UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
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)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2004 was $139,165,652, based on the last sale
price of such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of May 15, 2005 was
3,857,051.
Documents Incorzporated by Reference Part of Form 10-K
------------------------------------ -----------------
(1) Annual Report to Shareholders for the Year Ended Parts I and II; and
March 31, 2005 Part IV, Item 14(a)(1) and (2)
(2) Proxy Statement for Annual Meeting of Shareholders Part III
to be held July 18, 2005
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business......................................................1
Item 2. Properties....................................................1
Item 3. Legal Proceedings.............................................1
Item 4. Submission of Matters to a Vote of Security Holders...........2
Item 4A. Executive Officers............................................2
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..........2
Item 6. Selected Financial Data.......................................2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................2
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....2
Item 8. Financial Statements and Supplementary Data...................3
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...................................4
Item 9A. Controls and Procedures.......................................4
Item 9B. Other Information.............................................4
PART III
Item 10. Directors and Executive Officers of the Registrant............4
Item 11. Executive Compensation........................................4
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................4
Item 13. Certain Relationships and Related Transactions................5
Item 14. Principal Accountant Fees and Services........................5
PART IV
Item 15. Exhibits and Financial Statement Schedules....................5
Signatures ...................................................................6
PART I
Item 1. Business
We were organized as a Texas corporation on April 19, 1961. Until
September 1969, we operated as a licensee under the Small Business Investment
Act of 1958. At that time, we transferred to our wholly-owned subsidiary,
Capital Southwest Venture Corporation ("CSVC"), certain assets and our license
as a small business investment company ("SBIC"). CSVC is a closed-end,
non-diversified investment company of the management type registered under the
Investment Company Act of 1940 (the "1940 Act"). Prior to March 30, 1988, we
were registered as a closed-end, non-diversified investment company under the
1940 Act. On that date, we elected to become a business development company
subject to the provisions of the 1940 Act, as amended by the Small Business
Incentive Act of 1980. Because we wholly own CSVC, the portfolios of both
entities are referred to collectively as "our", "we" and "us".
We are a venture capital investment company whose objective is to
achieve capital appreciation through long-term investments in businesses
believed to have favorable growth potential. Our investment interests are
focused on expansion financings, management buyouts, recapitalizations, industry
consolidations and early-stage financings in a broad range of industry segments.
The portfolio is a composite of companies in which we have major interests as
well as a number of developing companies and marketable securities of
established publicly-owned companies. We make available significant managerial
assistance to the companies in which we invest and believe that providing
material assistance to such investee companies is critical to their business
development activities.
The twelve largest investments we own had a combined cost of
$41,744,164 and a value of $362,551,796, representing 85.9% of the value of our
consolidated investment portfolio at March 31, 2005. For a narrative description
of the twelve largest investments, see "Twelve Largest Investments - March 31,
2005" on pages 7 through 9 of our Annual Report to Shareholders for the Year
Ended March 31, 2005 (our "2005 Annual Report") which is herein incorporated by
reference. Certain of the information presented on the twelve largest
investments has been obtained from the respective companies and, in certain
cases, from public filings of such companies. The financial information
presented on each of the respective companies is from such companies' financial
statements, which in some instances are unaudited.
We compete for attractive investment opportunities with venture capital
partnerships and corporations, venture capital affiliates of industrial and
financial companies, SBICs and wealthy individuals.
The number of persons employed by us at March 31, 2005 was seven.
Our internet website address is www.capitalsouthwest.com. You can
review the filings we have made with the U.S. Securities and Exchange
Commission, free of charge by linking directly from our website to NASDAQ, a
database that links to EDGAR, the Electronic Data Gathering, Analysis, and
Retrieval System of the SEC. You should be able to access our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. The charters adopted by the
committees of our board of directors are also available on our website.
Item 2. Properties
We maintain our offices at 12900 Preston Road, Suite 700, Dallas,
Texas, 75230, where we rent approximately 3,700 square feet of office space
pursuant to a lease agreement expiring in February 2008. We believe that our
offices are adequate to meet our current and expected future needs.
Item 3. Legal Proceedings
We have no material pending legal proceedings to which we are a party
or to which any of our property is subject.
1
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended March 31, 2005.
Item 4A. Executive Officers
The names and ages of our executive officers as of June 1, 2005,
together with certain biographical information, are as follows:
William M. Ashbaugh, age 50, has served as Vice President since 2001. He
previously served as Managing Director in the corporate finance
departments of Hoak Breedlove Wesneski & Co. from 1998 to 2001,
Principal Financial Securities from 1997 to 1998 and Southwest
Securities from 1995 to 1997.
Patrick F. Hamner, age 49, has served as Vice President since 1986 and was
an Investment Associate from 1982 to 1986.
Susan K. Hodgson, age 43, has served as Secretary-Treasurer since 2001 and
was Controller from 1994 to 2001.
Gary L. Martin, age 58, has been a director since July 1988 and has served
as Vice President since 1984. He previously served as Vice President
from 1978 to 1980. Since 1980, Mr. Martin has served as President of
The Whitmore Manufacturing Company, a wholly-owned portfolio company.
William R. Thomas, age 76, has served as Chairman of the Board of Directors
since 1982 and President since 1980. In addition, he has been a
director since 1972 and was previously Senior Vice President from 1969
to 1980.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Information set forth under the captions "Shareholder Information -
Shareholders, Market Prices and Dividends" on page 37 of our 2005 Annual Report
is herein incorporated by reference.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 36 of our 2005 Annual
Report is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 33 through 35 of our 2005 Annual Report are herein incorporated
by reference.
Item 7A. 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. Most of the companies in our
investment portfolio do not hedge their exposure to raw material and commodity
price fluctuations.
Our investment in portfolio securities includes fixed-rate debt
securities which totaled $5,592,145 at March 31, 2005, equivalent to 1.33% of
the value of our total investments. Generally these debt securities are below
investment grade and have relatively high fixed rates of interest, therefore;
2
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.
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 price would result in an identical change in the fair
value of our investment in such security.
Item 8. Financial Statements and Supplementary Data
Pages 10 through 32 of our 2005 Annual Report are herein incorporated
by reference. See also Item 15 of this Form 10-K - "Exhibits and Financial
Statement Schedules".
Selected Quarterly Financial Data (Unaudited)
---------------------------------
The following presents a summary of the unaudited quarterly
consolidated financial information for the years ended March 31, 2005 and 2004.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
2005
- ----
Net investment income $ 489 $ 443 $ 1,366 $ 108 $ 2,406
Net realized gain (loss) on investments (1,556) (2,470) (3,422) 1,382 (6,066)
Net increase (decrease) in unrealized
appreciation of investments (2,392) (2,547) 15,025 7,799 17,885
Net increase (decrease) in net assets
from operations (3,459) (4,574) 12,969 9,289 14,225
Net increase (decrease) in net assets
from operations per share (0.90) (1.18) 3.36 2.41 3.69
2004
- ----
Net investment income $ 437 $ 382 $ 1,459 $ 309 $ 2,587
Net realized gain (loss) on investments (2) 1,935 (92) 6,351 8,192
Net increase in unrealized appreciation
of investments 8,756 13,214 12,964 39,755 74,689
Net increase in net assets from operations 9,191 15,531 14,331 46,415 85,468
Net increase in net assets from operations
per share 2.40 4.02 3.71 12.03 22.16
3
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of March 31, 2005, 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 as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. 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 March 31, 2005.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial
reporting that occurred during our fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The section of our 2005 Proxy Statement captioned "Nominees for
Director" under "Proposal 1. Election of Directors" identifies members of our
board of directors and nominees, and is incorporated in this Item 10 by
reference.
Item 4A of this Form 10-K identifies our executive officers and is
incorporated in this Item 10 by reference.
The sections of our 2005 Proxy Statement captioned "Meetings and
Committees of the Board of Directors - Audit Committee" under "Proposal 1.
Election of Directors" and "Report of the Audit Committee" identifies members of
our audit committee of our board of directors and our audit committee financial
expert, and are incorporated in this Item 10 by reference.
The section of our 2005 Proxy Statement captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" is incorporated in this Item 10 by
reference.
Code of Ethics
We have adopted a code of ethics that applies to all our directors,
officers and employees. We have made the Code of Conduct and Ethics available on
our website at www.capitalsouthwest.com.
Item 11. Executive Compensation
The information in the section of our 2005 Proxy Statement captioned
"Executive Compensation" is incorporated in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information in the sections of our 2005 Proxy Statement captioned
"Stock Ownership of Certain Beneficial Owners" and "Executive Compensation" are
incorporated in this Item 12 by reference.
The table below sets forth certain information as of March 31, 2005
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
4
Equity Compensation Plan Information
Number of Securities
Number of Securities Remaining Available For
To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity
Exercise of Price Of Outstanding Compensation Plans
Outstanding Options, Options, (excluding securities reflected
Plan Category Warrants And Rights Warrants And Rights in column (a))
- ------------- -------------------- ------------------- --------------
(a) (b) (c)
--- --- ---
Equity 48,500 $68.186 91,500
compensation plans
approved by security
holders(1)
Equity - - -
compensation plans
not approved by
security holders
-------- -------- --------
Total 48,500 $68.186 91,500
- ---------
(1) Includes the 1999 Stock Option Plan. For a description of this plan, please
refer to Footnote 5 contained in our consolidated financial statements.
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this
item during the fiscal year ended March 31, 2005 or proposed for the fiscal year
ending March 31, 2006.
Item 14. Principal Accountant Fees and Services
The information in the sections of our 2005 Proxy Statement captioned
"Proposal 2: Ratification of Appointment of Independent Auditors" and "Audit and
Other Fees" are incorporated in this Item 14 by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following information included in pages 10 through 32 of our
2005 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 2005
Consolidated Statements of Financial Condition - March 31, 2005
and 2004
Consolidated Statements of Operations - Years Ended
March 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Net Assets - Years Ended
March 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows - Years Ended March 31, 2005,
2004 and 2003
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Management's Report on Internal Control over Financial Reporting
(F) Reports of Independent Registered Public Accounting Firms
(G) Portfolio Changes During the Year
(a)(2) All schedules are omitted because they are not applicable or not
required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index.
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ William R. Thomas
----------------------------
William R. Thomas, President
and Chairman of the Board
Date: May 27, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ William R. Thomas
- ----------------------------- President and Chairman May 27, 2005
William R. Thomas of the Board and Director
(chief executive officer)
/s/ Gary L. Martin
- ----------------------------- Director May 27, 2005
Gary L. Martin
/s/ Graeme W. Henderson
- ----------------------------- Director May 27, 2005
Graeme W. Henderson
/s/ Samuel B. Ligon
- ----------------------------- Director May 27, 2005
Samuel B. Ligon
/s/ John H. Wilson
- ----------------------------- Director May 27, 2005
John H. Wilson
/s/ Susan K. Hodgson
- ----------------------------- Secretary-Treasurer May 27, 2005
Susan K. Hodgson (chief financial/accounting officer)
6
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. Asterisk denotes exhibits filed with this
report. Double asterick denotes exhibits furnished with this report.
Exhibit No. Description
----------- -----------
3.1(a) Articles of Incorporation and Articles of Amendment
to Articles of Incorporation, dated June 25, 1969
(filed as Exhibit 1(a) and 1(b) to Amendment No. 3 to
Form N-2 for the fiscal year ended March 31, 1979).
3.1(b) Articles of Amendment to Articles of Incorporation,
dated July 20, 1987 (filed as an exhibit to Form
N-SAR for the six month period ended September 30,
1987).
3.2 By-Laws of the Company, as amended (filed as Exhibit
2 to Amendment No. 11 to Form N-2 for the fiscal year
ended March 31, 1987).
4.1 Specimen of Common Stock certificate (filed as
Exhibit 4.1 to Form 10-K for the fiscal year ended
March 31, 2002).
10.1 The RectorSeal Corporation and Jet-Lube, Inc.
Employee Stock Ownership Plan as revised and restated
effective April 1, 1998 (filed as Exhibit 10.1 to
Form 10-K for the fiscal year ended March 31, 2002).
10.2 Amendment No. 1 to The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan as
revised and restated effective April 1, 1998 (filed
as Exhibit 10.2 to Form 10-K for the fiscal year
ended March 31, 2002).
10.3 Amendment No. 2 to The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan as
revised and restated effective April 1, 1998 (filed
as Exhibit 10.3 to Form 10-K for the fiscal year
ended March 31, 2003).
10.4 * Amendment No. 3 to The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan as
revised and restated effective April 1, 1998.
10.5 Retirement Plan for Employees of Capital Southwest
Corporation and Its Affiliates as amended and
restated effective April 1, 1989 (filed as Exhibit
10.3 to Form 10-K for the fiscal year ended March 31,
1995).
10.6 Amendments One and Two to Retirement Plan for
Employees of Capital Southwest Corporation and Its
Affiliates as amended and restated effective April 1,
1989 (filed as Exhibit 10.4 to Form 10-K for the
fiscal year ended March 31, 1998).
10.7 Amendment Three to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989 (filed
as Exhibit 10.5 to Form 10-K for the fiscal year
ended March 31, 2002).
10.8 Amendment Four to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989 (filed
as Exhibit 10.7 to Form 10-K for the fiscal year
ended March 31, 2003).
10.9 Amendment Five to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989 (filed
as Exhibit 10.8 to Form 10-K for the fiscal year
ended March 31, 2003).
