PROSPECTUS SUPPLEMENT
Table of Contents

Filed pursuant to Rule 497
File No. 333-220385

 

PROSPECTUS SUPPLEMENT

(to Prospectus dated November 1, 2017)

 

 

 

 

 

 

LOGO

Up to $50,000,000

5.95% Notes due 2022

 

 

We are an internally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. Our principal investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments.

We have entered into a Debt Distribution Agreement, dated June 8, 2018, or the Distribution Agreement, pursuant to which we may offer for sale, from time to time, up to $50,000,000 in aggregate principal amount of 5.95% notes due 2022, or the “Notes,” through B. Riley FBR, Inc., acting as our sales agent, or the “Agent.” Sales of the Notes, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended, or the “Securities Act,” including sales made directly on The Nasdaq Global Select Market or a similar securities exchange or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices. If any of the Notes are sold at prices above the par value of $25 per Note, the effective yield on such Notes to the purchasers may be less than 5.95%. The Agent will receive a commission from us equal to up to 2.0% of the gross sales of any Notes sold through the Agent under the Distribution Agreement. The Agent is not required to sell any specific principal amount of Notes, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the Notes offered by this prospectus supplement and the accompanying prospectus. See “Plan of Distribution” beginning on page S-56 of this prospectus supplement.

The Notes offered hereby will be a further issuance of, are fungible with, rank equally in right of payment with, and form a single series for all purposes under the indenture governing the Notes including, without limitation, waivers, amendments, consents, redemptions and other offers to purchase and voting, with the $50,000,000 and $7,500,000 aggregate principal amount of the Notes issued by us on December 15, 2017 and December 28, 2017, respectively, or the “Existing Notes.” The Existing Notes and the Notes will mature on December 15, 2022. We will pay interest on the Notes on March 15, June 15, September 15 and December 15 of each year. The Notes are expected to trade “flat,” which means that purchasers in the secondary market will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not reflected in the trading price.

We may redeem the Notes in whole or in part at any time or from time to time on or after December 15, 2019, at the redemption price of 100% plus accrued and unpaid interest, as discussed under the section titled “Description of the Notes — Optional Redemption” in this prospectus supplement. The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

The Notes will be our direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured unsubordinated indebtedness issued by us, including, without limitation, the Existing Notes. Because the Notes will not be secured by any of our assets, they will be effectively subordinated to all of our existing and future secured indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under our senior secured revolving credit facility, as amended, or the Credit Facility, of which we had $70.0 million outstanding as of June 6, 2018. The Notes will be structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries since the Notes are obligations exclusively of Capital Southwest Corporation and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes, and any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes. For further discussion, see the section titled “Description of the Notes” in this prospectus supplement.

The Notes will rank pari passu with, or equal to, our general liabilities (other than amounts outstanding under our Credit Facility). In total, these general liabilities were $71.4 million as of March 31, 2018. We currently do not have outstanding debt that is subordinated to the Notes and do not currently intend to issue indebtedness that expressly provides that it is subordinated to the Notes. Therefore, the Notes will not be senior to any of our indebtedness or obligations.

The Existing Notes are listed on The Nasdaq Global Select Market, and trade on The Nasdaq Global Select Market under the symbol “CSWCL.” We intend to list the Notes offered hereby on The Nasdaq Global Select Market under the same trading symbol.

On June 7, 2018, there were 2,300,000 Existing Notes issued and outstanding and the last reported sales price on The Nasdaq Global Select Market of the Notes was $26.47 per Note.

 

 

This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in the Notes. Please read this prospectus supplement and the accompanying prospectus before investing and keep them for future reference. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. This information is available free of charge by contacting us at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240, or by telephone at (214) 238-5700 or on our website at www.capitalsouthwest.com. Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains information about us.

 

 

Investing in the Notes involves a high degree of risk, and should be considered highly speculative. See “Supplementary Risk Factors ” beginning on page S-16  of this prospectus supplement and “Risk Factors” beginning on page 12 of the accompanying prospectus to read about factors you should consider, including the risk of leverage, before investing in the Notes.

Neither the Securities and Exchange Commission nor any state securities commission, nor any other regulatory body, has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

THE NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

 

 

Delivery of the Notes in book-entry form only through The Depository Trust Company will be made on or about the second trading date following the date of purchase.

 

 

B. Riley FBR

The date of this prospectus supplement is June 8, 2018


Table of Contents

TABLE OF CONTENTS

Prospectus Supplement

 

     Page  

ABOUT THIS PROSPECTUS SUPPLEMENT

     S-ii  

PROSPECTUS SUPPLEMENT SUMMARY

     S-1  

TERMS OF THE NOTES OFFERING

     S-8  

SUPPLEMENTARY RISK FACTORS

     S-16  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     S-21  

USE OF PROCEEDS

     S-22  

CAPITALIZATION

     S-23  

SELECTED FINANCIAL DATA

     S-24  

SENIOR SECURITIES

     S-26  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     S-27  

RATIO OF EARNINGS TO FIXED CHARGES

     S-43  

DESCRIPTION OF THE NOTES

     S-44  

PLAN OF DISTRIBUTION

     S-56  

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES

     S-58  

LEGAL MATTERS

     S-63  

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     S-63  

CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     S-63  

AVAILABLE INFORMATION

     S-64  

INDEX TO FINANCIAL STATEMENTS

     SF-1  

Prospectus

 

     Page  

PROSPECTUS SUMMARY

     1  

FEES AND EXPENSES

     10  

RISK FACTORS

     12  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     28  

USE OF PROCEEDS

     30  

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

     31  

RATIOS OF EARNINGS TO FIXED CHARGES

     34  

SELECTED FINANCIAL DATA

     35  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     38  

SENIOR SECURITIES

     52  

BUSINESS

     53  

PORTFOLIO COMPANIES

     61  

MANAGEMENT

     66  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     87  

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

     88  

SALES OF COMMON STOCK BELOW NET ASSET VALUE

     90  

DIVIDEND REINVESTMENT PLAN

     95  

DESCRIPTION OF COMMON STOCK

     96  

DESCRIPTION OF OUR DEBT SECURITIES

     99  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     111  

REGULATION

     120  

PLAN OF DISTRIBUTION

     124  

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR

     126  

BROKERAGE ALLOCATION AND OTHER PRACTICES

     126  

LEGAL MATTERS

     126  

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     126  

CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     126  

AVAILABLE INFORMATION

     127  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

This document is in two parts. The first part is this prospectus supplement, which describes the specific details regarding this offering of Notes and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which provides general information about us and the securities we may offer from time to time, some of which may not apply to this offering. To the extent the information contained in this prospectus supplement differs from the information contained in the accompanying prospectus, the information in this prospectus supplement shall control.

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information from that contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell, or a solicitation of an offer to buy, any of the Notes by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information contained in this prospectus supplement and the accompanying prospectus is complete and accurate only as of their respective dates, regardless of the time of their delivery or sale of the Notes. This prospectus supplement supersedes the accompanying prospectus to the extent it contains information different from or additional to the information in the accompanying prospectus.

 

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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider. To understand the terms of the Notes offered hereby, you should read the entire prospectus supplement and the accompanying prospectus carefully, including “Supplementary Risk Factors,” “Risk Factors,” “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements contained elsewhere in this prospectus supplement and/or the accompanying prospectus. Together, these documents describe the specific terms of the Notes we are offering. In this prospectus supplement and the accompanying prospectus, unless the context otherwise requires, the “Company,” “Capital Southwest Corporation,” “we,” “us” and “our” refer to Capital Southwest Corporation and our subsidiaries. You should also read and review the documents identified in the section titled “Available Information” in this prospectus supplement. On October 23, 2017, we entered into an indenture (the “Base Indenture”) between us and U.S. Bank National Association (the “trustee”). On December 15, 2017, we and the trustee entered into the first supplemental indenture to the Base Indenture (the “first supplemental indenture” and, together with the Base Indenture, the “indenture”) relating to our issuance, offer and sale of the Existing Notes. We will issue the Notes offered hereby under the same first supplemental indenture. The Notes offered hereby will be a further issuance of, be fungible with, rank equally in right of payment with, and form a single series for all purposes under the indenture, including, without limitation, waivers, amendments, consents, redemptions and other offers to purchase and voting, with the Existing Notes. We refer to the “Notes” and the “Existing Notes” separately within this prospectus supplement since only the Notes are being offered hereby, but any general discussion of the terms of the Notes would also apply to the Existing Notes since they are treated as the same under the indenture.

Organization

Capital Southwest Corporation, which we refer to as CSWC or the Company, is an internally managed closed-end, non-diversified management investment company that specializes in providing customized financing to middle market companies in a broad range of industry segments located primarily in the United States. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.”

CSWC was organized as a Texas corporation on April 19, 1961. Prior to March 30, 1988, CSWC was registered as a closed-end, non-diversified investment company under the Investment Company Act of 1940 Act, as amended, or the 1940 Act. On that date, we elected to be treated as a business development company, or BDC, under the 1940 Act.

