of the Board and Secretary-Treasurer concluded that our disclosure
controls and procedures were effective as of December 31, 2004. There have been
no significant changes during the quarter covered by this report in our internal
control over financial reporting or in other factors that could significantly
affect internal control over financial reporting.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1- Certification of President and Chairman of the Board
required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), filed herewith.
Exhibit 31.2- Certification of Secretary-Treasurer required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed herewith.
Exhibit 32.1- Certification of President and Chairman of the Board
required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and
Section 1350 of Chapter 63 of Title 18 of the United States Code,
furnished herewith.
Exhibit 32.2- Certification of Secretary-Treasurer required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of
Chapter 63 of Title 18 of the United States Code, furnished herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
Date: February 4, 2005 By: /s/ William R. Thomas
------------------------ -----------------------------------------
William R. Thomas, President and Chairman
of the Board (chief executive officer)
Date: February 4, 2005 By: /s/ Susan K. Hodgson
------------------------ -----------------------------------------
Susan K. Hodgson, Secretary-Treasurer
(chief financial/accounting officer)
Exhibit 31.1
CERTIFICATIONS
I, William R. Thomas, President and Chairman of the Board of Capital Southwest
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Southwest
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the consolidated financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 4, 2005 By: /s/ William R. Thomas
---------------- --------------------------------
William R. Thomas, President and
Chairman of the Board
Exhibit 31.2
CERTIFICATIONS
I, Susan K. Hodgson, Secretary-Treasurer of Capital Southwest Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Southwest
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the consolidated financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 4, 2005 By: /s/ Susan K. Hodgson
---------------- -------------------------------------
Susan K. Hodgson, Secretary-Treasurer
Exhibit 32.1
Certification of President and Chairman of the Board
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
I, William R. Thomas, President and Chairman of the Board of Capital
Southwest Corporation, certify that, to my knowledge:
1. the Form 10-Q, filed with the Securities and Exchange Commission on
February 4, 2005 ("accompanied report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the accompanied report fairly presents,
in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: February 4, 2005 By: /s/ William R. Thomas
---------------- --------------------------------
William R. Thomas, President and
Chairman of the Board
Exhibit 32.2
Certification of Secretary-Treasurer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
I, Susan K. Hodgson, Secretary-Treasurer of Capital Southwest
Corporation, certify that, to my knowledge:
1. the Form 10-Q, filed with the Securities and Exchange Commission on
February 4, 2005 ("accompanied report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the accompanied report fairly presents,
in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: February 4, 2005 By: /s/ Susan K. Hodgson
---------------- -------------------------------------
Susan K. Hodgson, Secretary-Treasurer