10.10 Amendment Six to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989 (filed
as Exhibit 10.9 to Form 10-K for the fiscal year
ended March 31, 2003).
10.11 * Amendment Seven to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989.
10.12 * Amendment Eight to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989.
10.13 * Amendment Nine to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989.
10.14 Capital Southwest Corporation and Its Affiliates
Restoration of Retirement Income Plan for certain
highly-compensated superseded plan participants
effective April 1, 1993 (filed as Exhibit 10.4 to
Form 10-K for the fiscal year ended March 31, 1995).
10.15 Amendment One to Capital Southwest Corporation and
Its Affiliates Restoration of Retirement Income Plan
for certain highly-compensated superceded plan
participants effective April 1, 1993 (filed as
Exhibit 10.6 to Form 10-K for the fiscal year ended
March 31, 1998).
10.16 Capital Southwest Corporation Retirement Income
Restoration Plan as amended and restated effective
April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for
the fiscal year ended March 31, 1995).
10.17 Form of Indemnification Agreement which has been
established with all directors and executive officers
of the Company (filed as Exhibit 10.9 to Form 8-K
dated February 10, 1994).
10.18 Capital Southwest Corporation 1999 Stock Option Plan
(filed as Exhibit 10.10 to Form 10-K for the fiscal
year ended March 31, 2000).
13.1 * Annual Report to Shareholders for the fiscal year
ended March 31, 2005.
21.1 List of subsidiaries of the Company (filed as exhibit
21 to Form 10-K for the fiscal year ended March 31,
1998).
23.1 * Consent of Independent Registered Public Accounting
Firm - Grant Thornton LLP.
23.2 * Consent of Independent Registered Public Accounting
Firm - Ernst & Young LLP.
23.3 * Consent of Independent Registered Public Accounting
Firm - KPMG LLP.
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.
31.2 * Certification of Secretary-Treasurer required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act,
filed herewith.
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.
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.
Exhibit 10.4
AMENDMENT NO. 3
TO
THE RECTORSEAL CORPORATION AND JET-LUBE, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Revised and Restated Effective April 1, 1998)
THIS AMENDMENT NO. 3, executed this ____ day of ________________, 2004,
and effective as of August 1, 2004, by The RectorSeal Corporation, a Delaware
corporation, having its principal office in Houston, Texas (hereinafter referred
to as the "Company").
WITNESSETH:
WHEREAS, the Company revised and restated The RectorSeal Corporation
and Jet-Lube, Inc. Employee Stock Ownership Plan (the "Plan") effective April 1,
1998, except for certain provisions for which another effective date was
subsequently provided elsewhere in the terms of the Plan, to (i) incorporate the
prior amendment to the Plan and (ii) bring the Plan into compliance with the
Internal Revenue Code of 1986, as amended (the "Code"), as modified by the Small
Business Job Protection Act of 1996, the General Agreement on Tariffs and Trade
under the Uruguay Round Agreements Act, the Uniformed Services Employment and
Reemployment Rights Act of 1994, the Taxpayer Relief Act of 1997, the Internal
Revenue Service Restructuring and Reform Act of 1998, and the Community Renewal
Tax Relief Act of 2000, as well as all applicable rules, regulations and
administrative pronouncements enacted, promulgated or issued since the date the
Plan was last restated;
WHEREAS, the Company adopted Amendment No. 1 to the revised and
restated Plan, effective as of April 1, 2002, except as specifically provided
otherwise in Amendment No. 1, to (i) reflect certain provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") which generally
became applicable to the Plan effective as of April 1, 2002, and (ii) constitute
good faith compliance with the requirements of EGTRRA;
WHEREAS, final Treasury regulations were issued April 17, 2002 under
section 401(a)(9) of the Code relating to distributions under Section 11.4 of
the Plan (the "Final Distribution Regulations");
WHEREAS, the Pension and Welfare Benefits Administration of the
Department of Labor issued final regulations establishing new standards for
processing benefit claims of participants and beneficiaries under Section 11.6
of the Plan which have been clarified by further guidance from the Pension and
Welfare Benefits Administration (collectively the "Final Claims Procedure
Regulations");
WHEREAS, the Company adopted Amendment No. 2 to the revised and
restated Plan to (i) revise Section 11.4 of the Plan, effective January 1, 2003,
to reflect the Final Distribution Regulations consistent with the Model
Amendment provided by the Internal Revenue Service in Rev. Proc. 2002-29, and
(ii) revise Section 11.6 of the Plan, effective April 1, 2002, to provide that
the administrator of the Plan shall process benefit claims of participants and
beneficiaries pursuant to the claims procedure specified in the summary plan
description for the Plan which shall comply with the Final Claims Procedure
Regulations, as may be amended from time to time; and
WHEREAS, the Company now desires to adopt this Amendment No. 3 to the
revised and restated Plan, effective as of August 1, 2004, to exclude the
Director of Business Development of Cargo Chemical Corporation from
participation in the Plan;
NOW, THEREFORE, in consideration of the premises and the covenants
herein contained, the Company hereby adopts the following Amendment No. 3 to the
Plan:
The last sentence of Section 2.2 of the Plan is hereby amended to read
as follows:
Notwithstanding the foregoing provisions of this Section 2.2, William R. Thomas
and the Director of Business Development of Cargo Chemical Corporation are
excluded from participating in the Plan.
IN WITNESS WHEREOF, the Company, acting by and through its duly
authorized officers, has caused this Amendment No. 3 to be executed as of the
day and year first above written.
THE RECTORSEAL CORPORATION
By:_______________________
COMPANY
-2-
EXHIBIT 10.11
AMENDMENT SEVEN TO
------------------
RETIREMENT PLAN FOR EMPLOYEES OF
--------------------------------
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
------------------------------------------------
As Amended and Restated Effective April 1, 1989
-----------------------------------------------
WHEREAS, effective as of April 1, 1989, the Retirement Plan for
Employees of Capital Southwest Corporation and Its Affiliates (the "Plan") was
amended and restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the amended and restated Plan,
said Plan may be amended by Capital Southwest Corporation (the "Sponsoring
Employer");
WHEREAS, the Sponsoring Employer has determined that the Plan shall be
amended to exclude the Director of Business Development of Cargo Chemical
Corporation from participation in the Plan; and
WHEREAS, the Board of Directors of the Sponsoring Employer has approved
and adopted this Amendment Seven to the Plan;
NOW, THEREFORE, Section 1.1(A)(13) of the Plan is hereby amended,
effective as of August 1, 2004, to delete the word "or" at the end of clause
(c), to replace the period at the end of clause (d) with a semicolon and the
word "or", and to add a new clause (e) which shall read in its entirety as
follows:
"(e) the Director of Business Development of Cargo Chemical
Corporation."
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this ____ day of
________________, 2004.
CAPITAL SOUTHWEST CORPORATION
By __________________________
Title: ______________________
EXHIBIT 10.12
AMENDMENT EIGHT TO
------------------
RETIREMENT PLAN FOR EMPLOYEES OF
--------------------------------
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
------------------------------------------------
As Amended and Restated Effective April 1, 1989
-----------------------------------------------
WHEREAS, effective as of April 1, 1989, the Retirement Plan for
Employees of Capital Southwest Corporation and Its Affiliates (the "Plan") was
amended and restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the Plan, the Plan may be
amended; and
WHEREAS, it is desirable that the Plan be amended to provide for
retroactive annuity starting dates under certain circumstances and to provide a
temporary interest rate for purposes of applying benefit limitations under
section 415 of the Internal Revenue Code;
NOW, THEREFORE, the Plan is hereby amended, effective as of April 1,
2004, as follows:
1. Section 4.1(A)(2) of the Plan is amended to add the following
paragraph at the end thereof:
"Notwithstanding the foregoing provisions of this Section 4.1(A)(2),
for Plan Years beginning in 2004 and 2005 the interest rate of 5.5% shall be
substituted for the annual rate of interest on 30-year Treasury securities for
purposes of this Section 4.1(A), except that in the case of any Participant or
Beneficiary receiving a distribution after December 31, 2003 and before January
1, 2005, the amount payable under any form of benefit subject to Section
417(e)(3) of the Internal Revenue Code and subject to adjustment under Section
415(b)(2)(B) of the Internal Revenue Code shall not, solely by reason of the
interest rate substitution described above, be less than the amount that would
have been so payable had the amount payable been determined using the annual
rate of interest on 30-year Treasury securities described above in this Section
4.1(A)(2) in effect as of the last day of the last Plan Year beginning before
January 1, 2004."
-2-
2. Section 4.1(C) of the Plan is amended to read in its entirety as
follows:
"(C) Requirement With Respect to Form of Payment: The Committee shall
provide each Participant, during the period beginning 90 days before his Annuity
Starting Date and ending 30 days before his Annuity Starting Date (or as soon
after the expiration of such period as is administratively practicable), a
written notification of his optional forms of payment. Such written notification
shall set forth an explanation of:
(1) if the Participant is married:
(a) the terms and conditions of the Qualified
Joint and 50% Survivor Annuity form of
payment;
(b) the Participant's right to elect, and the
effect of electing, to waive the Qualified
Joint and 50% Survivor Annuity form of
payment;
(c) the rights of the Participant's spouse; and
(d) the right to revoke, and the effect of
revoking, an election to waive the Qualified
Joint and 50% Survivor Annuity form of
payment;
(2) the eligibility conditions and material features of
the optional forms of payment available under the
Plan;
(3) the financial effect of electing each optional form
of payment;
(4) in the event the notification described herein is
required and is provided to the Participant after his
Annuity Starting Date, the Participant's right to
elect a retroactive Annuity Starting Date; and
(5) such other information as may be required under
applicable regulations.
The written notification described above shall not be required if the single-sum
value of the Participant's retirement income is less than or equal to $5,000.
In the event the written notification described above is required and
is provided to the Participant after the Participant's Annuity Starting Date,
the Participant's Annuity Starting Date shall be deemed to be his 'retroactive
Annuity Starting Date,' and the provisions of Section 4.1(J) shall apply.
Any provisions of Section 2.1, 2.2, 2.3, 2.4(A) or 3.1 hereof to the
contrary notwithstanding, if a Participant does not elect, in writing filed with
the Committee during the election period described below, to receive the
retirement income payable on his behalf on and after his Annuity Starting Date
either (i) under the form of payment that is specified in Section 2.1(C),
2.2(C), 2.3(F) or 2.4(A)(2), whichever is applicable, or (ii) under an optional
-3-
form of payment described in and subject to the provisions of Section 3.1
hereof, such Participant shall be deemed to have elected, and the retirement
income payable on and after his Annuity Starting Date shall automatically be
paid in accordance with the provisions of, either:
(1) if he does not have a spouse at his Annuity
Starting Date, the form of payment that is specified in
Section 2.1(C), 2.2(C), 2.3(F) or 2.4(A)(2), whichever is
applicable; or
(2) if he has a spouse at his Annuity Starting Date,
the Qualified Joint and 50% Survivor Annuity Option.
Any Participant may make an election under this section at any time (and any
number of times) prior to the commencement of his retirement income or other
benefit payments and during the period beginning on the date which is 90 days
prior to his Annuity Starting Date and ending on the latest to occur of (i) his
Annuity Starting Date, (ii) the date which is 90 days after the date on which he
was provided with the general written explanation described above or (iii) the
date which is 90 days after the date on which he was provided with any specific
detailed information concerning the payment of his retirement income that is
required to be furnished due to the request of the Participant. If any such
Participant does not file his election with the Committee prior to the
expiration of the election period described above, the commencement of his
retirement income will be delayed until the end of such election period, but he
will be entitled to a retroactive payment with respect to those retirement
income payments which were delayed. If any Participant has elected a form of
payment other than the automatic form provided above and his retirement income
or other benefit payments have not commenced, he may subsequently revoke such
election, in writing filed with the Committee within the election period
described above, in order to receive his retirement income payable in accordance
with the automatic form provided above. Any provisions of Section 3.1 hereof to
the contrary notwithstanding, if any Participant is not provided with the
written notification described in the first sentence of this section at least 30
days before his Annuity Starting Date but is provided in the written
notification a period of at least 30 days in which to make his election under
this section, he may waive such notice period (with any applicable spousal
consent) and file his election with the Committee, and his retirement income or
other benefit may commence within 30 days after the date on which he was
provided with such written notification, but more than 7 days after such date.
Any provisions herein to the contrary notwithstanding, the written consent of
the Participant's spouse during the applicable election period shall be required
in order for the Participant to receive his retirement income in a form other
than that provided under a Qualified Joint and Survivor Annuity."
3. Section 4.1 of the Plan is amended to add at the end thereof a new
Subsection (J), which shall read as follows:
"(J) Provisions Concerning Retroactive Annuity Starting Dates:
Notwithstanding any provision hereof to the contrary, in the event that the
written notification described in Section 4.1(C) is required and is provided to
-4-
the Participant after the Participant's Annuity Starting Date, the Participant's
Annuity Starting Date shall be deemed to be his 'retroactive Annuity Starting
Date' and payment of the Participant's retirement income under Section 2.1, 2.2,
2.3, 2.4(A) or 3.1 hereof shall be made or commence in accordance with Section
417(a) of the Internal Revenue Code, and regulations and rulings issued pursuant
thereto, and the following provisions of this Section 4.1(J).
(1) Notification requirement: In the event of a retroactive
Annuity Starting Date, the written notification to the Participant required by
Section 4.1(C) shall set forth the information described in Section 4.1(C) both
as of his retroactive Annuity Starting Date and as of a date which is not more
than 90 days after the date on which such written notification is provided to
the Participant.