We are also a regulated investment company, or RIC, under Subchapter M of the U.S. Internal Revenue Code of 1986, or the Code. As such, we are not required to pay corporate-level U.S. federal income tax on our investment income. We intend to maintain our RIC tax treatment, which requires that we qualify annually as a RIC by meeting certain specified requirements.

On September 30, 2015, we completed the spin-off, which we refer to as the Share Distribution, of CSW Industrials, Inc., or CSWI. CSWI is now an independent publicly traded company. The Share Distribution was effected through a tax-free, pro-rata distribution of 100.0% of CSWI’s common stock to shareholders of the Company. Each Company shareholder received one share of CSWI common stock for every one share of Company common stock on the record date, September 18, 2015. Cash was paid in lieu of any fractional shares of CSWI common stock.

Following the Share Distribution, we have maintained operations as an internally-managed BDC and pursued a credit-focused investing strategy akin to similarly structured organizations. We intend to continue to provide



 

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capital to middle-market companies. We intend to invest primarily in debt securities, including senior debt, second lien and subordinated debt, and may also invest in preferred stock and common stock alongside our debt investments or through warrants.

The following diagram depicts CSWC’s current summary organizational structure:

 

 

LOGO

Capital Southwest Management Corporation, or CSMC, a wholly-owned subsidiary of CSWC, is the management company for CSWC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for day-to-day operations.

CSWC also has a direct wholly-owned subsidiary that has been elected to be a taxable entity, or the Taxable Subsidiary. The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfolio companies that are organized as limited liability companies (or other forms of pass-through entities) and still allow us to satisfy the RIC tax requirement that at least 90.0% of our gross income for U.S. federal income tax purposes must consist of qualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.

Overview

CSWC is an internally managed closed-end, non-diversified management investment company that specializes in providing customized debt and equity financing to lower middle market, or LMM, companies and debt capital to upper middle market, or UMM, companies in a broad range of investment segments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Our investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets and in secured and unsecured subordinated debt securities. We also invest in equity interests in our portfolio companies alongside our debt securities.

We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We target senior debt, subordinated debt, and equity investments in LMM companies, as well as first and second lien syndicated loans



 

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in UMM companies. Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization, or EBITDA, between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million.

We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms including equity participation. Our ability to invest across a LLM company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company, as well as subordinated debt, which may either be secured or unsecured subordinated loans. Our LMM debt investments typically have a term of between five and seven years from the original investment date. We also often seek to invest in the equity securities of our LMM portfolio companies.

Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interest bearing debt securities in privately held companies that are generally larger in size than the LMM companies included in our portfolio. Our UMM debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from the original investment date.

We offer managerial assistance to our portfolio companies and provide them access to our investment experience, direct industry expertise and contacts. Our obligation to offer to make available significant managerial assistance to our portfolio companies is consistent with our belief that providing managerial assistance to a portfolio company is important to its business development activities.

Because we are internally managed, we do not pay external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio.

Our principal executive offices are located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240. We maintain a website at http://www.capitalsouthwest.com. Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider that information to be part of this prospectus supplement or the accompanying prospectus.

Business Strategies

Our business strategy is to achieve our investment objective of producing attractive risk-adjusted returns by generating current income from our debt investments and realizing capital appreciation from our equity and equity-related investments. We have adopted the following business strategies to achieve our investment objective:

 

   

Leveraging the Experience of Our Management Team. Our senior management team has extensive experience investing in and lending to middle market companies across changing market cycles. The



 

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members of our management team have diverse investment backgrounds, with prior experience at BDCs in the capacity of senior officers. We believe this extensive experience provides us with an in-depth understanding of the strategic, financial and operational challenges and opportunities of the middle market companies in which we invest. We believe this understanding allows us to select and structure better investments and to efficiently monitor and provide managerial assistance to our portfolio companies.

 

    Applying Rigorous Underwriting Policies and Active Portfolio Management. Our senior management team has implemented rigorous underwriting policies that are followed in each transaction. These policies include a thorough analysis of each potential portfolio company’s competitive position, financial performance, management team operating discipline, growth potential and industry attractiveness, which we believe allows us to better assess the company’s prospects. After investing in a company, we monitor the investment closely, typically receiving monthly, quarterly and annual financial statements. Senior management, together with the deal team and accounting and finance departments, meets at least monthly to analyze and discuss in detail the company’s financial performance and industry trends. We believe that our initial and ongoing portfolio review process allows us to monitor effectively the performance and prospects of our portfolio companies.

 

    Investing Across Multiple Companies, Industries, Regions and End Markets. We seek to maintain a portfolio of investments that is appropriately diverse among various companies, industries, geographic regions and end markets. This portfolio balance is intended to mitigate the potential effects of negative economic events for particular companies, regions, industries and end markets. However, we may from time to time hold securities of an individual portfolio company that comprise more than 5% of our total assets and/or more than 10% of the outstanding voting securities of the portfolio company. For that reason, we are classified as a non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act.

 

    Utilizing Long-Standing Relationships to Source Deals. Our senior management team and investment professionals maintain extensive relationships with entrepreneurs, financial sponsors, attorneys, accountants, investment bankers, commercial bankers and other non-bank providers of capital who refer prospective portfolio companies to us. These relationships historically have generated significant investment opportunities. We believe that our network of relationships will continue to produce attractive investment opportunities.

 

    Focusing on Underserved Markets. The middle market has traditionally been underserved. We believe that operating margin and growth pressures, as well as regulatory concerns, have caused many financial institutions to de-emphasize services to middle market companies in favor of larger corporate clients and more liquid capital market transactions. We also invest in securities that would be rated below investment grade if they were rated. We believe these dynamics have resulted in the financing market for middle market companies being underserved, providing us with greater investment opportunities.

 

    Focus on Established Companies. We generally invest in companies with established market positions, proven management teams with strong operating discipline, histories of generating revenues, and recurring cash flow streams. We believe that those companies generally possess better risk adjusted return profiles than earlier stage companies that are building their management teams and establishing their revenue base. We also believe that established companies in our target size range generally provide opportunities for capital appreciation.

 

   

Capital Structures Appropriate for Potential Industry and Business Volatility. Our investment team spends significant time understanding the performance of both the target portfolio company and its specific industry throughout a full economic cycle. The history of each specific industry and target portfolio company will demonstrate a different level of potential volatility in financial performance. We seek to



 

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understand this dynamic thoroughly and invest our capital at leverage levels in the capital structure that will remain within enterprise value and in securities that will receive interest payments if such downside volatility were to occur.

 

    Providing Customized Financing Solutions. We offer a variety of financing structures and have the flexibility to structure our investments to meet the needs of our portfolio companies. Often we invest in senior and subordinated debt securities, coupled with equity interests. We believe our ability to customize financing structures makes us an attractive partner to middle market companies.

Risk Factors

Investing in our securities involves a high degree of risk. You should consider carefully the information found in the sections titled “Supplementary Risk Factors” beginning on page S-16 of this prospectus supplement and “Risk Factors” beginning on page 12 of the accompanying prospectus, including, but not limited to, the following risks:

 

    Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital.

 

    Our investments in portfolio companies involve a number of significant risks:

 

    They may have unpredictable operating results, could become parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position.

 

    Most of our portfolio companies are private companies. Private companies may not have readily publicly available information about their businesses, operations and financial condition. Consequently, we rely on the ability of our management team and investment professionals to obtain adequate information to evaluate the potential returns from making investments in these portfolio companies. If we are unable to uncover all material information about the target portfolio company, we may not make a fully informed investment decision and may lose all or part of our investment.

 

    The lack of liquidity in our investments may adversely affect our business.

 

    Any unrealized losses or defaults we experience may be an indication of future realized losses, which could reduce our income available to make distributions.

 

    Our investments in equity securities involve a substantial degree of risk. We may not realize gains from our equity investments.

 

    Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.

 

    Our business model depends to a significant extent upon strong referral relationships. Our inability to maintain or develop these relationships, as well as the failure of these relationships to generate investment opportunities, could adversely affect our business.

 

    In addition to regulatory limitations on our ability to raise capital, our current debt obligations contain various covenants, which, if not complied with, could accelerate our repayment obligations under the Credit Facility or the Existing Notes, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.

 

    All of our assets are subject to security interests under our secured Credit Facility and if we default on our obligations under the Credit Facility, we may suffer adverse consequences, including foreclosure on our assets.


 

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    Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.

 

    Changes in interest rates may affect our cost of capital, the value of investments and net investment income.

 

    If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.

 

    A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.

 

    We will be subject to corporate-level U.S. federal income tax if we are unable to qualify as a RIC under Subchapter M of the Code.

 

    Even if we qualify as a RIC, we may face tax liabilities that reduce our cash flow.

 

    Our historical financial statements are not necessarily representative of the results we would have achieved as a stand-alone publicly-traded company and therefore may not be indicative of our future performance.

 

    Our investment portfolio is and will continue to be recorded at fair value. Our board of directors, or the Board, has final responsibility for overseeing, reviewing and approving, in good faith, our fair value determination. As a result of recording our investments at fair value, there is and will continue to be subjectivity as to the value of our portfolio investments.

 

    The capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets in the United States, which may have a negative impact on our business and operations.

 

    Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could negatively affect the profitability of our operations.

 

    The market price of our common stock may fluctuate significantly.