(2) Election of retroactive Annuity Starting Date: In the
event of a retroactive Annuity Starting Date, the Participant's retirement
income shall be determined and payable as of a date which is not more than 90
days after the date on which the written notification required by Section 4.1(C)
is provided to the Participant, unless the Participant elects to have such
retirement income determined and payable as of such retroactive Annuity Starting
Date. The Participant may make such election on the appropriate form provided by
the Committee and filed with the Committee within the election period described
in Section 4.1(C).
(3) Spousal consent requirement: In the event that (a) a
Participant elects to receive his retirement income under Section 2.1, 2.2, 2.3,
2.4(A), or 3.1 hereof determined as of a retroactive Annuity Starting Date, and
(b) under the form of payment elected by such Participant, the benefit payable
to the Participant's spouse upon the Participant's death would be less than the
benefit payable to such surviving spouse after the Participant's death if the
Participant had elected to receive a Qualified Joint and 50% Survivor Annuity
determined and payable as of the date on which his retirement income payments
actually commence, then the Participant's spouse must consent in writing to the
Participant's election of such retroactive Annuity Starting Date. Such spousal
consent requirement shall be satisfied if the Participant's spouse consents in
the manner provided in Section 4.1(C) to the Participant's election to receive
his retirement income in a form other than that provided under a Qualified Joint
and Survivor Annuity.
(4) Make-up payments with interest: In the event that a
Participant elects (with spousal consent, if applicable) to receive his
retirement income under Section 2.1, 2.2, 2.3, 2.4(A), or 3.1 hereof determined
as of a retroactive Annuity Starting Date, the Participant shall receive a
make-up payment to reflect any missed payment or payments for the period from
the retroactive Annuity Starting Date to the date of the actual make-up payment,
with an appropriate adjustment for interest from the date the missed payment or
payments would have been made (including, if applicable, a payment of the
single-sum value of the Participant's retirement income) to the date of the
actual make-up payment.
-5-
(5) Future payment amount: If the Participant elects (with
spousal consent, if applicable) to receive his retirement income determined as
of a retroactive Annuity Starting Date and the Participant receives his
retirement income in a form other than a single-sum payment, the retirement
income payments that commence after he has received the notification required by
Section 4.1(C), other than any required make-up payment, shall be in an amount
that is equal to the amount that would have been paid to the Participant had
payments actually commenced on his retroactive Annuity Starting Date.
(6) Section 415 compliance: Except in the case where payment
of the Participant's retirement income (other than a form of payment that is
subject to Section 417(e) of the Internal Revenue Code, including lump-sum
distributions and other forms of distribution that provide payments in the form
of a decreasing annuity or for a period less than the life of the recipient)
commences no more than 12 months after the retroactive Annuity Starting Date,
payment of the Participant's retirement income, including any interest
adjustments, shall satisfy the requirements of Section 415 of the Internal
Revenue Code if the date retirement income payments actually commence is
substituted for the retroactive Annuity Starting Date for all purposes,
including for purposes of determining the applicable interest rate and the
applicable mortality table described in Section 4.1(A)(2) hereof.
(7) Section 417(e) compliance: If the retirement income
received by the Participant is in a form of payment that would have been subject
to Section 417(e) of the Internal Revenue Code if payment had commenced as of
the retroactive Annuity Starting Date, then the amount of payment as of the
actual commencement date shall be no less than the amount of payment produced by
applying the applicable interest rate and the applicable mortality table
(described in Section 4.1(A)(2) hereof), determined as of the date payment
actually commences, to the annuity form that was used to determine the amount of
retirement income as of the Participant's retroactive Annuity Starting Date."
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this ____ day of
______________, 2004.
CAPITAL SOUTHWEST CORPORATION
By __________________________
Title: ______________________
EXHIBIT 10.13
AMENDMENT NINE TO
-----------------
RETIREMENT PLAN FOR EMPLOYEES OF
--------------------------------
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
------------------------------------------------
As Amended and Restated Effective April 1, 1989
-----------------------------------------------
WHEREAS, effective as of April 1, 1989, the Retirement Plan for
Employees of Capital Southwest Corporation and Its Affiliates (the "Plan") was
amended and restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the Plan, the Plan may be
amended; and
WHEREAS, it is desirable that the Plan be amended to reduce the limit
for mandatory cash-outs of small benefits;
NOW, THEREFORE, Section 3.2 of the Plan is hereby amended, effective as
of March 27, 2005, to read in its entirety as follows:
"3.2 - LUMP-SUM PAYMENT OF SMALL RETIREMENT INCOME
Notwithstanding any provision of the Plan to the contrary, if
the single-sum value of the retirement income or other benefit payable
on behalf of any Participant hereunder whose retirement income or other
benefit payments have not commenced does not exceed $5,000, the
following provisions shall apply. A distribution under this Section 3.2
will not be permitted after the Annuity Starting Date and will not be
permitted in the case of a Participant who is entitled to disability
retirement income payments. For the purposes of the Plan, a payment
shall not be considered to occur after the Annuity Starting Date merely
because actual payment is reasonably delayed for calculation of the
benefit amount if all payments due are actually made. Once a
determination has been made by the Committee as to whether or not a
lump-sum payment may be payable as of the date of termination of the
Participant's service under the provisions of this Section 3.2,
calculations shall not be required as of any subsequent date to
determine whether or not a lump-sum amount is payable under this
Section 3.2; provided, however, that the Committee shall have the right
(but shall be under no obligation) to establish, on a nondiscriminatory
and uniformly applied basis, subsequent dates as of which calculations
shall be made to determine whether or not (due to changes in the
actuarial assumptions used to compute lump-sum distributions or due to
a change in the maximum permissible involuntary cash-out amount)
lump-sum amounts are payable under this Section 3.2 as of any such
subsequent date on behalf of those Participants whose service had been
terminated prior to such date but whose retirement income or other
benefit payments have not commenced.
-2-
(A) Involuntary Cash-Out: If the single-sum value of the
benefit payable on behalf of the Participant does not exceed $1,000,
the actuarial equivalent of such benefit shall be paid in a lump sum.
(B) Voluntary Cash-Out: If the single-sum value of the benefit
payable on behalf of the Participant is greater than $1,000 but does
not exceed $5,000, the Participant (or his Beneficiary, in the event of
the Participant's death) may elect to receive the actuarial equivalent
(determined using the interest and mortality assumptions that are being
used as of the Annuity Starting Date to determine actuarially
equivalent lump-sum distributions) of such benefit in a lump-sum
distribution or in such other form of payment as is permitted under the
Plan, commencing as of the Annuity Starting Date. Such election must be
in writing and must be filed with the Committee within 90 days after
the date as of which the Committee informs him in writing of the
actuarially equivalent value of such benefits. Payment of the elected
benefit must be made or commence within 90 days after such election.
(C) Lump-Sum Cash-Out of Zero Vested Accrued Benefits: For the
purposes of the Plan, if the present value of the vested accrued
benefit that is payable on behalf of any Participant whose service is
or has been terminated (either before, on or after the Effective Date
of the Plan) is zero, the Participant shall be deemed to have received
a distribution of such vested accrued benefit as of the date of
termination of his service."
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this ____ day of
March, 2005.
CAPITAL SOUTHWEST CORPORATION
By __________________________
Title: ______________________
Exhibit 13.1
Twelve Largest Investments - March 31, 2005
================================================================================
The RectorSeal Corporation $72,500,000
- --------------------------------------------------------------------------------
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
automotive chemical products sold under the Cargo and Blue Magic trade names.
RectorSeal owns a 20% equity interest in The Whitmore Manufacturing Company
(described on page 8).
During the year ended March 31, 2005, RectorSeal earned $7,598,000 on
revenues of $76,072,000, compared with earnings of $6,235,000 on revenues of
$65,883,000 in the previous year. RectorSeal's earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.
At March 31, 2005, Capital Southwest owned 100% of RectorSeal's common
stock having a cost of $52,600 and a value of $72,500,000.
================================================================================
Palm Harbor Homes, Inc. $70,696,000
- --------------------------------------------------------------------------------
Palm Harbor Homes, Dallas, Texas, is an integrated manufacturer and
retailer of manufactured and modular housing produced in 18 plants and sold in
32 states by 121 company-owned retail stores and builder locations and
approximately 375 independent dealers, builders and developers. The company
provides financing through its subsidiary, CountryPlace Mortgage, and through
its jointly-owned mortgage banking company, BSM Financial, and sells insurance
through its subsidiary, Standard Casualty. Palm Harbor's homes are designed to
meet the need for attractive, affordable housing.
During the year ended March 25, 2005, Palm Harbor reported a net loss of
$3,823,000 ($0.17 per share) on net sales of $610,538,000, compared with a net
loss of $6,017,000 ($0.26 per share) on net sales of $578,465,000 in the
previous year. The March 31, 2005 closing Nasdaq bid price of Palm Harbor's
common stock was $16.06 per share.
At March 31, 2005, 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%.
================================================================================
Alamo Group Inc. $50,783,000
- --------------------------------------------------------------------------------
Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and
distributor of heavy-duty, tractor and truck mounted mowing and other vegetation
maintenance equipment, street-sweeping equipment and replacement parts. Founded
in 1969, Alamo Group operates 14 manufacturing facilities and serves
governmental, industrial and agricultural markets in the U.S., Europe, Canada
and Australia.
For the year ended December 31, 2004, Alamo reported consolidated earnings
of $13,396,000 ($1.36 per share) on net sales of $342,171,000, compared with
earnings of $8,038,000 ($0.82 per share) on net sales of $279,078,000 in the
previous year. The March 31, 2005 closing NYSE market price of Alamo's common
stock was $24.74 per share.
At March 31, 2005, the $2,065,047 investment in Alamo by Capital Southwest
and its subsidiary was valued at $50,783,000 ($18.00 per share), consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 27.1%.
================================================================================
Skylawn Corporation $40,000,000
- --------------------------------------------------------------------------------
Skylawn Corporation, Hayward, California, owns and operates cemeteries,
mausoleums and mortuaries. Skylawn's operations, all of which are in California,
include a major cemetery in San Mateo, a mausoleum and an adjacent mortuary in
Oakland and cemeteries, mausoleums and mortuaries in Hayward and Sacramento. The
company also owns a funeral home in San Bruno and is building a major funeral
home on the grounds of its San Mateo County cemetery. Its insurance company and
funeral and cemetery trusts enable Skylawn's clients to make pre-need
arrangements.
For the fiscal year ended March 31, 2005, Skylawn reported earnings of
$2,153,000 on revenues of $24,964,000, compared with earnings of $2,839,000 on
revenues of $25,227,000 in the previous year.
At March 31, 2005, Capital Southwest owned 100% of Skylawn Corporation's
common stock, which had a cost of $4,510,400 and was valued at $40,000,000.
================================================================================
Encore Wire Corporation $32,694,000
- --------------------------------------------------------------------------------
Encore Wire Corporation, McKinney, Texas, manufactures a broad line of
copper electrical building wire and cable including non-metallic sheathed,
underground feeder and THHN wire and cable for residential, commercial and
industrial construction. Encore's products are sold through large-volume
distributors and building materials retailers.
For the year ended December 31, 2004, Encore reported net income of
$33,360,000 ($1.42 per share) on net sales of $603,225,000, compared with net
income of $14,376,000 ($0.63 per share) on net sales of $384,750,000 in the
previous year. The March 31, 2005 closing Nasdaq bid price of Encore's common
stock was $10.14 per share.
At March 31, 2005, 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 $32,694,000 ($8.00 per share), representing a fully-diluted equity
interest of 17.1%.
================================================================================
Media Recovery, Inc. $26,256,000
- --------------------------------------------------------------------------------
Media Recovery, Inc., Graham, Texas, distributes computer and office
automation supplies and accessories to corporate customers through its direct
sales force. Its Shockwatch division manufactures impact and tilt 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, 2004, Media Recovery reported net
income of $3,943,000 on net sales of $123,664,000, compared with net income of
$3,454,000 on net sales of $108,751,000 in the previous year.
At March 31, 2005, the $5,415,000 investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $26,256,000, consisting of 4,800,000
shares of Series A convertible preferred stock, representing a fully-diluted
equity interest of 76.6%.
================================================================================
The Whitmore Manufacturing Company $18,000,000
- --------------------------------------------------------------------------------
The Whitmore Manufacturing Company, Rockwall, Texas, manufactures specialty
lubricants for heavy equipment used in surface mining, railroads and other
industries, and produces water-based coatings for the automotive and primary
metals industries. Whitmore's subsidiary, Fluid Protection Corporation,
manufactures fluid contamination control devices.
During the year ended March 31, 2005, Whitmore reported net income of
$1,475,000 on net sales of $16,469,000, compared with net income of $376,000 on
net sales of $13,739,000 in the previous year. The company is owned 80% by
Capital Southwest and 20% by Capital Southwest's subsidiary, The RectorSeal
Corporation (described on page 7).
At March 31, 2005, the direct investment in Whitmore by Capital Southwest
was valued at $18,000,000 and had a cost of $1,600,000.
================================================================================
Texas Capital Bancshares, Inc. $12,365,086
- --------------------------------------------------------------------------------
Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has total
assets of approximately $2.6 billion. With banks in Austin, Dallas, Fort Worth,
Houston, Plano and San Antonio, Texas Capital Bancshares conducts its business
through its wholly-owned subsidiary, Texas Capital Bank, N.A., which targets
middle market commercial and wealthy private client customers in Texas.
For the year ended December 31, 2004, Texas Capital reported net income of
$19,560,000 ($0.75 per share), compared with net income of $13,834,000 ($0.60
per share) in the previous year. The March 31, 2005 closing Nasdaq bid price of
Texas Capital's common stock was $20.97 per share.
At March 31, 2005, Capital Southwest owned 589,656 unrestricted shares of
common stock, having a cost of $4,275,006 and a market value of $12,365,086
($20.97 per share).
================================================================================
Cenveo, Inc. $11,824,756
- --------------------------------------------------------------------------------
Cenveo, Inc. (formerly Mail-Well, Inc.), Englewood, Colorado, is one of
North America's largest providers of visual communication solutions delivered
through print and electronic media. Its products include offset and digital
printing, custom and stock envelopes, and business documents.
For the year ended December 31, 2004, Cenveo reported a net loss of
$19,708,000 ($0.41 per share) on net sales of $1.743 billion, compared with net
income of $5,150,000 ($0.11 per share) on net sales of $1.672 billion in the
previous year. The March 31, 2005 closing NYSE market price of Cenveo's common
stock was $5.64 per share.
At March 31, 2005, the $2,986,870 investment in Cenveo by Capital Southwest
was valued at $11,824,756 ($5.64 per share), consisting of 2,096,588
unrestricted shares of common stock, representing a fully-diluted equity
interest of 3.6%.
================================================================================
All Components, Inc. $11,500,000
- --------------------------------------------------------------------------------
All Components, Inc., Addison, Texas, distributes and produces memory and
other electronic components for personal computer manufacturers, retailers,
value-added resellers and other corporate customers. Through its Dallas-based
sales and distribution center and its contract manufacturing plants in Austin,
Texas and Boise, Idaho, the company serves over 2,000 customers throughout the
United States.
During the year ended August 31, 2004, All Components reported net income
of $4,460,000 on net sales of $230,698,000, compared with net income of
$4,060,000 on net sales of $156,994,000 in the previous year.
At March 31, 2005, the $2,650,000 investment in All Components by Capital
Southwest and its subsidiary was valued at $11,500,000 consisting of a 12%
subordinated note valued at its cost of $2,500,000 and 150,000 shares of Series
A convertible preferred stock valued at $9,000,000, representing a 56.6%
fully-diluted equity interest.
================================================================================
PETsMART, Inc. $8,622,000
- --------------------------------------------------------------------------------
PETsMART, Inc., Phoenix, Arizona, is the largest specialty retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 725 pet superstores in the United States and Canada, many of which offer
pet grooming services and operate PETsHOTELS. 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 30, 2005, PETsMART, Inc. reported net income of
$171,228,000 ($1.14 per share) on net sales of $3.363 billion, compared with net
income of $135,402,000 ($0.92 per share) on net sales of $2.993 billion in the
previous year. The March 31, 2005 closing Nasdaq bid price of PETsMART's common
stock was $28.74 per share.
At March 31, 2005, Capital Southwest and its subsidiary owned 300,000
unrestricted shares of common stock, having a cost of $1,318,771 and a market
value of $8,622,000 ($28.74 per share).
================================================================================
Liberty Media Corporation $7,310,954
- --------------------------------------------------------------------------------
Liberty Media Corporation, Englewood, Colorado, acquired by AT&T as part of
Tele-Communications, Inc. in 1999 and now an independent company, is a holding
company owning interests in a broad range of electronic retailing, media,
communications and entertainment businesses.
For the year ended December 31, 2004, Liberty Media reported net income of
$46 million ($0.02 per share) on net sales of $7.628 billion, compared with a
net loss of $1.222 billion ($0.44 per share) on net sales of $3.738 billion in
the previous year. The March 31, 2005 closing NYSE market price of Series A
common stock was $10.37 per share.
At March 31, 2005, Capital Southwest owned 705,010 unrestricted shares of
Series A common stock, having a cost of $138,515 and a market value of
$7,310,954 ($10.37 per share).
Portfolio of Investments - March 31, 2005
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
+AT&T CORP. <1% ++26,649 shares common
New York, New York stock (acquired 3-9-99) $ 12 $ 499,669
Global leader in local,
long distance, Internet
and transaction- based
voice and data services.
- ------------------------------------------------------------------------------------------------------------------------------------
+ALAMO GROUP INC. 27.1% 2,821,300 shares common stock
Seguin, Texas (acquired 4-1-73 thru 10-4-99) 2,065,047 50,783,000
Tractor-mounted mowing and vegetation
maintenance equipment for governmental,
industrial and agricultural markets;
street-sweeping equipment for municipalities.
- ------------------------------------------------------------------------------------------------------------------------------------
ALL COMPONENTS, INC. 56.6% 12% subordinated note due 2008
Addison, Texas (acquired 10-28-03 and 1-06-04) 2,500,000 2,500,000
Distribution and production of memory 150,000 shares Series A convertible
and other components for personal computer preferred stock, convertible
manufacturers, retailers and value-added into 600,000 shares of common
resellers; electronics contract manufacturing. stock at $0.25 per share
(acquired 9-16-94) 150,000 9,000,000
----------- ------------
2,650,000 11,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
+ALLTEL CORPORATION <1% ++8,880 shares common stock
Little Rock, Arkansas (acquired 7-1-98) 108,355 487,068
Wireless and wireline local,
long-distance, network access
and Internet services.
- ------------------------------------------------------------------------------------------------------------------------------------
AMPRO MORTGAGE CORPORATION 34.9% 10% subordinated note due 2007
Dallas, Texas (acquired 10-19-04 and 1-13-05) 352,646 352,646
Originator and banker of 12% subordinated note due 2005
residential mortgage loans. (acquired 3-25-05) 201,252 201,252
5,000 shares Series A cumulative
preferred stock (acquired
2-28-03) 5,000,000 --
1,500 shares Series B cumulative
preferred stock (acquired
3-31-04) 1,500,000 1,500,000
29,167 shares Series A
common stock (acquired
2-28-03) 29,167 --
Warrant to purchase 375,000
shares of Series A common
stock at $1.00 per share,
expiring 2014 (acquired
3-31-04) -- --
Warrant to purchase 88,162
shares of Series A common
stock at $1.00 per share,
expiring 2014 (acquired
10-19-04 and 1-13-05) -- --
----------- ------------
7,083,065 2,053,898
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
BALCO, INC. 88.5% 445,000 shares common stock
Wichita, Kansas and 60,920 shares Class B
Specialty architectural products used non-voting common stock
in the construction and remodeling of (acquired 10-25-83 and 5-30-02) $ 624,920 $ 5,000,000
commercial and institutional buildings.
- ------------------------------------------------------------------------------------------------------------------------------------
BOXX TECHNOLOGIES, INC. 15.0% 3,125,354 shares Series B
Austin, Texas convertible preferred stock,
Workstations for computer graphics convertible into 3,125,354
imaging and design. shares of common stock
at $0.50 per share (acquired
8-20-99 thru 8-8-01) 1,500,000 2
Warrants to purchase 80,000
shares of Series B preferred
stock at $0.50 per share,
expiring 2005 (acquired 8-24-00) -- --
----------- ------------
1,500,000 2
- ------------------------------------------------------------------------------------------------------------------------------------
CMI HOLDING COMPANY, INC. 19.2% 10% subordinated notes due 2007
Richardson, Texas (acquired 4-16-04 thru
Owns Chase Medical, which develops 12-17-04) 750,000 750,000
and sells devices used in cardiac surgery 2,327,658 shares Series A
to relieve congestive heart failure; convertible preferred stock,
development of cardiac imaging systems. convertible into 2,327,658
shares of common stock at $1.72
per share (acquired 8-21-02
and 6-04-03) 4,000,000 4,000,000
Warrants to purchase 109,012
shares of common stock at
$1.72 per share, expiring 2012
(acquired 4-16-04) -- --
----------- ------------
4,750,000 4,750,000
- ------------------------------------------------------------------------------------------------------------------------------------
+CENVEO, INC. 3.6% ++2,096,588 shares common stock
(formerly Mail-Well, Inc.) (acquired 2-18-94 thru 11-10-98) 2,986,870 11,824,756
Englewood, Colorado
Envelopes and commercial printing.
- ------------------------------------------------------------------------------------------------------------------------------------
+COMCAST CORPORATION <1% ++43,104 shares common stock
Philadelphia, Pennsylvania (acquired 11-18-02) 21 1,453,467
Leading provider of cable, entertainment
and communications products and services.
- ------------------------------------------------------------------------------------------------------------------------------------
DENNIS TOOL COMPANY 67.4% 20,725 shares 5% convertible
Houston, Texas preferred stock, convertible
Polycrystalline diamond compacts (PDCs) into 20,725 shares of common
used in oil field drill bits and in mining stock at $48.25 per share
and industrial applications. (acquired 8-10-98) 999,981 999,981
140,137 shares common stock
(acquired 3-7-94 and 8-10-98) 2,329,963 1,500,000
----------- ------------
3,329,944 2,499,981
- ------------------------------------------------------------------------------------------------------------------------------------
+ENCORE WIRE CORPORATION 17.1% 4,086,750 shares common stock
McKinney, Texas (acquired 7-16-92 thru
Electric wire and cable for residential 10-7-98) 5,800,000 32,694,000
and commercial use.
- ------------------------------------------------------------------------------------------------------------------------------------
EXOPACK HOLDING CORP. 1.4% 5,925 shares common stock
Spartanburg, South Carolina (acquired 7-27-01 thru
Paper and plastic flexible packaging 9-29-03) 623,790 805,800
for products such as pet food, building
materials, chemicals and other commodities.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
EXTREME INTERNATIONAL, INC. 53.3% 12% subordinated note due
Sugar Land, Texas 2008, $1,788,247 principal
Owns Bill Young Productions, Texas amount (acquired 9-30-03) $ 1,157,481 $ 1,788,247
Video and Post, and Extreme Communications, 39,359.18 shares Series C
which produce radio and television convertible preferred stock,
commercials and corporate communications videos. convertible into 157,436.72
shares of common stock at
$25.00 per share (acquired
9-30-03) 2,625,000 3,935,918
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) 375,000 375,000
Warrants to purchase 13,035
shares of common stock at $25.00
per share, expiring 2008 (acquired
8-11-98 thru 9-30-03) -- --
----------- ------------
4,157,481 6,099,165
- ------------------------------------------------------------------------------------------------------------------------------------
+FMC CORPORATION <1% ++6,430 shares common stock
Chicago, Illinois (acquired 6-6-86) 66,726 343,683
Chemicals for agricultural,
industrial and consumer markets.
- ------------------------------------------------------------------------------------------------------------------------------------
+FMC TECHNOLOGIES, INC. <1% ++11,057 shares common stock
Chicago, Illinois (acquired 1-2-02) 57,051 366,871
Equipment and systems for the energy,
food processing and air transportation
industries.
- ------------------------------------------------------------------------------------------------------------------------------------
HEELING, INC. 43.0% 1,745,455 shares Series A
Carrollton, Texas preferred stock (acquired
Heelys stealth skate shoes sold through 5-26-00) 480,000 480,000
specialty skate, lifestyle and sporting 436,364 shares Series B
goods stores, footwear chains, department convertible preferred stock,
stores and over the Internet at Heelys.com. convertible into 436,364 shares
of common stock at $0.275
per share (acquired 5-26-00) 120,000 3,000,000
----------- ------------
600,000 3,480,000
- ------------------------------------------------------------------------------------------------------------------------------------
+HOLOGIC, INC. <1% ++158,205 shares common stock
Bedford, Massachusetts (acquired 8-27-99) 220,000 5,040,411
Medical instruments including bone
densitometers, mammography devices and
digital radiography systems.
- ------------------------------------------------------------------------------------------------------------------------------------
+KIMBERLY-CLARK CORPORATION <1% ++77,180 shares common stock
Dallas, Texas (acquired 12-18-97) 2,358,518 5,073,041
Manufacturer of tissue, personal
care and health care products.
- ------------------------------------------------------------------------------------------------------------------------------------
+LIBERTY MEDIA CORPORATION <1% ++705,010 shares Series A
Englewood, Colorado common stock (acquired 3-9-99
Holding company owning interests in thru 12-12-02) 138,515 7,310,954
electronic retailing, media, communications
and entertainment businesses.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
+LIBERTY MEDIA INTERNATIONAL <1% ++42,463 shares Series A
Englewood, Colorado common stock (acquired 6-7-04
Broadband distribution and video and 8-9-04) $ 207,423 $ 1,854,784
programming services.
- ------------------------------------------------------------------------------------------------------------------------------------
MEDIA RECOVERY, INC. 76.6% 4,800,000 shares Series A
Graham, Texas convertible preferred stock,
Computer and office automation supplies convertible into 4,800,000
and accessories; impact and tilt monitoring shares of common stock at
devices to detect mishandled shipments; $1.00 per share (acquired
dunnage for protecting shipments. 11-4-97) 5,415,000 26,256,000
- ------------------------------------------------------------------------------------------------------------------------------------
ORGANIZED LIVING, INC. 3.9% 3,333,335 shares Series D
Columbus, Ohio convertible preferred stock,
Specialty retailer of products designed convertible into 3,333,335
to provide home and office storage and shares of common stock at
organization solutions. $1.80 per share (acquired
1-7-00 and 10-30-00) 6,000,000 1
- ------------------------------------------------------------------------------------------------------------------------------------
PALLET ONE, INC. 8.8% 1,796,850 shares Series A
Bartow, Florida preferred stock (acquired
Wood pallet manufacturer with 14 10-18-01) 1,350,000 1,796,850
manufacturing facilities. 150,000 shares common stock
(acquired 10-18-01) 150,000 150,000
----------- ------------
1,500,000 1,946,850
- ------------------------------------------------------------------------------------------------------------------------------------
+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.