Investment Criteria

Our investment team has identified the following investment criteria that we believe are important in evaluating prospective investment opportunities. However, not all of these criteria have been or will be met in connection with each of our investments:

 

    Companies with Positive and Sustainable Cash Flow: We generally seek to invest in established companies with sound historical financial performance.

 

    Excellent Management: Management teams with a proven record of achievement, exceptional ability, unyielding determination and integrity. We believe management teams with these attributes are more likely to manage the companies in a manner that protects and enhances value.

 

    Industry: We primarily focus on companies having competitive advantages in their respective markets and/or operating in industries with barriers to entry, which may help protect their market position.

 

    Strong Private Equity Sponsors: We focus on developing relationships with leading private equity firms in order to partner with these firms and provide them capital to support the acquisition and growth of their portfolio companies.

 

    Appropriate Risk-Adjusted Returns: We focus on and price opportunities to generate returns that are attractive on a risk-adjusted basis, taking into consideration factors, in addition to the ones depicted above, including credit structure, leverage levels and the general volatility and potential volatility of cash flows.


 

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Recent Developments

On April 2, 2018, the Company paid regular dividends declared on February 28, 2018 in the amount of $4.5 million, or $0.28 per share.

On April 16, 2018 and May 11, 2018, the Company entered into Incremental Assumption Agreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed under the accordion feature of the Credit Facility and increased total commitments from $180 million to $210 million.

On April 25, 2018, the Board unanimously approved the application of the recently modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, effective April 25, 2019.

On June 1, 2018, the Board declared a $0.29 dividend per share for the quarter ended June 30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018.

On June 7, 2018, the Board declared a $0.60 supplemental dividend per share for the quarter ended June 30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018.



 

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TERMS OF THE NOTES OFFERING

This summary sets forth certain terms of the Notes that we are offering pursuant to this prospectus supplement and the accompanying prospectus. On December 15, 2017, we and the trustee entered into the first supplemental indenture, between us and the trustee relating to our issuance, offer and sale of the Existing Notes. We will issue the Notes offered hereby under the same first supplemental indenture. The Notes offered hereby will be a further issuance of, be fungible with, rank equally in right of payment with, and form a single series for all purposes under the indenture, including, without limitation, waivers, amendments, consents, redemptions and other offers to purchase and voting, with the Existing Notes. We refer to the “Notes” and the “Existing Notes” separately within this prospectus supplement since only the Notes are being offered hereby, but any general discussion of the terms of the Notes would also apply to the Existing Notes since they are treated as the same under the indenture. This section and the “Description of the Notes” section in this prospectus supplement outline the specific legal and financial terms of the Notes. You should read this section of the prospectus supplement together with the section titled “Description of the Notes” beginning on page S-44 of this prospectus supplement and the more general description of the Notes in the section titled “Description of Our Debt Securities” beginning on page 99 of the accompanying prospectus before investing in the Notes. Capitalized terms used in this prospectus supplement and not otherwise defined shall have the meanings ascribed to them in the accompanying prospectus or in the indenture governing the Notes.

 

Issuer

   Capital Southwest Corporation

Title of the securities

   5.95% Notes due 2022

Initial aggregate principal amount being offered

   Up to $50,000,000

Manner of offering

   “At the market” offering that may be made, from time to time, through the Agent, as sales agent, using commercially reasonable efforts. See “Plan of Distribution.”

Principal payable at maturity

   100% of the aggregate principal amount; the principal amount of each Note will be payable on its stated maturity date at the office of the trustee for the Notes or at such other office as we may designate.

Type of Note

   Fixed rate note

Listing

   The Existing Notes are listed on The Nasdaq Global Select Market and trade on The Nasdaq Global Select Market under the symbol “CSWCL.” We intend to list the Notes offered hereby on The Nasdaq Global Select Market under the same trading symbol.

Interest rate

   5.95% per year. However, if any of the Notes are sold at prices above the par value of $25 per Note, the effective yield on such Notes to the purchasers may be less than 5.95%.

Day count basis

   360-day year of twelve 30-day months

Original issue date

   December 15, 2017

Issue date of the Notes

   The second trading date following the date of the “at the market” purchase of the Notes.


 

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Stated maturity date

   December 15, 2022

Date interest starts accruing

   The interest payment date prior to the “at the market” purchase of the Notes, except that, if you purchase Notes after the record dates noted below (or your settlement of a purchase of Notes otherwise occurs after such record date), your Notes will not begin to accrue interest until the interest payment date immediately following such record date (i.e., your Notes will not accrue interest for the period from such purchase date to the interest payment date immediately following such record date).

Interest payment dates

   Every March 15, June 15, September 15 and December 15, commencing on the first applicable interest payment date following a given purchase of the Notes under this prospectus supplement, except that, if you purchase Notes after the record date in a given interest period (or your settlement of a purchase of Notes otherwise occurs after such record date), the first interest payment will not occur until the applicable interest payment date at the end of the next interest period (i.e., you will not receive an interest payment on the interest payment date immediately following such record date). The interest payable on each interest payment date will be paid only to holders of record of the Notes at the close of business on the record date immediately preceding the applicable interest payment date. Interest payments on the Existing Notes have been made since March 15, 2018. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.

Interest periods

   The interest period for the Notes will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. Interest on the Notes will accrue from the most recent interest payment date immediately preceding the date of issuance of the Notes from time to time, except that, if you purchase Notes after a record date noted below (or your settlement of a purchase of Notes otherwise occurs after such record date), your Notes will not begin to accrue interest until the interest payment date immediately following such record date (i.e., your Notes will not accrue interest for the period from such purchase date to the interest payment date immediately following such record date).


 

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Regular record dates for interest

   Every March 1, June 1, September 1 and December 1, commencing with the first such date to follow a given purchase of the Notes under this prospectus supplement.

Specified currency

   U.S. Dollars

Place of payment

   New York City and/or such other places that may be specified in the indenture or a notice to holders.

Ranking of notes

  

The Notes will be our direct unsecured obligations and will rank:

 

•  pari passu with our other outstanding and future unsecured unsubordinated indebtedness, including, without limitation, the Existing Notes;

 

•  senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;

 

•  effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured in respect of which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under our Credit Facility, of which $70.0 million was outstanding as of June 6, 2018; and

 

•  structurally subordinated to all future indebtedness and other obligations of any of our subsidiaries.

Denominations

   We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof.

Business day

   Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City or another place of payment are authorized or obligated by law or executive order to close.

Optional redemption

   The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after December 15, 2019 upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption.


 

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   You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes.
   Before redeeming any Notes, we would have to comply with certain requirements under our Credit Facility, to the extent such requirements remain in effect at such time, or otherwise obtain consent from the lenders.
   Any exercise of our option to redeem the Notes will be done in compliance with the 1940 Act.
   If we redeem only some of the Notes, the trustee or DTC, as applicable, will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture governing the Notes and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

Sinking fund

   The Notes will not be subject to any sinking fund.

Repayment at option of holders

   Holders will not have the option to have the Notes repaid prior to the stated maturity date.

Satisfaction and discharge

   We may satisfy and discharge our obligations under the indenture and the Notes by delivering to the trustee for cancellation all outstanding Notes or, in certain circumstances, by depositing with the trustee after the Notes have become due and payable, will become due and payable at their stated maturity within one year, or are to be called for redemption moneys sufficient to pay all of the outstanding Notes, and paying all other sums payable under the indenture by us. See “Description of the Notes — Satisfaction and Discharge” in this prospectus supplement.

Defeasance

   The Notes are subject to defeasance by us. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions required under


 

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   the indenture relating to the Notes, we will be deemed to have been discharged from our obligations under the Notes. See “Description of the Notes — Defeasance” in this prospectus supplement.

Covenant defeasance

   The Notes are subject to covenant defeasance by us. In the event of a “covenant defeasance,” upon depositing such funds and satisfying conditions similar to those for defeasance we would be released from certain covenants under the indenture relating to the Notes. The consequences to the holders of the Notes would be that, while they would no longer benefit from certain covenants under the indenture, and while the Notes could not be accelerated for any reason, the holders of the Notes nonetheless could look to the Company for repayment of the Notes if there were a shortfall in the funds deposited with the trustee or the trustee is prevented from making a payment. See “Description of the Notes — Defeasance” in this prospectus supplement.

Form of notes

   The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

Trustee, paying agent, and security registrar

   U.S. Bank National Association

Other covenants

   In addition to any covenants described elsewhere in this prospectus supplement or the accompanying prospectus, the following covenants shall apply to the Notes:
  

•  We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring additional



 

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borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% on or after April 25, 2019) after such borrowings. See “Supplementary Risk Factors — Risks Related to the Notes — Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company” in this prospectus supplement.

 

•  We agree that, for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(B) as modified by (i) Section 61(a)(1) of the 1940 Act or any successor provisions and after giving effect to any exemptive relief granted to us by the SEC and (ii) the two other exceptions set forth below. These statutory provisions of the 1940 Act are not currently applicable to us and will not be applicable to us as a result of this offering. However, if Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act were currently applicable to us in connection with this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 200% (or 150% on or after April 25, 2019) at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase. Under the covenant, we will be permitted to declare a cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but only up to such amount as is necessary for us to maintain our status as a RIC under Subchapter M of the Code. Furthermore, the covenant will not be triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions (after giving effect to any exemptive relief granted to us by the



 

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SEC) for more than six consecutive months. See “Supplementary Risk Factors — Risks Related to the Notes — Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company” in this prospectus supplement.