- ------------------------------------------------------------------------------------------------------------------------------------
+PETSMART, INC. <1% ++300,000 shares common stock
Phoenix, Arizona (acquired 6-1-95) 1,318,771 8,622,000
Retail chain of more than 725 stores
selling pet foods, supplies and services.
- ------------------------------------------------------------------------------------------------------------------------------------
PHARMAFAB, INC. 28.6% 35,000 shares Series A
Grand Prairie, Texas convertible preferred stock,
Value-added contract manufacturer of convertible into 129,506 shares
branded and generic pharmaceutical drugs. common stock at $27.0259 per
share (acquired 8-1-03) 3,500,000 3,500,000
20,000 shares Series B convertible
preferred stock, convertible
into 74,004 shares common stock
at $27.0259 per share
(acquired 8-1-03) 2,000,000 2,000,000
----------- ------------
5,500,000 5,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock
Houston, Texas (acquired 1-5-73 and 3-31-73) 52,600 72,500,000
Specialty chemical products for plumbing,
HVAC, electrical, construction, industrial,
oil field and automotive applications;
owns 20% of Whitmore Manufacturing Company.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock
Hayward, California (acquired 7-16-69) $ 4,510,400 $ 40,000,000
Cemeteries, mausoleums and mortuaries located
in northern California.
- ------------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION <1% ++90,000 shares common stock
Westwood, Kansas (acquired 6-20-84) 503,645 2,047,500
Diversified telecommunications company.
- ------------------------------------------------------------------------------------------------------------------------------------
TCI HOLDINGS, INC. - 21 shares 12% Series C
Denver, Colorado cumulative compounding
Cable television systems and microwave preferred stock (acquired
relay systems. 1-30-90) -- 677,250
- ------------------------------------------------------------------------------------------------------------------------------------
+TEKELEC <1% 2,936 shares common stock
Calabasas, California (acquired 9-20-04) 54,580 37,346
Network signaling products, switching
solutions and services for telecommunications
networks and contact centers.
- ------------------------------------------------------------------------------------------------------------------------------------
+TEXAS CAPITAL BANCSHARES, INC. 2.3% ++589,656 shares common stock
Dallas, Texas (acquired 5-1-00) 4,275,006 12,365,086
Regional bank holding company with banking
operations in six Texas cities.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS SHREDDER, INC. 53.3% 750 shares Series B convertible
San Antonio, Texas preferred stock, convertible
Design and manufacture of heavy-duty into 750,000 shares of common
shredder systems for recycling steel and stock at $0.10 per share
other materials from junk automobiles. (acquired 3-6-91) 75,000 7,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock
Rockwall, Texas (acquired 8-31-79) 1,600,000 18,000,000
Specialized mining, industrial and
railroad lubricants; automotive
transit coatings.
- ------------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS - Diamond State Ventures, L.P. -
1.9% limited partnership interest
(acquired 10-12-99 thru 2-14-05) 190,625 190,625
- First Capital Group of Texas III,
L.P. - 3.3% limited partnership
interest (acquired 12-26-00
thru 1-5-05) 764,604 764,604
100.0% Humac Company - 1,041,000 shares
common stock (acquired 1-31-75
and 12-31-75) -- 150,000
- STARTech Seed Fund I - 12.6%
limited partnership interest
(acquired 4-17-98 thru 1-5-00) 178,066 1
- STARTech Seed Fund II - 3.2%
limited partnership interest
(acquired 4-28-00 thru 2-23-05) 1,000,000 1
- Sterling Group Partners I, L.P. -
1.7% limited partnership interest
(acquired 4-20-01 thru 1-24-05) 1,348,408 1,348,408
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $84,546,398 $422,022,222
=========== ============
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Notes to Portfolio of Investments
(a) The percentages in the "Equity" column express the potential equity
interests held by Capital Southwest Corporation and Capital Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the issuer's common stock the Company owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all warrants, convertible securities and employee stock options. The symbol
"<1%" indicates that the Company holds a potential equity interest of less than
one percent.
(b) Unrestricted securities (indicated by ++) are freely marketable securities
having readily available market quotations. All other securities are restricted
securities which are subject to one or more restrictions on resale and are not
freely marketable. At March 31, 2005, restricted securities represented
approximately 86.4% 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, 2005 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks. They apply to restricted securities of all issuers in the
investment portfolio of the Company except securities of the following issuers,
which are not obligated to bear registration costs: Humac Company, Skylawn
Corporation and The Whitmore Manufacturing Company.
(e) The descriptions of the companies and ownership percentages shown in the
portfolio of investments were obtained from published reports and other sources
believed to be reliable, are supplemental and are not covered by the report of
independent auditors. Acquisition dates indicated are the dates specific
securities were acquired, 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.
Portfolio Changes During the Year
New Investments and Additions to Previous Investments
Amount
-----------
AmPro Mortgage Corporation .................. $ 553,898
CMI Holding Company, Inc. ................... 750,000
Diamond State Ventures, L.P. ................ 33,750
First Capital Group of Texas III, L.P........ 160,000
Liberty Media International, Inc. ........... 180,325
StarTech Seed Fund II ....................... 100,000
Sterling Group Partners I, L.P. ............. 450,000
Miscellaneous ............................... 52,717
-----------
$ 2,280,690
===========
Dispositions
Amount
Cost Received
----------- -----------
AT&T Wireless Services, Inc. ................ $ 10 $ 643,170
CashWorks, Inc. ............................. -- 608,517
Concert Industries Ltd. ..................... 9,131,224 34,100
Diamond State Ventures, L.P. ................ 40,000 40,000
First Capital Group of Texas III, L.P........ 35,396 35,396
Neenah Paper, Inc. .......................... 38,408 82,684
Sterling Group Partners I, L.P. ............. 164,692 738,529
Texas Capital Bancshares, Inc. .............. 725,000 2,239,922
Texas Petrochemical Holdings, Inc. .......... 3,000,000 --
VocalData, Inc. ............................. 1,489,805 142,914
Miscellaneous ............................... 52,717 --
----------- -----------
$14,677,252 $ 4,565,232
=========== ===========
Repayments Received ......................... $ 394,269
===========
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Financial Condition
March 31
Assets 2005 2004
------------ ------------
Investments at market or fair value
Companies more than 25% owned
(Cost: 2005 - $23,114,866,
2004 - $23,114,865) ................ $259,628,981 $237,095,981
Companies 5% to 25% owned
(Cost: 2005 - $19,050,000,
2004 - $30,431,224) ................ 44,890,852 70,189,005
Companies less than 5% owned
(Cost: 2005 - $42,381,532,
2004 - $43,736,560) ................ 117,502,389 99,663,833
------------ ------------
Total investments
(Cost: 2005 - $84,546,398,
2004 - $97,282,649) ................ 422,022,222 406,948,819
Cash and cash equivalents ............... 5,104,935 10,150,796
Receivables ............................. 136,401 76,477
Other assets ............................ 7,120,043 6,802,767
------------ ------------
Totals ............................... $434,383,601 $423,978,859
============ ============
March 31
Liabilities and Shareholders' Equity 2005 2004
------------- -------------
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 .......... 1,842,587 1,815,996
Income taxes payable ............................ -- 2,726,850
Deferred income taxes ........................... 117,007,107 108,312,663
------------- -------------
Total liabilities ........... 131,849,694 133,355,509
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,294,416
shares at March 31, 2005 and March 31,
2004 ..................................... 4,294,416 4,294,416
Additional capital ........................... 7,904,997 7,904,997
Undistributed net investment
income ..................................... 3,669,805 3,578,088
Undistributed net realized gain on
investments ................................ 73,316,166 79,381,980
Unrealized appreciation of investments -
net of deferred income taxes ............... 220,381,825 202,497,171
Treasury stock - at cost
(437,365 shares) ........................... (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $78.44 per share at March 31, 2005,
and $75.35 per share at March 31, 2004
on the 3,857,051 shares outstanding ........ 302,533,907 290,623,350
------------- -------------
Totals ....................................... $ 434,383,601 $ 423,978,859
============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended March 31
-----------------------------------------------
2005 2004 2003
------------- ------------- -------------
Investment income:
Interest ..................................................................... $ 437,753 $ 213,987 $ 204,490
Dividends .................................................................... 3,778,190 3,860,937 3,360,990
Management and directors' fees ............................................... 637,000 632,864 495,900
------------- ------------- -------------
4,852,943 4,707,788 4,061,380
------------- ------------- -------------
Operating expenses:
Salaries ..................................................................... 1,132,510 997,079 911,671
Net pension benefit .......................................................... (254,872) (272,912) (387,923)
Other operating expenses ..................................................... 1,068,313 775,847 626,106
------------- ------------- -------------
1,945,951 1,500,014 1,149,854
------------- ------------- -------------
Income before interest expense and income taxes ................................. 2,906,992 3,207,774 2,911,526
Interest expense ................................................................ 420,351 531,068 476,761
------------- ------------- -------------
Income before income taxes ...................................................... 2,486,641 2,676,706 2,434,765
Income tax expense .............................................................. 80,693 89,646 135,513
------------- ------------- -------------
Net investment income ........................................................... $ 2,405,948 $ 2,587,060 $ 2,299,252
============= ============= =============
Proceeds from disposition of investments ........................................ $ 4,565,232 $ 16,486,067 $ 4,563,763
Cost of investments sold ........................................................ 14,677,252 3,883,188 2,556,651
------------- ------------- -------------
Realized gain (loss) on investments before income taxes ......................... (10,112,020) 12,602,879 2,007,112
Income tax expense (benefit) .................................................... (4,046,206) 4,411,007 661,384
------------- ------------- -------------
Net realized gain (loss) on investments ......................................... (6,065,814) 8,191,872 1,345,728
------------- ------------- -------------
Increase (decrease) in unrealized appreciation of investments before income taxes 27,809,654 114,067,574 (69,688,616)
Increase (decrease) in deferred income taxes on appreciation of investments ..... 9,925,000 39,379,000 (24,317,000)
------------- ------------- -------------
Net increase (decrease) in unrealized appreciation of investments ............... 17,884,654 74,688,574 (45,371,616)
------------- ------------- -------------
Net realized and unrealized gain (loss) on investments .......................... $ 11,818,840 $ 82,880,446 $ (44,025,888)
============= ============= =============
Increase (decrease) in net assets from operations ............................... $ 14,224,788 $ 85,467,506 $ (41,726,636)
============= ============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
Years Ended March 31
-----------------------------------------------
2005 2004 2003
------------- ------------- -------------
Operations
Net investment income ........................................... $ 2,405,948 $ 2,587,060 $ 2,299,252
Net realized gain (loss) on investments ......................... (6,065,814) 8,191,872 1,345,728
Net increase (decrease) in unrealized appreciation of investments 17,884,654 74,688,574 (45,371,616)
------------- ------------- -------------
Increase (decrease) in net assets from operations ............... 14,224,788 85,467,506 (41,726,636)
Distributions from:
Undistributed net investment income ............................. (2,314,231) (2,308,631) (2,297,431)
Capital share transactions
Exercise of employee stock options .............................. -- 997,500 --
------------- ------------- -------------
Increase (decrease) in net assets ............................. 11,910,557 84,156,375 (44,024,067)
Net assets, beginning of year ..................................... 290,623,350 206,466,975 250,491,042
------------- ------------- -------------
Net assets, end of year ........................................... $ 302,533,907 $ 290,623,350 $ 206,466,975
============= ============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended March 31
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Cash flows from operating activities
Increase (decrease) in net assets from operations ........................ $ 14,224,788 $ 85,467,506 $(41,726,636)
Adjustments to reconcile increase (decrease) in net assets from operations
to net cash provided by (used in) operating activities:
Proceeds from disposition of investments ............................ 4,510,652 16,486,067 4,563,763
Purchases of securities ............................................. (2,280,690) (12,458,840) (11,904,639)
Maturities of securities ............................................ 394,269 2,754,845 80,000
Depreciation and amortization ....................................... 17,597 19,089 21,668
Net pension benefit ................................................. (254,872) (272,912) (387,923)
Net realized and unrealized (gain) loss on investments .............. (11,818,840) (82,880,446) 44,025,888
(Increase) decrease in receivables .................................. (59,924) 221,187 1,455,633
(Increase) decrease in other assets ................................. (10,477) 5,023 (29,447)
Increase (decrease) in accrued interest and other liabilities ....... 121,196 41,701 (96,188)
Decrease in accrued pension cost .................................... (164,129) (167,281) (167,280)
Deferred income taxes ............................................... 88,800 95,600 135,800
------------ ------------ ------------
Net cash provided by (used in) operating activities ...................... 4,768,370 9,311,539 (4,029,361)
------------ ------------ ------------
Cash flows from financing activities
Increase (decrease) in note payable to bank .............................. (7,500,000) -- 9,000,000
Increase (decrease) in notes payable to portfolio company ................ -- (2,500,000) 5,000,000
Decrease in subordinated debenture ....................................... -- -- (5,000,000)
Distributions from undistributed net investment income ................... (2,314,231) (2,308,631) (2,297,431)
Proceeds from exercise of employee stock options ......................... -- 997,500 --
------------ ------------ ------------
Net cash provided by (used in) financing activities ...................... (9,814,231) (3,811,131) 6,702,569
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ..................... (5,045,861) 5,500,408 2,673,208
Cash and cash equivalents at beginning of year ........................... 10,150,796 4,650,388 1,977,180
------------ ------------ ------------
Cash and cash equivalents at end of year ................................. $ 5,104,935 $ 10,150,796 $ 4,650,388
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest .................................. $ 420,446 $ 531,194 $ 606,722
Income taxes .............................. $ -- $ -- $ --
Note:
- -----
On September 20, 2004, the Company 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
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Capital Southwest Corporation ("CSC") is a business development company
subject to regulation under the Investment Company Act of 1940. Capital
Southwest Venture Corporation ("CSVC"), a wholly-owned subsidiary of CSC, is a
Federal licensee under the Small Business Investment Act of 1958. Capital
Southwest Management Corporation ("CSMC"), a wholly-owned subsidiary of CSC, is
the management company for CSC and CSVC. The following is a summary of
significant accounting policies followed in the preparation of the consolidated
financial statements of CSC, CSVC and CSMC (together, the "Company"):
Principles of Consolidation. The consolidated financial statements have
been prepared on the value method of accounting in accordance with accounting
principles generally accepted in the United States of America for investment
companies. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.