 

•  If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable Generally Accepted Accounting Principles in the United States of America, or U.S. GAAP.

Events of default

   You will have rights if an Event of Default occurs with respect to the Notes and is not cured.
  

The term “Event of Default” in respect of the Notes means any of the following:

 

•  We do not pay the principal of, or any premium on, any Note when due and payable at maturity;

 

•  We do not pay interest on any Note when due and payable, and such default is not cured within 30 days of its due date;

 

•  We remain in breach of any other covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding Notes);

 

•  We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days; or

 

•  On the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage of less than 100%, giving effect to any exemptive relief granted to us by the SEC.



 

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Further issuances

   We have the ability to issue additional debt securities under the indenture with terms different from the Notes and, without the consent of the holders of the Notes, to reopen the Notes and issue additional Notes. If we issue additional debt securities, these additional debt securities could have a lien or other security interest greater than that accorded to the holders of the Notes, which are unsecured.

Use of proceeds

   We estimate that the net proceeds we will receive from the sale of the Notes in this offering will be approximately $48.7 million, after deducting the Agent’s discount of approximately $1.0 million payable by us and estimated offering expenses of approximately $0.3 million payable by us.
   We intend to use the net proceeds from this offering to repay outstanding indebtedness under our Credit Facility. However, through re-borrowings under our Credit Facility, we intend to make investments in LMM and UMM portfolio companies in accordance with our investment objective and strategies, to make investments in marketable securities and other temporary investments, and for other general corporate purposes, including payment of operating expenses. As of June 6, 2018, we had $70.0 million of indebtedness outstanding under our Credit Facility. Our Credit Facility matures on November 16, 2021, and borrowings under the Credit Facility currently bear interest on a per annum basis equal to LIBOR plus 3.00%. See “Use of Proceeds” in this prospectus supplement.

Governing law

   The Notes and the indenture will be governed by and construed in accordance with the laws of the State of New York.

Global clearance and settlement procedures

   Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the trustee or the paying agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.


 

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SUPPLEMENTARY RISK FACTORS

Investing in the Notes involves a high degree of risk. Before you invest in the Notes, you should be aware of various significant risks, including those described below. You should carefully consider these risks, together with all of the other information included in this prospectus supplement and the accompanying prospectus, before you decide whether to make an investment in the Notes. The risks set forth below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of our operations could be materially adversely affected. In such case, you could lose all or part of your investment.

Risks Related to the Notes

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future and will rank pari passu with, or equal to, all outstanding and future unsecured unsubordinated indebtedness issued by us and our general liabilities.

The Notes will not be secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the Notes will effectively be subordinated to any secured indebtedness we or our subsidiaries have outstanding as of the date of this prospectus supplement (including our Credit Facility) or that we or our subsidiaries may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our secured indebtedness or secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. As of June 6, 2018, we had $70.0 million in outstanding indebtedness under our Credit Facility, which is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100.0% of the equity interests in the Company’s wholly-owned subsidiaries.

The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The Notes will be obligations exclusively of Capital Southwest Corporation, and not of any of our subsidiaries. None of our subsidiaries will be a guarantor of the Notes and the Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries. These entities may incur substantial indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture under which the Notes will be issued contains limited protection for holders of the Notes.

The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:

 

   

issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness

 

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or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in those entities and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% on or after April 25, 2019) after such borrowings. See “— Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company” below;

 

    pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated indebtedness, except that we have agreed that, for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(B) as modified by (i) Section 61(a)(1) of the 1940 Act or any successor provisions and after giving effect to any exemptive relief granted to us by the SEC and (ii) the following two exceptions: (A) we will be permitted to declare a cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but only up to such amount as is necessary for us to maintain our status as a RIC under Subchapter M of the Code; and (B) this restriction will not be triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions (after giving effect to any exemptive relief granted to us by the SEC) for more than six consecutive months. If Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act were currently applicable to us in connection with this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 200% (or 150% on or after April 25, 2019) at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase; see “— Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company” below;

 

    sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

    enter into transactions with affiliates;

 

    create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

    make investments; or

 

    create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture (as defined in “Description of the Notes”) will not require us to make an offer to purchase the Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity other than as described under “Description of the Notes — Events of Default” elsewhere herein. Our ability to recapitalize, incur additional debt (including additional debt that matures sooner than the Notes), and take a number of other actions that are not limited by the

 

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terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels, and prices of the Notes.

An active trading market for the Notes may not develop, which could limit your ability to sell the Notes.

Although the Existing Notes are listed on The Nasdaq Global Select Market under the trading symbol “CSWCL,” we cannot provide any assurances that an active trading market will develop or be maintained for the Notes or that you will be able to sell your Notes. If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. The Agent has advised us that they intend to make a market in the Notes, but they are not obligated to do so.

Our amount of debt outstanding will increase as a result of this offering, and if we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including a default under our Credit Facility or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by lenders or the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including the Credit Facility), we could be in default under the terms of the agreements governing such indebtedness, including the Notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under the Credit Facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Notes, our other debt, and to fund other liquidity needs.

If our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the future need to refinance or restructure our debt, including any Notes sold, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. If we breach our covenants under the Credit Facility or any of our other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders thereof. If this occurs, we would be in default under the Credit Facility or other debt, the lenders or holders could exercise rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

 

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A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or the Notes, if any, or change in the debt markets could cause the liquidity or market value of the Notes to decline significantly.

Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the Notes. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. We do not undertake any obligation to maintain our credit ratings or to advise holders of Notes of any changes in our credit ratings. There can be no assurance that our credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agencies if in their judgment future circumstances relating to the basis of the credit ratings, such as adverse changes in our company, so warrant. The conditions of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future, which could have an adverse effect on the market prices of the Notes.

We may choose to redeem the Notes when prevailing interest rates are relatively low.

On or after December 15, 2019, we may choose to redeem the Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the Notes. Before redeeming any Notes, we would have to comply with certain requirements under our Credit Facility, to the extent such requirements remain in effect at such time, or otherwise obtain consent from the lenders. If prevailing rates are lower at the time of redemption, and we redeem the Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed. Our redemption right also may adversely impact your ability to sell the Notes as the optional redemption date or period approaches.

Changes relating to LIBOR may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. As of March 31, 2018, approximately 92.1% of our debt investment portfolio (at fair value) bore interest rates indexed upon LIBOR. Additionally, our Credit Facility accrues interest at the applicable LIBOR rate plus 3.00%, with a step-down to LIBOR plus 2.75% at the time our net worth exceeds $325 million. The use of a new index could reduce our interest income and therefore have an adverse effect on our results of operations. Management continues to monitor the status and discussions regarding LIBOR.

Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company.

The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our total assets). However, on March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150%, if certain requirements are met. Under the SBCA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leverage capacity, if shareholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive shareholder approval, we would be allowed to reduce our asset coverage requirement to 150% on the first day after such approval. Alternatively, the SBCA allows the majority of our independent directors to approve the reduction in our asset coverage requirement to 150%, and such approval would become effective on the one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC

 

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filings regarding, among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity and usage, and risks related to leverage.

On April 25, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account such issuance, would not be less than 166%, effective April 25, 2019.

Leverage is generally considered a speculative investment technique and increases the risk of investing in our securities. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. If we incur additional leverage, you will experience increased risks of investing in our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995. Information contained in this prospectus supplement and the accompanying prospectus contain forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “predict,” “will,” “continue,” “likely,” “would,” “could,” “should,” “expect,” “anticipate,” “potential,” “estimate,” “indicate,” “seek,” “believe,” “target,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. The matters described in the section titled “Supplementary Risk Factors” in this prospectus supplement and the section titled “Risk Factors” in the accompanying prospectus and certain other factors noted throughout this prospectus supplement and the accompanying prospectus constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We undertake no obligation to revise or update any forward-looking statements but advise you to consult any additional disclosures that we may make directly to you or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. We believe these factors include, but are not limited to, the following:

 

    our future operating results;

 

    market conditions and our ability to access debt and equity capital and our ability to manage our capital resources effectively;

 

    the timing of cash flows, if any, from the operations of our portfolio companies;

 

    our business prospects and the prospects of our prospective portfolio companies;

 

    the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;

 

    the adequacy of our cash resources and working capital;

 

    our ability to recover unrealized losses;

 

    our expected financings and investments;

 

    our contractual arrangements and other relationships with third parties;

 

    the impact of fluctuations in interest rates on our business;

 

    the impact of a protracted decline in the liquidity of credit markets on our business;

 

    our ability to operate as a BDC and a RIC, including the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;

 

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

    our ability to successfully invest any capital raised in an offering;

 

    the return or impact of current and future investments;

 

    our transition to a debt focused investment strategy;

 

    the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

    our regulatory structure and tax treatment;

 

    the impact of the recently enacted U.S. tax reform legislation, including as a result of future regulation and guidance interpreting the statute; and

 

    the timing, form and amount of any dividend distributions.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of the Notes in this offering will be approximately $48.7 million, after deducting the Agent’s discount of approximately $1.0 million payable by us and estimated offering expenses of approximately $0.3 million payable by us.