Investments. Investments are stated at market or fair value determined by
the Board of Directors as described in the Notes to Portfolio of Investments and
Note 2 below. The average cost method is used in determining cost of investments
sold. Investments are recorded on a trade date basis. Dividends are recognized
on the ex-dividend date and interest income is accrued daily.
Segment Information. The Company operates and manages its business in a
singular segment. As an investment company, the Company invests in portfolio
companies in various industries and geographic areas as presented in the
portfolio of investments.
Indemnification. The Company enters into agreements that contain customary
indemnification provisions. The maximum exposure under these indemnification
agreements is unknown, but the Company has had no previous claims or losses and
expects the risk of losses to be remote.
Related Parties. Several of the Company's directors, officers and employees
serve on the boards of various portfolio companies.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Stock-Based Compensation. Effective April 1, 2003, the Company adopted the
fair value method of recording compensation expense related to all stock options
granted after March 31, 2003, in accordance with FASB Statement 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 resigned on December 31, 2004 with no
options vested.
The following table illustrates the effect on net asset value and net asset
value per share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123 to stock-based compensation for options granted prior
to the implementation of FASB Statement No. 123.
Years Ended March 31
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net asset value, as reported $302,533,907 $290,623,350 $206,466,975
Deduct: Total fair value computed
stock-based compensation 160,764 179,440 179,440
------------ ------------ ------------
Pro forma net asset value $302,373,143 $290,443,910 $206,287,535
============ ============ ============
Net asset value per share:
Basic - as reported $78.44 $75.35 $53.92
====== ====== ======
Basic - pro forma $78.39 $75.30 $53.87
====== ====== ======
Diluted - as reported $78.38 $75.32 $53.79
====== ====== ======
Diluted- pro forma $78.34 $75.27 $53.74
====== ====== ======
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.
In December 2004, the FASB issued a revised SFAS No. 123(R), "Share-Based
Payment." It requires the Company 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 at the beginning of the fiscal year that
begins after June 15, 2005. The Company expects that the adoption effective
April 1, 2006, will not have a material effect on our financial condition,
results of operations and cash flows and that the effect on our net asset value
will be comparable to the pro forma disclosures presented above.
2. Valuation of Investments
The consolidated financial statements as of March 31, 2005 and 2004 include
securities valued at $364,732,932 (86.4% of the value of the consolidated
investment portfolio) and $357,538,427 (87.9% of the value of the consolidated
investment portfolio), respectively, whose values have been determined by the
Board of Directors in the absence of readily ascertainable market values.
Because of the inherent uncertainty of valuation, these values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
3. Income Taxes
For the tax years ended December 31, 2004, 2003 and 2002, CSC and CSVC
qualified to be taxed as regulated investment companies ("RICs") under
applicable provisions of the Internal Revenue Code. As RICs, CSC and CSVC must
distribute at least 90% of their taxable net investment income (investment
company taxable income) and may either distribute or retain their taxable net
realized gain on investments (capital gains). Both CSC and CSVC intend to meet
the applicable qualifications to be taxed as RICs in future years; however,
either company's ability to meet certain portfolio diversification requirements
of RICs in future years may not be controllable by such company.
For the year ended December 31, 2004, CSC and CSVC had net investment
income for book and tax purposes of $2,314,231 and $527,647, respectively, all
of which has been distributed. During 2004, CSC and CSVC had a net capital loss
for book purposes of $434,183 and $2,032,537, respectively, and a net capital
loss for tax purposes of $773,674 and $2,262,703, respectively. As of December
31, 2004, CSC and CSVC had capital loss carryforwards of $2,989,796 (expires
2009-2012) and $2,351,473 (expires 2009-2012), respectively, which may be used
to offset future taxable capital gains.
The aggregate cost of investments for federal income tax purposes as of
March 31, 2005 was $87,467,764. Such investments had unrealized appreciation of
$352,030,249 and unrealized depreciation of $14,554,425 for book purposes, or
net unrealized appreciation of $337,475,824. They had unrealized appreciation of
$349,728,725 and unrealized depreciation of $15,174,267 for tax purposes, or net
unrealized appreciation of $334,554,458 at March 31, 2005. 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.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $117,094,000 and
$107,169,000 have been provided on net unrealized appreciation of investments of
$337,475,824 and $309,666,170 at March 31, 2005 and 2004, respectively. Such
appreciation is not included in taxable income until realized. Deferred income
taxes on net unrealized appreciation of investments have been provided at the
then currently effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 2005 and 2004.
4. Notes Payable
The note payable to bank at March 31, 2005 and 2004 was from an unsecured
revolving line of credit of $25,000,000 of which $8,000,000 and $15,500,000 had
been drawn at March 31, 2005 and 2004, 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 note payable to portfolio company is a demand promissory note to
Skylawn Corporation with interest payable at the greater of prime minus 2.0% or
the Applicable Federal Rate established by the Internal Revenue Service.
Interest expense on this portfolio company note was $134,542 in 2005, $151,089
in 2004 and $75,531 in 2003.
5. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase -0-, -0-
and 28,000 shares of common stock at $35.625 per share (the market price at the
time of grant) were outstanding and exercisable at March 31, 2005, 2004 and
2003, respectively. During the three years ended March 31, -0- options were
exercised in 2005, 28,000 were exercised in 2004 and -0- were exercised in 2003.
The 1984 Incentive Stock Option Plan expired in 1994.
On July 19, 1999, shareholders approved the 1999 Stock Option Plan
("Plan"), which provides for the granting of stock options to employees and
officers of the Company and authorizes the issuance of common stock upon the
exercise of such options for up to 140,000 shares of common stock. All options
are granted at or above market price and generally expire ten years from the
date of grant and are generally exercisable on or after the first anniversary of
the date of grant in five to ten annual installments.
At March 31, 2005, there were 91,500 shares available for grant under the
Plan. The per share weighted average fair value of stock options granted during
2005 was $23.53 on the date of grant using the Black Scholes option-pricing
model with the following assumptions: expected dividend yield of .79%, risk-free
interest rate of 4.07%, expected volatility of 22.6%, and expected life of 7
years.
The following summarizes activity in the stock option plans for the years
ended March 31, 2005, 2004 and 2003:
Number Weighted Average
of shares Exercise Price
--------- --------------
Balance at April 1, 2002 82,500 $58.336
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
------- -------
Balance at March 31, 2003 82,500 58.336
Granted -- --
Exercised (28,000) 35.625
Forfeited -- --
Expired -- --
------- -------
Balance at March 31, 2004 54,500 70.004
Granted 7,500 76.000
Exercised -- --
Forfeited (7,500) 76.000
Expired (6,000) 84.700
------- -------
Balance at March 31, 2005 48,500 $68.186
======= =======
At March 31, 2005, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $65.00 - $77.00 and 5.84
years, respectively.
At March 31, 2005, 2004 and 2003, the number of options exercisable was
25,650, 24,200 and 44,750, respectively and the weighted average exercise price
of those options was $68.98, $73.24 and $50.61, respectively.
6. Employee Stock Ownership Plan
The Company and one of its wholly-owned portfolio companies sponsor a
qualified employee stock ownership plan ("ESOP") in which certain employees
participate. Contributions to the plan, which are invested in Company stock, are
made at the discretion of the Board of Directors. A participant's interest in
contributions to the ESOP fully vests after five years of active service. During
the three years ended March 31, 2005, the Company made contributions to the
ESOP, which were charged against net investment income, of $93,588 in 2005,
$88,937 in 2004 and $44,417 in 2003.
7. Retirement Plans
The Company sponsors a qualified defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned portfolio companies.
The following information about the plan represents amounts and information
related to the Company's participation in the plan and is presented as though
the Company sponsored a single-employer plan. Benefits are based on years of
service and an average of the highest five consecutive years of compensation
during the last ten years of employment. The funding policy of the plan is to
contribute annual amounts that are currently deductible for tax reporting
purposes. No contribution was made to the plan during the three years ended
March 31, 2005.
The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2005, 2004 and 2003:
Years Ended March 31
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Change in benefit obligation
Benefit obligation at beginning
of year ........................ $ 3,799,113 $ 3,676,599 $ 3,284,463
Service cost ......................... 92,434 81,309 41,142
Interest cost ........................ 214,076 215,511 202,424
Amendments ........................... -- -- 346,882
Actuarial loss ....................... 94,812 189,566 165,560
Benefits paid ........................ (367,024) (363,872) (363,872)
------------ ------------ ------------
Benefit obligation at end of year .... $ 3,833,411 $ 3,799,113 $ 3,676,599
============ ============ ============
Change in plan assets
Fair value of plan assets at beginning
of year ........................ $ 10,030,763 $ 6,881,723 $ 9,410,320
Actual return on plan assets ......... (337,485) 3,512,912 (2,164,725)
Benefits paid ........................ (367,024) (363,872) (363,872)
------------ ------------ ------------
Fair value of plan assets at end of
year ............................ $ 9,326,254 $ 10,030,763 $ 6,881,723
============ ============ ============
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
----------------------------
2005 2004
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................ $ (3,392,308) $ (3,403,639)
============ ============
Projected benefit obligation for service rendered to
date .......................................... $ (3,833,411) $ (3,799,113)
Plan assets at fair value* ......................... 9,326,254 10,030,763
Excess of plan assets over the projected benefit ------------ ------------
obligation .................................... 5,492,843 6,231,650
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions ........................ 1,272,655 275,731
Unrecognized prior service costs ................... 202,816 210,351
Unrecognized net assets being amortized over
20 years ...................................... -- (73,815)
------------ ------------
Prepaid pension cost included in other assets ...... $ 6,968,314 $ 6,643,917
============ ============
- ------------
*Primarily equities and bonds including approximately 28,000 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
-----------------------------------
2005 2004 2003
--------- --------- ---------
Service cost - benefits earned during
the year ......................... $ 92,434 $ 81,309 $ 41,142
Interest cost on projected benefit
obligation ....................... 214,076 215,511 202,424
Expected return on assets ............. (564,627) (576,020) (641,722)
Net amortization and deferral ......... (66,280) (66,296) (104,087)
--------- --------- ---------
Net pension benefit from qualified plan $(324,397) $(345,496) $(502,243)
========= ========= =========
The Company also sponsors an unfunded Retirement Restoration Plan, which is
a nonqualified plan that provides for the payment, upon retirement, of the
difference between the maximum annual payment permissible under the qualified
retirement plan pursuant to Federal limitations and the amount which would
otherwise have been payable under the qualified plan.
The following table sets forth the Retirement Restoration Plan's benefit
obligations at March 31, 2005, 2004 and 2003:
Years Ended March 31
-----------------------------------------
2005 2004 2003
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ................... $ 1,414,091 $ 1,353,386 $ 1,778,496
Service cost .................... 10,380 5,464 5,389
Interest cost ................... 74,711 82,683 104,436
Amendments ...................... -- -- (347,147)
Actuarial (gain) loss ........... (32,685) 139,839 (20,507)
Benefits paid ................... (164,129) (167,281) (167,281)
----------- ----------- -----------
Benefit obligation at end of year $ 1,302,368 $ 1,414,091 $ 1,353,386
=========== =========== ===========
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
--------------------------
2005 2004
----------- -----------
Projected benefit obligation ..................... $(1,302,368) $(1,414,091)
Unrecognized net gain from past ex-
perience different from that assumed
and effects of changes in assumptions ....... 52,182 84,867
Unrecognized prior service costs ................. (255,136) (270,699)
----------- -----------
Accrued pension cost included in other liabilities $(1,505,322) $(1,599,923)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 2005, 2004 and 2003 of $69,528, $72,584 and $114,320, 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
-------------------------------
2005 2004 2003
-------- -------- -------
Discount rate ............................ 5.75% 5.75% 6.0%
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
-------------------------------
2005 2004 2003
-------- -------- -------
Discount rate...................... 5.75% 6.0% 6.5%
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 2005 2004
- -------------- -------- --------
Equity securities........................... 78.6% 81.5%
Debt securities............................. 16.2% 17.2%
Cash ....................................... 5.2% 1.3%
------ ------
100.0% 100.0%
====== ======
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 25% 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 2011-2015:
Years Ended March 31
---------------------------------------------------
2011-
(In Thousands) 2006 2007 2008 2009 2010 2015
------ ------ ------ ------ ------ ------
$342 $327 $310 $293 $275 $1,132
8. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$1,407,527 in five portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $76,000 through February, 2008. For the
three years ended March 31, total rental expense charged to investment income
was $75,248 in 2005, $74,122 in 2004 and $60,482 in 2003.