We intend to use the net proceeds from this offering to repay outstanding indebtedness under our Credit Facility. However, through re-borrowings under our Credit Facility, we intend to make investments in LMM and UMM portfolio companies in accordance with our investment objective and strategies, to make investments in marketable securities and other temporary investments, and for other general corporate purposes, including payment of operating expenses. As of June 6, 2018, we had $70.0 million of indebtedness outstanding under our Credit Facility. Our Credit Facility matures on November 16, 2021, and borrowings under the Credit Facility currently bear interest on a per annum basis equal to LIBOR plus 3.00%.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization:

 

  (a) on an actual basis as of March 31, 2018; and

 

  (b) on an as adjusted basis for the sale of $50 million aggregate principal amount of the Notes offered hereby, after deducting the Agent’s discount of approximately $1.0 million payable by us and estimated offering expenses of approximately $0.3 million payable by us.

This table should be read together with “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included in this prospectus supplement, and our most recent consolidated financial statements and notes thereto included in this prospectus supplement and the accompanying prospectus.

 

     As of March 31, 2018  
     Actual     As Adjusted for
this Offering
 
     (in thousands, except share
and per share numbers)
 

Cash and cash equivalents

   $ 7,907     $ 16,632  

Borrowings:

    

Credit Facility(1)

     40,000       —    

Notes offered hereby (net of deferred issuance costs)

     55,305       104,030  
  

 

 

   

 

 

 

Total borrowings

   $ 95,305     $ 104,030  
  

 

 

   

 

 

 

Net Assets:

    

Common stock, par value $0.25 per share, 25,000,000 common shares authorized, and 18,358,808 common shares issued and outstanding

   $ 4,625     $ 4,625  

Additional paid-in capital

     260,713       260,713

Net investment income in excess of (less than) distributions

     6,147       6,147

Accumulated undistributed net realized gain

     3,231       3,231

Unrealized appreciation of investments, net of income taxes

     57,509       57,509

Treasury stock — at cost, 2,339,512 shares

     (23,937     (23,937

Total net assets

   $ 308,288     $ 308,288  

Total liabilities and net assets

   $ 417,490     $ 417,490  
  

 

 

   

 

 

 

 

(1)  The above table reflects the carrying value of indebtedness outstanding as of March 31, 2018. As of June 6, 2018, outstanding indebtedness under our Credit Facility was $70.0 million. The net proceeds from the sale of the Notes in this offering are expected to be used to pay down outstanding indebtedness under our Credit Facility. On an as adjusted for this offering basis and reflecting the use of proceeds from this offering, the line item “Credit Facility” would be $21.3 million as of June 6, 2018. See “Use of Proceeds” in this prospectus supplement.

 

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SELECTED FINANCIAL DATA

The selected financial and other data below reflects the historical financial condition and the results of operations of Capital Southwest Corporation as of and for the years ended March 31, 2018, 2017, 2016, 2015, and 2014. The selected financial data as of and for the year ended March 31, 2018 has been derived from consolidated financial statements that have been audited by RSM US LLP, an independent registered public accounting firm. The selected financial data as of and for the year ended March 31, 2017, 2016, 2015, and 2014 has been derived from consolidated financial statements that have been audited by Grant Thornton LLP, an independent registered public accounting firm. You should read this selected financial and other data in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Senior Securities” and the financial statements and related notes in this prospectus supplement and the accompanying prospectus.

 

    Year ended March 31,  
    2018     2017     2016     2015     2014  

Income statement data:

         

Investment income:

         

Interest and dividends

  $ 34,233     $ 22,324     $ 8,033     $ 9,231     $ 11,915  

Interest income from cash and cash equivalents

    21       166       386       122       67  

Fees and other income

    872       984       741       595       625  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    35,126       23,474       9,160       9,948       12,607  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Compensation-related expenses

    9,238       8,217       9,515       6,440       5,489  

Interest expense

    4,875       989                    

General, administrative and other

    4,585       4,601       11,610       5,683       2,963  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    18,698       13,807       21,125       12,123       8,452  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    16,428       9,667       (11,965     (2,175     4,155  

Income tax expense (benefit)

    195       1,779       (1,278     270       (739
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

    16,233       7,888       (10,687     (2,445     4,894  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses):

         

Non-control/Non-affiliate investments

    1,492       3,992       (9,575     8,226       14,084  

Affiliate investments

    90       3,876       (1,458     157,213        

Control investments

          28       231       (1,175      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on investments

    1,582       7,896       (10,802     164,264       14,084  

Net unrealized appreciation (depreciation) on investments

    21,492       7,690       16,089       (108,377     93,032  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains on investments

    23,074       15,586       5,287       55,887       107,116  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 39,307     $ 23,474     $ (5,400   $ 53,442     $ 112,010  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss) per share — basic and diluted

  $ 1.01     $ 0.50     $ (0.68   $ (0.16   $ 0.32  

Net realized earnings per share — basic and diluted1

  $ 1.11     $ 1.00     $ (1.37   $ 10.45     $ 1.24  

Net increase (decrease) in net assets from operations — basic and diluted

  $ 2.45     $ 1.48     $ (0.35   $ 3.44     $ 7.32  

Net asset value per common share

  $ 19.08     $ 17.80     $ 17.34     $ 49.30     $ 49.98  

Total dividends/distributions declared per common share

  $ 0.99     $ 0.79     $ 0.14     $ 0.20     $ 0.20  

Weighted average number of shares outstanding — basic

    16,074       15,825       15,636       15,492       15,278  

Weighted average number of shares outstanding — diluted

    16,139       15,877       15,724       15,531       15,298  

 

1  “Net realized earnings per share — basic and diluted” is calculated as the sum of “Net investment income (loss)” and “Net realized gain (loss) on investments” divided by weighted average shares outstanding — basic and diluted.

 

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     Year ended March 31,  
     2018     2017     2016     2015     2014  

Balance sheet data:

          

Assets:

          

Investments at fair value

   $ 393,095     $ 286,880     $ 178,436     $ 535,536     $ 677,920  

Cash and cash equivalents

     7,907       22,386       95,969       225,797       88,163  

Interest, escrow and other receivables

     5,894       4,308       6,405       4,418       1,371  

Net pension assets

                       10,294       10,962  

Deferred tax asset

     2,050       2,017       2,342              

Other assets

     8,544       10,161       1,341       827       278  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 417,490     $ 325,752     $ 284,493     $ 776,872     $ 778,694  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Notes

   $ 55,305     $     $     $     $  

Credit facility

     40,000       25,000                    

Other liabilities

     6,245       5,996       9,028       4,923       3,263  

Dividends payable

     4,525       7,191       625              

Accrued restoration plan liability

     2,937       2,170       2,205       3,119       3,103  

Deferred income taxes

     190       323             1,412       1,940  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     109,202       40,680       11,858       9,454       8,306  

Net assets

     308,288       285,072       272,635       767,418       770,388  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and net assets

   $ 417,490     $ 325,752     $ 284,493     $ 776,872     $ 778,694  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

          

Number of portfolio companies

     30       28       23       22       27  

Weighted average yield on debt investments at end of period

     11.46     10.28     10.67     3.14     NM  

Weighted average yield on total investments at end of period

     10.48     10.49     9.46     0.46     NM  

Expense ratios (as percentage of average net assets):

          

Total expenses, excluding interest expense

     4.70     4.59     4.48     1.59     1.18  

NM = not meaningful

 

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SENIOR SECURITIES

Information about our senior securities is shown in the following table as of March 31 for the years indicated in the table, unless otherwise noted.

 

Class and Year

   Total Amount
Outstanding
Exclusive
of Treasury
Securities(1)
     Asset
Coverage
per Unit(2)
     Involuntary
Liquidating
Preference
per Unit(3)
     Average
Market
Value
per Unit(4)
 
     (dollars in
thousands)
                      

Credit Facility

           

2018

   $ 40,000      $ 4.16               N/A  

2017

     25,000      $ 12.40               N/A  

2022 Notes

           

2018

   $ 57,500      $ 4.16             $ 25.40  

2017

                           

 

(1)  Total amount of each class of senior securities outstanding at the end of the period presented.
(2)  Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3)  The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “-” indicates information which the SEC expressly does not required to be disclosed for certain types of senior securities.
(4)  Average market value per unit for our Credit Facility is not applicable because this is not registered for public trading.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this prospectus supplement and the accompanying prospectus.

The information contained herein may contain “forward-looking statements” based on our current expectations, assumptions and estimates about us and our industry. These forward-looking statements involve risks and uncertainties. Words such as “believe,” “seek,” “estimate,” “expect,” “intend,” “target,” “will,” “would,” “may,” “could,” “continue” and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those we express in the forward-looking statements as a result of several factors more fully described in the section titled “Supplementary Risk Factors” in this prospectus supplement, the section titled “Risk Factors” in the accompanying prospectus, the section titled “Special Note Regarding Forward-Looking Statements” in this prospectus supplement and the section titled “Cautionary Statement Concerning Forward-Looking Statements” in the accompanying prospectus.

OVERVIEW

We are an internally managed closed-end, non-diversified management investment company that has been elected to be regulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to LMM companies and debt capital to UMM companies in a broad range of investment segments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Our investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets, and in secured and unsecured subordinated debt securities. We also invest in equity interests in our portfolio companies alongside our debt securities.

We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We target senior debt, subordinated debt, and equity investments in LMM companies, as well as first and second lien syndicated loans in UMM companies. Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million, and our UMM investments typically range in size from $5.0 million to $15.0 million.

We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company, as well as subordinated debt which may either be secured or unsecured subordinated loans. Our LMM debt investments typically have a term of between five and seven years from the original investment date. We also often seek to invest in the equity securities of our LMM portfolio companies.

 

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Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interest bearing debt securities in privately held companies that are generally larger in size than the LMM companies included in our portfolio. Our UMM debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from the original investment date.

Since the Share Distribution on September 30, 2015 through March 31, 2018, our exited investments resulted in a weighted average internal rate of return to the Company of approximately 16.9% (based on original cash invested of approximately $119.4 million). Internal rate of return is the discount rate that makes the net present value of all cash flows related to a particular investment equal to zero. Internal rate of return is gross of expenses related to investments as these expenses are not allocable to specific investments. Investments are considered to be exited when the original investment objective has been achieved through the receipt of cash and/or non-cash consideration upon the repayment of a debt investment or sale of an investment or through the determination that no further consideration was collectible and, thus, a loss may have been realized. Approximately 78.9% of these exited investments resulted in an aggregate cash flow realized internal rate of return to the Company of 10% or greater.

Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the years ended March 31, 2018 and 2017, the ratio of our annualized fourth quarter operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 3.36% and 4.54%, respectively.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by the consolidated financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.

Valuation of Investments

The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of March 31, 2018 and 2017, our investment portfolio at fair value represented approximately 94.2% and 88.0% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. See Note 4 — “Fair Value Measurements” in the notes to consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures.

 

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Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from the values that would have been determined had a ready market for the securities actually existed. In addition, changes in the market environment, portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.

Our Board of Directors is responsible for determining, in good faith, the fair value for our investment portfolio and our valuation procedures, consistent with 1940 Act requirements. Our Board of Directors believes that our investment portfolio as of March 31, 2018 and 2017 reflects fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.

Revenue Recognition

Interest and Dividend Income

Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan. In accordance with our valuation policy, accrued interest and dividend income is evaluated periodically for collectability. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding ability to service debt or other obligations, it will be restored to accrual basis. As of March 31, 2018 and March 31, 2017, we did not have any investments on non-accrual status or past due its contractual payment obligation.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The new guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early application is permitted. While we continue to assess the effect of adoption, we currently believe the single change relates to the recognition of a new right-of-use asset and lease liability on our consolidated balance sheet for our office space operating lease. We currently have one operating lease for office space and do not expect a significant change in our leasing activity between now and adoption. See further discussion of our operating lease obligation in “Note 12 — Commitments and Contingences” in the notes to the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements under SAC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when

 

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(or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606) — Narrow-Scope Improvements and Practical Expedients. This ASU clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters. The new guidance is effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. CSWC is still completing its assessment; however, in evaluating the potential impact on its consolidated financial statements, the Company determined that its material financial contracts are excluded from the scope of ASU 2014-09. As a result of the scope exception for financial contracts, the Company’s management has determined that there will be no material changes to the recognition timing and classification of revenues and expenses; additionally, the adoption of ASU 2014-09 will not have a significant impact to pretax income upon adoption or on the consolidated financial statement disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which is intended to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein. The adoption of this new accounting standard will not have a material impact on the Company’s consolidated financial statements.

INVESTMENT PORTFOLIO COMPOSITION

Our LMM investments consist of secured debt, subordinated debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Our LMM portfolio companies generally have annual EBITDA between $3.0 million and $15.0 million, and our LMM investments typically range in size from $5.0 million to $25.0 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, generally bear interest at floating rates, and generally have a term of between five and seven years from the original investment date.

Our UMM investments consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the LMM companies included in our portfolio with EBITDA generally greater than $50.0 million. Our UMM investments typically range in size from $5.0 million to $15.0 million. Our UMM debt investments are generally secured by ether a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.

The total value of our investment portfolio was $393.1 million as of March 31, 2018, as compared to $286.9 million as of March 31, 2017. As of March 31, 2018, we had investments in 30 portfolio companies with an aggregate cost of $335.4 million. As of March 31, 2017, we had investments in 28 portfolio companies with an aggregate cost of $250.5 million.

As of March 31, 2018 and 2017, approximately $220.3 million, or 92.1%, and $155.0 million, or 92.6%, respectively, of our debt investment portfolio (at fair value) bore interest at floating rates, of which 94.2% and 100%, respectively were subject to contractual minimum interest rates. As of March 31, 2018 and 2017, approximately $18.8 million, or 7.9%, and $12.4 million, or 7.4%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.

 

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The following tables provide a summary of our investments in LMM and UMM companies as of March 31, 2018 and 2017 (excluding our investment in I-45 SLF LLC):

 

     As of March 31, 2018  
     LMM(a)     UMM  
     (dollars in thousands)  

Number of portfolio companies

     19       10  

Fair value

   $ 259,116     $ 66,866  

Cost

   $ 204,331     $ 66,266  

% of portfolio at cost — debt

     83.5     100.0

% of portfolio at cost — equity

     16.5      

% of debt investments at cost secured by first lien

     74.2     65.2

Weighted average annual effective yield(b)(c)

     11.9     10.2

Weighted average EBITDA(c)

   $ 8,600     $ 86,200  

Weighted average leverage through CSWC security(c)(d)

     3.3x       4.3x  

 

(a)  At March 31, 2018, we had equity ownership in approximately 73.7% of our LMM investments.
(b)  The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March 31, 2018, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. As of March 31, 2018, there were no investments on non-accrual status. Weighted-average annual effective yield is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.
(c)  Weighted average metrics are calculated using investment cost basis weighting.
(d)  Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Management uses this metric as a guide to evaluate the relative risk of its position in each portfolio debt investment.

 

     As of March 31, 2017  
     LMM(a)     UMM  
     (dollars in thousands)  

Number of portfolio companies

     10       17  

Fair value

   $ 126,305     $ 97,180  

Cost

   $ 93,822     $ 95,918  

% of portfolio at cost — debt

     74.8     100.0

% of portfolio at cost — equity

     25.2      

% of debt investments at cost secured by first lien

     61.5     51.2

Weighted average annual effective yield(b)(c)

     11.4     9.6

Weighted average EBITDA(c)

   $ 7,400     $ 101,300  

Weighted average leverage through CSWC security(c)(d)

     3.1x       4.0x  

 

(a)  At March 31, 2017, we had equity ownership in approximately 70.0% of our LMM investments.
(b)  The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March 31, 2017, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. As of March 31, 2017, there were no investments on non-accrual status. Weighted-average annual effective yield is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.
(c)  Weighted average metrics are calculated using investment cost basis weighting.
(d)  Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Management uses this metric as a guide to evaluate the relative risk of its position in each portfolio debt investment.

 

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As of March 31, 2018 and March 31, 2017, our investment portfolio consisted of the following investments:

 

     Fair Value      Percentage of
Total Portfolio
at Fair Value
    Cost      Percentage of
Total Portfolio
at Cost
 
     (dollars in thousands)  

March 31, 2018:

          

First lien loans1

   $ 197,110        50.1   $ 194,820        58.1

Second lien loans

     23,229        5.9       23,092        6.9  

Subordinated debt

     18,783        4.8       18,885        5.6  

Preferred equity

     36,545        9.3       16,666        5.0  

Common equity & warrants

     50,315        12.8       17,134        5.1  

I-45 SLF LLC2

     67,113        17.1       64,800        19.3  
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 393,095        100.0   $ 335,397        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

March 31, 20173:

          

First lien loans1

   $ 107,817        37.6   $ 106,799        42.6

Second lien loans

     47,176        16.5       46,856        18.7  

Subordinated debt

     12,453        4.3       12,402        4.9  

Preferred equity

     19,343        6.7       15,782        6.3  

Common equity & warrants

     36,696        12.8       7,901        3.2  

I-45 SLF LLC2

     63,395        22.1       60,800        24.3  
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 286,880        100.0   $ 250,540        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

1 Included in first lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in payment priority to other senior secured lenders. As of March 31, 2018 and 2017, the fair value of the first lien last out loans are $26.9 million and $21.8 million, respectively.
2 I-45 SLF LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loans in the UMM. The I-45 SLF LLC portfolio consists of 93.7% first lien loans and 6.3% second lien loans. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications similar to those in which CSWC invests directly. We own 80% of I-45 SLF LLC and have a profits interest of 75.6%, while Main Street Capital owns 20% and has a profits interest of 24.4%. I-45 SLF LLC’s Board of Managers makes all investment and operational decisions for the fund, and consists of equal representation from our Company and Main Street Capital. The Company does not guarantee or otherwise obligate itself to make payments on debts owed by I-45 SLF LLC.
3 Presentation of the March 31, 2017 disclosure is updated to conform to current period presentation.