9. Sources of Income
Income was derived from the following sources:
Investment Income
-------------------------------- Realized Gain
Years Ended (Loss) on
March 31 Investments
- -------- Other Before Income
2005 Interest Dividends Income Taxes
- ---- -------------------------------- -------------
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)
================================================
2004
- ----
Companies more than
25% owned ......... $ -- $3,577,800 $629,000 $ --
Companies 5% to 25%
owned ............. -- -- 3,864 (188,900)
Companies less than
5% owned .......... 203,304 283,137 -- 12,791,779
Other sources,
including temporary
investments ....... 10,683 -- -- --
------------------------------------------------
$213,987 $3,860,937 $632,864 $ 12,602,879
================================================
2003
- ----
Companies more than
25% owned ......... $ 5,600 $3,073,770 $494,900 $ --
Companies 5% to 25
owned ............. -- -- -- (47,525)
Companies less than
5% owned .......... 180,000 287,220 1,000 2,054,637
Other sources,
including temporary
investments ....... 18,890 -- -- --
------------------------------------------------
$204,490 $3,360,990 $495,900 $ 2,007,112
================================================
Selected Per Share Data and Ratios
Years Ended March
-----------------------------------------------
Per Share Data 2005 2004 2003 2002 2001
-----------------------------------------------
Investment income ............................................ $ 1.26 $ 1.22 $ 1.06 $ 1.08 $ 1.06
Operating expenses ........................................... (.51) (.39) (.30) (.27) (.26)
Interest expense ............................................. (.11) (.14) (.12) (.24) (.30)
Income taxes ................................................. (.02) (.02) (.04) (.04) (.05)
-----------------------------------------------
Net investment income ........................................ .62 .67 .60 .53 .45
Distributions from undistributed net investment income ....... (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments ...................... (1.57) 2.13 .35 (.14) (.85)
Net increase (decrease) in unrealized appreciation of
investments after deferred taxes ......................... 4.64 19.37 (11.85) 6.31 (1.69)
Exercise of employee stock options* .......................... -- (.14) -- (.08) --
-----------------------------------------------
Increase (decrease) in net asset value ....................... 3.09 21.43 (11.50) 6.02 (2.69)
Net asset value
Beginning of year .......................................... 75.35 53.92 65.42 59.40 62.09
-----------------------------------------------
End of year ................................................ $78.44 $75.35 $ 53.92 $65.42 $59.40
===============================================
Increase (decrease) in deferred taxes on unrealized
appreciation ............................................. $ 2.57 $10.09 $ (6.35) $ 3.26 $(1.01)
Deferred taxes on unrealized appreciation:
Beginning of year .......................................... 27.79 17.70 24.05 20.79 21.80
-----------------------------------------------
End of year ................................................ $30.36 $27.79 $ 17.70 $24.05 $20.79
===============================================
Ratios and Supplemental Data
Ratio of operating expenses to average net assets ............ .67% .63% .52% .42% .42%
Ratio of operating expenses to average net assets plus average
deferred taxes on unrealized appreciation ................ .49% .47% .39% .31% .31%
Ratio of net investment income to average net assets ......... .83% 1.09% 1.04% .85% .74%
Portfolio turnover rate ...................................... .56% 3.74% 1.53% 1.05% 2.56%
Net asset value total return ................................. 4.90% 41.16% (16.75%) 11.18% (3.25%)
Shares outstanding at end of period (000s omitted) ........... 3,857 3,857 3,829 3,829 3,815
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, 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.
Because of its inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company has assessed the effectiveness of its internal control over
financial reporting as of March 31, 2005. In making this assessment, it used the
criteria described in "Internal Control-Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management believes that, as of March 31, 2005, the
Company's internal control over financial reporting is effective.
Grant Thornton LLP has issued its attestation report on management's
assessment and on the effectiveness of the Company's internal control over
financial reporting. That report appears on the next page.
Date: May 23, 2005
/s/ William R. Thomas
- ---------------------
William R. Thomas
President & Chairman of the Board
/s/ Susan K. Hodgson
- --------------------
Susan K. Hodgson
Secretary-Treasurer
(chief financial/accounting officer)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Capital Southwest Corporation
We have audited management's assessment, included in Management's Report on
Internal Control Over Financial Reporting, that Capital Southwest Corporation (a
Texas corporation) and subsidiaries, maintained effective internal control over
financial reporting as of March 31, 2005 based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of 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 of America). 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, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
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 the
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Capital Southwest Corporation
and subsidiaries maintained effective internal control over financial reporting
as of March 31, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in
our opinion Capital Southwest Corporation and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
March 31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America), the consolidated
statement of financial condition of Capital Southwest Corporation and
subsidiaries, including the portfolio of investments on pages 10-15 as of March
31, 2005, and the related statements of operations, changes in net assets, and
cash flows, and the selected per share data and ratios on page 27 for the year
then ended, and our report dated May 23, 2005 expressed an unqualified opinion
on those financial statements and per share data and ratios.
/s/Grant Thornton LLP
- ---------------------
Grant Thornton LLP
Dallas, Texas
May 23, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statement of financial
condition of Capital Southwest Corporation (a Texas corporation) and
subsidiaries, including the portfolio of investments on pages 10-15, as of March
31, 2005, and the related consolidated statements of operations, changes in net
assets, and cash flows, and the selected per share data and ratios on page 27
for the year then ended. These financial statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and per share data and
ratios based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). 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, 2005 and
confirmation of securities not held by the custodian by correspondence with
others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion the consolidated financial statements and the selected per
share data and ratios referred to above present fairly, in all material re-
spects, the consolidated financial position of Capital Southwest Corporation and
subsidiaries at March 31, 2005, the consolidated results of operations, changes
in net assets, and cash flows, and the selected per share data and ratios for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America), management's
assessment that Capital Southwest Corporation and subsidiaries maintained
effective internal control over financial reporting as of March 31, 2005, based
on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
accompanying report dated May 23, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of Capital Southwest
Corporation and subsidiaries' internal control over financial reporting.
GRANT THORNTON LLP
Dallas, Texas
May 23, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statement of financial
condition of Capital Southwest Corporation and subsidiaries, including the
portfolio of investments as of March 31, 2004, and the related consolidated
statements of operations, changes in net assets, and cash flows, and the
selected per share data and ratios for the year then ended. These financial
statements and per share data and ratios are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and per share data and ratios based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included verification by examination of
securities held by the custodian as of March 31, 2004 and confirmation of
securities not held by the custodian by correspondence with others. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion the consolidated financial statements and the selected per
share data and ratios referred to above present fairly, in all material
respects, the consolidated financial position of Capital Southwest Corporation
and subsidiaries at March 31, 2004, the consolidated results of its operations,
changes in its net assets, and its cash flows, and the selected per share data
and ratios for the year then ended, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
May 12, 2004
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statements of operations,
changes in net assets, and cash flows of Capital Southwest Corporation and
subsidiaries for the year ended March 31, 2003, and the selected per share data
and ratios for each of the years in the three-year period ended March 31, 2003.
These consolidated financial statements and per share data and ratios are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and per share data and ratios
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and selected per
share data and ratios referred to above present fairly, in all material
respects, the results of operations, and the changes in net assets and cash
flows for the year ended March 31, 2003, and the selected per share data and
ratios for each of the years in the three-year period ended March 31, 2003, of
Capital Southwest Corporation and subsidiaries in conformity with U.S. generally
accepted accounting principles.
KPMG LLP
Dallas, Texas
April 25, 2003
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The composite measure of the Company's financial performance in the
Consolidated Statements of Operations is captioned "Increase (decrease) in net
assets from operations" and consists of three elements. The first is "Net
investment income", which is the difference between the Company's income from
interest, dividends and fees and its combined operating and interest expenses,
net of applicable income taxes. The second element is "Net realized gain (loss)
on investments", which is the difference between the proceeds received from
disposition of portfolio securities and their stated cost, net of applicable
income tax expense. The third element is the "Net increase (decrease) in
unrealized appreciation of investments", which is the net change in the market
or fair value of the Company's investment portfolio, compared with stated cost,
net of an increase or decrease in deferred income taxes which would become
payable if the unrealized appreciation were realized through the sale or other
disposition of the investment portfolio. It should be noted that the "Net
realized gain (loss) on investments" and "Net increase (decrease) in unrealized
appreciation of investments" are directly related in that when an appreciated
portfolio security is sold to realize a gain, a corresponding decrease in net
unrealized appreciation occurs by transferring the gain associated with the
transaction from being "unrealized" to being "realized." Conversely, when a loss
is realized on a depreciated portfolio security, an increase in net unrealized
appreciation occurs.
Net Investment Income
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential return from equity participation and provides minimal
current yield in the form of interest or dividends. The Company also earns
interest income from the short-term investment of cash funds, and the annual
amount of such income varies based upon the average level of funds invested
during the year and fluctuations in short-term interest rates. During the three
years ended March 31, the Company had interest income from temporary cash
investments of $35,048 in 2005, $10,247 in 2004 and $17,346 in 2003. The Company
also receives management fees from its wholly-owned portfolio companies which
aggregated $597,000 in 2005 and 2004 and $458,400 in 2003. During the three
years ended March 31, 2005, the Company recorded dividend income from the
following sources:
Years Ended March 31
------------------------------------
2005 2004 2003
---------- ---------- ----------
Alamo Group Inc. ................... $ 677,112 $ 677,112 $ 677,112
Balco, Inc. ........................ 252,960 252,960 --
Dennis Tool Company ................ 25,000 49,999 49,999
Kimberly-Clark Corporation ......... 127,347 109,596 95,703
PalletOne, Inc. .................... 80,858 -- --
The RectorSeal Corporation ......... 960,000 1,407,729 960,000
Skylawn Corporation ................ 600,000 950,000 1,146,659
Sprint Corporation ................. 45,000 36,000 36,000
TCI Holdings, Inc. ................. 81,270 81,270 81,270
The Whitmore Manufacturing Company . 846,273 240,000 240,000
Other .............................. 82,370 56,271 74,247
---------- ---------- ----------
$3,778,190 $3,860,937 $3,360,990
========== ========== ==========
Total operating expenses, excluding interest expense, increased by $445,937
or 29.7% and by $350,160 or 30.5% during the years ended March 31, 2005 and
2004, respectively. Due to the nature of its business, the majority of the
Company's operating expenses are related to employee and director compensation,
office expenses, legal and accounting fees and the net pension benefit. Interest
expense decreased by $110,717 during the year ended March 31, 2005 primarily due
to a decrease in notes payable.
Net Realized Gain (Loss) on Investments
Net realized loss on investments was $6,065,814 (after income tax benefit
of $4,046,206) during the year ended March 31, 2005, compared with a gain of
$8,191,872 (after income tax expense of $4,411,007) during 2004 and a gain of
$1,345,728 (after income tax expense of $661,384) during 2003. Management does
not attempt to maintain a comparable level of realized gains from year to year,
but instead attempts to maximize total investment portfolio appreciation. This
strategy often dictates the long-term holding of portfolio securities in pursuit
of increased values and increased unrealized appreciation, but may at opportune
times dictate realizing gains or losses through the disposition of certain
portfolio investments.
Net Increase (Decrease) in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded an increase
(decrease) in unrealized appreciation of investments before income taxes of
$27,809,654, $114,067,574 and $(69,688,616) in 2005, 2004 and 2003,
respectively. As explained in the first paragraph of this discussion and
analysis, the realization of gains or losses results in a corresponding decrease
or increase in unrealized appreciation of investments. Set forth in the
following table are the significant increases and decreases in unrealized
appreciation (before the related change in deferred income taxes and excluding
the effect of gains or losses realized during the year) by portfolio company for
securities held at the end of each year.
Years Ended March 31
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Alamo Group Inc. .............. $ 19,749,000 $ 8,464,000 $ (8,464,000)
Cenveo, Inc. .................. 2,453,008 5,115,674 (2,557,926)
Concert Industries Ltd. ....... -- (442,998) (5,479,000)
Encore Wire Corporation ....... (27,245,000) 46,316,000 (10,898,000)
Extreme International, Inc. .. 375,000 4,613,661 551,750
Media Recovery, Inc. .......... 9,256,000 7,000,000 --
Palm Harbor Homes, Inc. ....... (15,710,000) 15,710,000 (39,275,000)
PETsMART, Inc. ................ 507,000 4,335,000 (436,051)
The RectorSeal Corporation .... 12,500,000 5,000,000 5,000,000
Texas Capital Bancshares, Inc. 2,865,728 6,110,352 --
The Whitmore Manufacturing
Company .................... 6,000,000 2,000,000 1,200,000
As shown in the above table for the year ended March 31, 2005, 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 year ended March 31, 2005, the value of our investment in Encore Wire
Corporation was reduced by $27,245,000 due to the cyclical variations in
Encore's profitability and the effect of copper price fluctuations and
competitive market conditions on Encore's earnings. In the year ago period, we
increased our value of Encore by $46,316,000 reflecting increases in the
company's sales and earnings which stemmed partly from higher copper prices.