Portfolio Asset Quality

We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein, including each investment’s expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry participants and the portfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity investments.

 

    Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materially above underwriting expectations and the trends and risk factors are generally favorable.

 

    Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally favorable to neutral.

 

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    Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to negative. The portfolio company or investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments are generally not past due.

 

    Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, the trends and risk factors are generally negative and the risk of the investment has increased substantially. Interest and principal payments on our investment are likely to be impaired.

The following table shows the distribution of our debt portfolio investments on the 1 to 4 investment rating scale at fair value as of March 31, 2018 and 2017:

 

     As of March 31, 2018  

Investment Rating

   Debt
Investments at
Fair Value
     Percentage of
Debt Portfolio
 
     (dollars in thousands)  

1

   $ 8,194        3.4

2

     217,989        91.2  

3

     12,939        5.4  

4

             
  

 

 

    

 

 

 

Total

   $ 239,122        100.0
  

 

 

    

 

 

 

 

     As of March 31, 2017  

Investment Rating

   Debt
Investments at
Fair Value
     Percentage of
Debt Portfolio
 
     (dollars in thousands)  

1

   $ 12,173        7.3

2

     155,276        92.7  

3

             

4

             
  

 

 

    

 

 

 

Total

   $ 167,449        100.0
  

 

 

    

 

 

 

Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due.

As of March 31, 2018 and 2017, we did not have any investments on non-accrual status or past due its contractual payment obligation.

Investment Activity

During the year ended March 31, 2018, we made new debt investments in 14 portfolio companies totaling $142.9 million, follow-on debt investments in four portfolio companies totaling $9.4 million, and equity investments in one existing and seven new portfolio companies totaling $9.8 million. We also funded $4.0 million on our existing equity commitment to I-45 SLF LLC. We received partial repayments totaling approximately $11.7 million and full prepayments of approximately $72.2 million from 13 portfolio companies.

 

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During the year ended March 31, 2017, we made new debt investments in 15 portfolio companies totaling $117.9 million, follow-on debt investments in two portfolio companies totaling $1.1 million, and equity investments in three new portfolio companies totaling $2.8 million. We also funded $24.0 million on our existing equity commitment to I-45 SLF LLC. We received proceeds from sales and repayments of debt investments in portfolio companies of $45.8 million. In addition, we received proceeds from sales and return of capital of equity investments in portfolio companies totaling $7.7 million and recognized net realized gains on those sales totaling $7.2 million in the year ended March 31, 2017.

Total portfolio investment activity for the years ended March 31, 2018 and 2017 was as follows (in thousands):

 

Year ended March 31, 2018    First Lien
Loans
    Second Lien
Loans
    Subordinated
Debt
    Preferred &
Common
Equity &
Warrants
    I-45 SLF
LLC
    Total  

Fair value, beginning of period

   $ 107,817     $ 47,176     $ 12,453     $ 56,039     $ 63,395     $ 286,880  

New investments

     128,189       9,765       14,406       9,821       4,000       166,181  

Proceeds from sales of investments

                       (104           (104

Principal repayments received

     (41,687     (34,179     (8,100                 (83,966

PIK interest earned

                 11       295             306  

Accretion of loan discounts

     705       100       52                   857  

Realized gain

     814       550       114       104             1,582  

Unrealized gain (loss)

     1,272       (183     (153     20,705       (282     21,359  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 197,110     $ 23,229     $ 18,783     $ 86,860     $ 67,113     $ 393,095  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield on debt investments at end of period

               11.46
            

 

 

 

Weighted average yield on total investments at end of period

               10.48
            

 

 

 

 

Year ended March 31, 2017    First Lien
Loans
    Second Lien
Loans
    Subordinated
Debt
    Preferred &
Common
Equity &
Warrants
    I-45 SLF
LLC
     Total  

Fair value, beginning of period

   $ 39,491     $ 38,227     $ 15,114     $ 49,267     $ 36,337      $ 178,436  

New investments

     101,858       17,133             2,787       24,000        145,778  

Proceeds from sales of investments

           (2,507           (7,692            (10,199

Principal repayments received

     (36,168     (7,051     (60                  (43,279

PIK interest earned

                       63              63  

Accretion of loan discounts

     303       97       34                    434  

Realized gain

     1,514       207       28       5,885              7,634  

Unrealized gain

     819       1,070       52       3,014       3,058        8,013  

Conversion of security from debt to equity

                 (2,715     2,715               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Fair value, end of period

   $ 107,817     $ 47,176     $ 12,453     $ 56,039     $ 63,395      $ 286,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Weighted average yield on debt investments at end of period

                10.28
             

 

 

 

Weighted average yield on total investments at end of period

                10.49
             

 

 

 

 

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RESULTS OF OPERATIONS

The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase (decrease) in net assets from operations” and consists of three elements. The first is “Net investment income (loss),” which is the difference between income from interest, dividends and fees and our combined operating and interest expenses, net of applicable income taxes. The second element is “Net realized gain (loss) on investments before income tax,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost. The third element is the “Net change in unrealized appreciation on investments, net of tax” which is the net change in the market or fair value of our investment portfolio, compared with stated cost. It should be noted that the “Net realized gain (loss) on investments before income tax” and “Net change in unrealized appreciation on investments, net of tax” 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.

Comparison of years ended March 31, 2018 and March 31, 2017

 

     Year ended March 31,     Net Change  
     2018     2017     Amount     %  
     (in thousands)  

Total investment income

   $ 35,126     $ 23,474     $ 11,652       49.6

Interest expense

     (4,875     (989     (3,886     392.9

Other operating expenses

     (13,823     (12,818     (1,005     7.8
  

 

 

   

 

 

   

 

 

   

Income before taxes

     16,428       9,667       6,761       69.9

Income tax expense

     195       1,779       (1,584     (89.0 )% 
  

 

 

   

 

 

   

 

 

   

Net investment income

     16,233       7,888       8,345       105.8

Net realized gain on investments before income tax

     1,582       7,896       (6,314     (80.0 )% 

Net change in net unrealized appreciation on investments, net of tax

     21,492       7,690       13,802       179.5
  

 

 

   

 

 

   

 

 

   

Net increase in net assets from operations

   $ 39,307     $ 23,474     $ 15,833       67.4
  

 

 

   

 

 

   

 

 

   

Investment Income

Total investment income consisted of interest income, management fees, dividend income and other income for each applicable period. For the year ended March 31, 2018, total investment income was $35.1 million, a $11.7 million, or 49.6%, increase over total investment income of $23.5 million for the year ended March 31, 2017. The increase was primarily due to a $9.4 million, or 76.0% increase in interest income generated from our debt investments due to a 42.6% increase in the cost basis of debt investments held from $166.1 million to $236.8 million year over year in addition to an increase in the weighted average yield on debt investments from 10.28% to 11.46%.

We receive management fees primarily from our controlled affiliate investments which aggregated $0.4 million for both the years ended March 31, 2018 and 2017. We also received other miscellaneous fees and income of approximately $0.5 million and $0.6 million during the years ended March 31, 2018 and 2017, respectively, related primarily to other portfolio company activity.

Operating Expenses

Due to the nature of our business, the majority of our operating expenses are related to interest and fees on our borrowings, employee compensation (including both cash and share-based compensation), and general and administrative expenses.

 

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Interest and Fees on our Borrowings

For the year ended March 31, 2018, total interest expense was $4.9 million, an increase of $3.9 million as compared to the total interest expense of $1.0 million for the year ended March 31, 2017. The increase was primarily attributable to an increase of $24.4 million in average borrowings on our Credit Facility during the year ended March 31, 2018, as well as the additional $57.5 million of December 2022 Notes.

Salaries, General and Administrative Expenses

For the year ended March 31, 2018, total employee compensation expense (including both cash and share-based compensation) was $9.2 million, a $1.0 million, or 12.4%, increase over total employee compensation expense of $8.2 million for the year ended March 31, 2017. The increase was primarily due to an increase in headcount, as well as additional restricted stock award grants. For both the years ended March 31, 2018 and 2017, total general and administrative expense was $4.6 million.

Net Investment Income

For the year ended March 31, 2018, net investment income was $16.2 million, an $8.3 million, or 105.8%, increase over net investment income of $7.9 million for the year ended March 31, 2017. The increase was driven by an $11.7 million increase in total investment income and a $1.6 million decrease in income tax expense primarily due to the tax reform, offset by a $3.9 million increase in interest expense and a $1.0 million increase in employee compensation expense.

Increase in Net Assets from Operations

During the fiscal year ended March 31, 2018, we recognized realized gains on investments before income tax totaling $1.6 million, which consisted of gains on the partial repayments of five non-control/non-affiliate investments and full repayments on 13 non-control/non-affiliate investments.