During the year ended March 31, 2005, the value of our investment in Palm Harbor
Homes, Inc. decreased by $15,710,000 due to the unfavorable pattern of the
company's earnings and the continuing negative outlook for the manufactured
housing industry. In the year ago period, we increased our value of Palm Harbor
due to anticipated improvement of the manufactured housing industry resulting
from substantially reduced inventories of foreclosed homes and reappearance of
sources of chattel mortgage financing.
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, 2005."
Deferred Taxes on Unrealized Appreciation of Investments
The Company provides for deferred Federal income taxes on net unrealized
appreciation of investments. Such taxes would become payable at such time as
unrealized appreciation is realized through the sale or other disposition of
those components of the investment portfolio which would result in taxable
transactions. At March 31, 2005 consolidated deferred Federal income taxes of
$117,094,000 were provided on net unrealized appreciation of investments of
$337,475,824 compared with deferred taxes of $107,169,000 on net unrealized
appreciation of $309,666,170 at March 31, 2004. Deferred income taxes at March
31, 2005 and 2004 were provided at the then currently effective maximum Federal
corporate tax rate on capital gains of 35%.
Portfolio Investments
During the year ended March 31, 2005, the Company invested $2,280,690 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 2004 and 2003 fiscal years, the Company invested a total
of $12,458,840 and $11,904,639, respectively.
Financial Liquidity and Capital Resources
At March 31, 2005, the Company had cash and cash equivalents of
approximately $5.1 million. Pursuant to Small Business Administration ("SBA")
regulations, cash and cash equivalents of $0.3 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 $65.0 million. The Company also has an unsecured
$25.0 million revolving line of credit from a commercial bank, of which $17.0
million was available at March 31, 2005. 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 37 years. Retention of future gains is
viewed as an important source of funds to sustain the Company's investment
activity. Approximately $57.3 million of the Company's investment portfolio is
represented by unrestricted publicly-traded securities, which have an
ascertainable market value and represent a source of liquidity.
Funds to be used by the Company for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Skylawn
Corporation, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies of the Company, to the extent of their
available cash reserves and borrowing capacities. At March 31, 2005, the Company
owed $5.0 million to Skylawn Corporation.
Management believes that the Company's cash and cash equivalents and cash
available from other sources described above are adequate to meet its expected
requirements. Consistent with the long-term strategy of the Company, the
disposition of investments from time to time may also be an important source of
funds for future investment activities.
Contractual Obligations
As shown below, the Company had the following contractual obligations as of
March 31, 2005. For further information see Note 4 and Note 8 of the
Consolidated Financial Statements.
Payments Due By Period ($ in Thousands)
---------------------------------------
Less than More Than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- -----------------------------------------------------------------------------------
Long-term debt obligations $13,000 $ 5,000 $ 8,000 -- --
Capital lease obligations -- -- -- -- --
Operating lease obligations 76 -- $ 76 -- --
Purchase obligations -- -- -- -- --
Other long-term liabilities
reflected on the Company's
balance sheet under GAAP -- -- -- -- --
---------------------------------------------------
Total $13,076 $ 5,000 $ 8,076 -- --
===================================================
Critical Accounting Policies
Valuation of Investments
In accordance with the Investment Company Act of 1940, investments in
unrestricted securities (freely marketable securities having readily available
market quotations) are valued at market and investments in restricted securities
(securities subject to one or more resale restrictions) are valued at fair value
determined in good faith by the Company's Board of Directors. Under the
valuation policy of the Company, unrestricted securities are valued at the
closing sale price for listed securities and at the lower of the closing bid
price or the last sale price for Nasdaq securities on the valuation date.
Restricted securities, including securities of publicly-owned companies which
are subject to restrictions on resale, are valued at fair value, which is
considered to be the amount the Company may reasonably expect to receive if such
securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
Deferred Income Taxes
In future years, the Company may not qualify or elect to be taxed as a
regulated investment company ("RIC") under applicable provisions of the Internal
Revenue Code. Therefore, deferred Federal income taxes have been provided on net
unrealized appreciation of investments at the then currently effective corporate
tax rate on capital gains.
Impact of Inflation
The Company does not believe that its business is materially affected by
inflation, other than the impact which inflation may have on the securities
markets, the valuations of business enterprises and the relationship of such
valuations to underlying earnings, all of which will influence the value of the
Company's investments.
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
business development company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. Accordingly the Company states that:
The Company's objective is to achieve capital appreciation through
investments in businesses believed to have favorable growth potential. Such
businesses are often undercapitalized small companies which lack management
depth and have not yet attained profitability. The Company's venture investments
often include securities which do not yield interest or dividends and are
subject to legal or contractual restrictions on resale, which restrictions
adversely affect the liquidity and marketability of such securities.
Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company, there is a
significantly greater risk of loss than is the case with traditional investment
securities. The high-risk, long-term nature of the Company's venture investment
activities may prevent shareholders of the Company from achieving price
appreciation and dividend distributions.
Selected Consolidated Financial Data
(all figures in thousands except per share data)
1995 1996 1997 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ........................ $ 49,730 $ 58,544 $ 59,908 $ 61,154 $ 73,580 $ 85,002
Unrealized appreciation .................... 153,031 198,386 233,383 340,132 276,698 238,627
--------- --------- --------- --------- --------- ---------
Investments at market or
fair value .............................. 202,761 256,930 293,291 401,286 350,278 323,629
Total assets ............................... 213,811 326,972 310,760 522,324 360,786 392,586
Notes payable * ............................ 11,000 11,000 5,000 5,000 5,000 10,000
Deferred taxes on
unrealized appreciation ................. 53,247 69,121 81,313 118,674 96,473 83,151
Net assets ................................. 147,370 189,048 218,972 296,023 256,232 236,876
Shares outstanding ......................... 3,735 3,767 3,767 3,788 3,815 3,815
- -------------------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...................... $ 2,447 $ 2,855 $ 2,574 $ 2,726 $ 1,762 $ 1,663
Net realized gain (loss) on
investments ............................. 142 11,174 6,806 6,485 995 6,020
Net increase (decrease) in
unrealized appreciation
before distributions .................... 13,584 38,746 22,804 69,388 (41,233) (24,750)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions .................... 16,173 52,775 32,184 78,599 (38,476) (17,067)
Cash dividends paid ........................ (2,241) (2,270) (2,260) (2,268) (2,280) (2,289)
Securities distributed ..................... -- (9,402) -- -- -- --
Employee stock options
exercised ............................... 385 575 -- 720 965 --
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets .......... 14,317 41,678 29,924 77,051 (39,791) (19,356)
- -------------------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ................. $ 14.26 $ 18.35 $ 21.59 $ 31.33 $ 25.29 $ 21.80
Net assets ................................. 39.46 50.18 58.13 78.15 67.16 62.09
Closing market price ....................... 38.00 60.00 67.875 94.00 73.00 54.75
Cash dividends paid ........................ .60 .60 .60 .60 .60 .60
Securities distributed ..................... -- 2.50 -- -- -- --
*Excludes quarter-end borrowing which is repaid on the first business day after
year end.
Selected Consolidated Financial Data (continued)
(all figures in thousands except per share data)
2001 2002 2003 2004 2005
- ------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ........................ $ 87,602 $ 82,194 $ 91,462 $ 97,283 $ 84,546
Unrealized appreciation .................... 228,316 265,287 195,598 309,666 337,476
--------- --------- --------- --------- ---------
Investments at market or
fair value .............................. 315,918 347,481 287,060 406,949 422,022
Total assets ............................... 322,668 357,183 298,490 423,979 434,384
Notes payable * ............................ 16,000 14,000 23,000 20,500 13,000
Deferred taxes on
unrealized appreciation ................. 79,310 92,107 67,790 107,169 117,094
Net assets ................................. 226,609 250,491 206,467 290,623 302,534
Shares outstanding ......................... 3,815 3,829 3,829 3,857 3,857
- ------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...................... $ 1,723 $ 2,042 $ 2,299 $ 2,587 2,406
Net realized gain (loss) on
investments ............................. (3,231) (538) 1,346 8,192 (6,066)
Net increase (decrease) in
unrealized appreciation
before distributions .................... (6,470) 24,174 (45,372) 74,689 17,885
--------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions .................... (7,978) 25,678 (41,727) 85,468 14,225
Cash dividends paid ........................ (2,289) (2,295) (2,297) (2,309) (2,314)
Securities distributed ..................... -- -- -- -- --
Employee stock options
exercised ............................... -- 499 -- 997 --
--------- --------- --------- --------- ---------
Increase (decrease) in net assets .......... (10,267) 23,882 (44,024) 84,156 11,911
- ------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ................. $ 20.79 $ 24.05 $ 17.70 $ 27.79 $ 30.36
Net assets ................................. 59.40 65.42 53.92 75.35 78.44
Closing market price ....................... 65.00 68.75 48.15 75.47 79.10
Cash dividends paid ........................ .60 .60 .60 .60 .60
Securities distributed ..................... -- -- -- -- --
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, 2005. This total does not include an estimated 2,400 shareholders with
shares held under beneficial ownership in nominee name or within clearinghouse
positions of brokerage firms or banks.
Market Prices
The Company's common stock trades on The Nasdaq Stock Market under the
symbol CSWC. The following high and low selling prices for the shares during
each quarter of the last two fiscal years were taken from quotations provided to
the Company by Nasdaq:
Quarter Ended High Low
- --------------------------------------------------------------------------------
June 30, 2003.................................... $66.75 $47.26
September 30, 2003............................... 60.00 53.31
December 31, 2003................................ 64.75 56.35
March 31, 2004................................... 78.00 61.15
Quarter Ended High Low
- --------------------------------------------------------------------------------
June 30, 2004.................................... $84.28 $72.68
September 30, 2004............................... 81.40 69.55
December 31, 2004................................ 80.44 73.00
March 31, 2005................................... 79.87 74.25
Dividends
The payment dates and amounts of cash dividends per share since April 1, 2003
are as follows:
Payment Date Cash Dividend
- --------------------------------------------------------------------------------
May 30, 2003..................................... $0.20
November 28, 2003................................ 0.40
May 28, 2004..................................... 0.20
November 30, 2004................................ 0.40
May 31, 2005..................................... 0.20
The amounts and timing of cash dividend payments have generally been
dictated by requirements of the Internal Revenue Code regarding the distribution
of taxable net investment income (ordinary income) of regulated investment
companies. Instead of distributing realized long-term capital gains to
shareholders, the Company has ordinarily elected to retain such gains to fund
future investments.
Automatic Dividend Reinvestment and Optional Cash Contribution Plan
As a service to its shareholders, the Company offers an Automatic Dividend
Reinvestment and Optional Cash Contribution Plan for shareholders of record who
own a minimum of 25 shares. The Company pays all costs of administration of the
Plan except brokerage transaction fees. Upon request, shareholders may obtain
information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas,
Texas 75230. Telephone (972) 233-8242. Questions and answers about the Plan are
on the next page.
Annual Meeting
The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday, July 18, 2005, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (second floor), 12900 Preston Road, Dallas, Texas.
Exhibit 23.1
Consent of Grant Thornton LLP
Independent Registered Public Accounting Firm
We have issued our reports dated May 23, 2005, accompanying the consolidated
financial statements and management's assessment of the effectiveness of
internal control over financial reporting included in the Annual Report to
Shareholders of Capital Southwest Corporation for the year ended March 31, 2005
and incorporated by reference in the March 31, 2005 annual report on Form 10-K.
We hereby consent to the incorporation by reference of said reports in the
Registration Statement of Capital Southwest Corporation on Form S-8 (File No.
33-43881).
/s/ GRANT THORNTON LLP
May 23, 2005
Dallas, Texas
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-43881) pertaining to Capital Southwest Corporation of our report
dated May 12, 2004, with respect to the consolidated financial statements of
Capital Southwest Corporation for the year ended March 31, 2004 included in the
March 31, 2005 Annual Report to Shareholders of Capital Southwest Corporation
and incorporated by reference in this Annual Report (Form 10-K) for the year
ended March 31, 2005.
Ernst & Young LLP
May 24, 2005
Dallas, Texas
Exhibit 23.3
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Capital Southwest Corporation:
We consent to the incorporation by reference in the registration statement on
Form S-8 of Capital Southwest Corporation of our report dated April 25, 2003,
with respect to the consolidated statements of operations, changes in net
assets, and cash flows for the year ended March 31, 2003, and the selected per
share data and ratios for each of the years in the three-year period ended March
31, 2003, of Capital Southwest Corporation and subsidiaries, which report
appears in the annual report to shareholders for the year ended March 31, 2005,
and is incorporated by reference in the March 31, 2005 annual report on Form
10-K of Capital Southwest Corporation.
KPMG LLP
Dallas, Texas
May 27, 2005
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 annual report on Form 10-K 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c) 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
d) 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 the
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: May 27, 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 annual report on Form 10-K 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c) 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
d) 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 the
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: May 27, 2005 By: /s/ Susan K. Hodgson
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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-K, filed with the Securities and Exchange Commission on
May 27, 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: May 27, 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-K, filed with the Securities and Exchange Commission on
May 27, 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: May 27, 2005 /s/ Susan K. Hodgson
------------ -------------------------------------
Susan K. Hodgson, Secretary-Treasurer