In addition, for the fiscal year ended March 31, 2018, we recorded a net increase in unrealized appreciation on investments, net of tax, totaling $21.5 million, consisting of net unrealized appreciation on our current portfolio of $22.0 million, the reversal of $0.6 million of net unrealized appreciation recognized in prior periods due to the realized gains noted above, and net unrealized appreciation related to deferred tax associated with the Taxable Subsidiary of $0.1 million. Net unrealized appreciation on our current portfolio included unrealized gains on TitanLiner, Inc. of $20.3 million and Media Recovery, Inc. of $5.3 million, partially offset by unrealized losses on Deepwater Corrosion Services of $5.3 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.

During the fiscal year ended March 31, 2017, we recognized realized gains on investments before income tax totaling $7.9 million, which consisted of net gains on the partial repayments of 22 non-control/non-affiliate investments, full repayments on five non-control/non-affiliate investments and the sale of certain equity securities.

In addition, for the fiscal year ended March 31, 2017, we recorded a net increase in unrealized appreciation, net of tax, on investments totaling $7.7 million, consisting of net unrealized appreciation on our current portfolio of $12.5 million, the reversal of $4.5 million of net unrealized appreciation recognized in prior periods due to the realized gains noted above, and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.3 million. Net unrealized appreciation on our current portfolio included unrealized gains on Media Recovery, Inc. of $5.6 million, Deepwater Corrosion Services, Inc. of $4.9 million and I-45 SLF LLC of $3.1 million, partially offset by unrealized losses on TitanLiner, Inc. of $3.3 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.

 

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Comparison of years ended March 31, 2017 and March 31, 2016

 

     Year ended March 31,     Net Change  
     2017     2016     Amount     %  
     (in thousands)  

Total investment income

   $ 23,474     $ 9,160     $ 14,314       156.3

Interest expense

     (989           (989     100.0

Other operating expenses

     (12,818     (21,125     8,307       (39.3 )% 
  

 

 

   

 

 

   

 

 

   

Income (loss) before taxes

     9,667       (11,965     21,632       180.8

Income tax expense (benefit)

     1,779       (1,278     3,057       239.2
  

 

 

   

 

 

   

 

 

   

Net investment income (loss)

     7,888       (10,687     18,575       173.8

Net realized gain (loss) on investments before income tax

     7,896       (10,802     18,698       173.1

Net change in net unrealized appreciation on investments, net of tax

     7,690       16,089       (8,399     (52.2 )% 
  

 

 

   

 

 

   

 

 

   

Net increase (decrease) in net assets from operations

   $ 23,474     $ (5,400   $ 28,874       534.7
  

 

 

   

 

 

   

 

 

   

Investment Income

Total investment income consisted of interest income, management fees, dividend income and other income for each applicable period. For the year ended March 31, 2017, total investment income was $23.5 million, a $14.3 million, or 156.3%, increase over total investment income of $9.2 million for the year ended March 31, 2016. This increase was primarily due to a $7.9 million, or 173.2%, increase in interest income generated from our debt investments due to a 78% increase in the cost basis of debt investments held from $93.4 million to $166.1 million year over year, partially offset by a decrease in the weighted average yield on debt investments from 10.67% to 10.28% year over year. Additionally, there was a $6.4 million, or 184.0%, increase in dividend income due to dividends received from I-45 SLF LLC and Media Recovery, Inc. Total investment income also includes interest income we earn 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 two years ended March 31, we had interest income from cash and cash equivalents of $0.2 million in 2017 and $0.4 million in 2016.

We receive management fees primarily from our controlled affiliate investments which aggregated $0.4 million in 2017 and $0.7 million in 2016. We also received other miscellaneous income of approximately $0.6 million and $0.1 million during the years ended March 31, 2017 and 2016, respectively, related primarily to other portfolio company activity.

Operating Expenses

Due to the nature of our business, the majority of our operating expenses are related to interest and fees on our borrowings, employee compensation (including both cash and share-based compensation), and general and administrative expenses.

Interest and Fees on our Borrowings

For the year ended March 31, 2017, total interest expense was $1.0 million. We entered into the Credit Facility in August 2016. As such, there was no interest expense incurred during the year ended March 31, 2016.

Salaries, General and Administrative Expenses

For the year ended March 31, 2017, total employee compensation expense (including both cash and share-based compensation) was $8.2 million, a $1.6 million, or 16.2%, decrease from the total employee compensation expense of $9.8 million for the year ended March 31, 2016. The decrease was primarily due to approximately $1.6 million of compensation expense incurred in fiscal 2016 for employees who transferred to CSWI following

 

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the Share Distribution. For the year ended March 31, 2017, total general and administrative expense was $4.6 million, a $6.7 million, or 59.4%, decrease over total general and administrative expenses of $11.3 million for the year ended March 31, 2016. The decrease was primarily due to expenses of $7.0 million related to the Share Distribution.

Net Investment Income/Loss

For the year ended March 31, 2017, net investment income was $7.9 million, a $18.6 million, or 173.8%, increase over net investment loss of $10.7 million during the fiscal year ended March 31, 2016, primarily as a result of the $14.3 million increase in total investment income and the $7.3 million decrease in operating expenses.

Increase/Decrease in Net Assets from Operations

During the fiscal year ended March 31, 2017, we recognized realized gains on investments before income tax totaling $7.9 million, which consisted of net gains on the partial repayments of 22 non-control/non-affiliate investments, full repayments on five non-control/non-affiliate investments and the sale of certain equity securities.

In addition, for the fiscal year ended March 31, 2017, we recorded a net increase in unrealized appreciation on investments totaling $7.7 million, consisting of net unrealized appreciation on our current portfolio of $12.5 million, the reversal of $4.5 million of net unrealized appreciation recognized in prior periods due to the realized gains noted above, and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.3 million. Net unrealized appreciation on our current portfolio included unrealized gains on Media Recovery, Inc. of $5.6 million, Deepwater Corrosion Services, Inc. of $4.9 million and I-45 SLF LLC of $3.1 million, partially offset by unrealized losses on TitanLiner, Inc. of $3.3 million. These unrealized gains and losses were due to changes in fair value based on the overall EBITDA performance and cash flows of each investment.

During the fiscal year ended March 31, 2016, we recognized a total net realized loss before income taxes of $10.8 million consisting of the difference between $19.7 million of proceeds from disposition of investments and $30.5 million of cost from four partial repayments of investments and the disposition of 12 investments.

In addition, for the fiscal year ended March 31, 2016, we recorded a net increase in unrealized appreciation on investments of $16.1 million, consisting of net unrealized appreciation on our current portfolio of $7.6 million and the reversal of $8.5 million of net unrealized appreciated recognized in prior periods due to the realized gains and losses noted above.

FINANCIAL LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources are generated primarily from cash flows from operations, the net proceeds of public offerings of debt securities and advances from the Credit Facility. Management believes that the Company’s cash and cash equivalents, cash available from investments, and commitments under the Credit Facility are adequate to meet its needs for the next twelve months.

We may from time to time seek to retire or repurchase our common stock through cash purchases, as well as retire, cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities. Any repurchase or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, calculated pursuant to the 1940 Act, is at least

 

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200% (or, pursuant to recent legislation, 150% if certain requirements are met as described in the Business Section under “Regulation as a Business Development Company — Senior Securities”) after such borrowing. As of March 31, 2018, our asset coverage was 416%.

Cash Flows

For the year ended March 31, 2018, we experienced a net decrease in cash and cash equivalents in the amount of $14.5 million. During that period, our operating activities used $63.9 million in cash, consisting primarily of new portfolio investments of $166.2 million, partially offset by $82.5 million of repayments received from debt investments in portfolio companies. In addition, our financing activities increased cash by $49.4 million, consisting primarily of proceeds from the issuance of the December 2022 Notes of $55.8 million and net borrowings under the Credit Facility of $15.0 million, partially offset by cash dividends paid in the amount of $18.6 million. At March 31, 2018, the Company had cash and cash equivalents of approximately $7.9 million.

For the year ended March 31, 2017, we experienced a net decrease in cash and cash equivalents in the amount of $73.6 million. During that period, our operating activities used $89.6 million in cash, consisting primarily of new portfolio investments of $145.8 million, partially offset by $44.6 million of sales and repayments received from debt investments in portfolio companies and $7.7 million in proceeds from sales of equity investments in portfolio companies. In addition, our financing activities increased cash by $16.0 million, consisting primarily of proceeds from the Credit Facility of $25.0 million, partially offset by cash dividends paid in the amount of $6.0 million and debt issuance costs paid of $2.5 million. At March 31, 2017, the Company had cash and cash equivalents of approximately $22.4 million.

Financing Transactions

Credit Facility

In August 2016, CSWC entered into the Credit Facility to provide additional liquidity to support its investment and operational activities, which included total commitments of $100.0 million. The Credit Facility contains an accordion feature that allows CSWC to increase the total commitments under the facility up to $150.0 million from new and existing lenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitments by $15 million through adding an additional lender using the accordion feature.

On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to the Amendment, borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused commitment fees of 0.50% to 1.50% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Amendment (1) increased the total borrowing capacity under the Credit Facility to $180.0 million, with commitments from a diversified group of eight lenders, (2) increased the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings to LIBOR plus 3.00%, with a step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million, (4) reduced unused commitment fees to a range of 0.50% to 1.0% per annum based on utilization, and (5) extended the Credit Facility’s revolving period that ended on August 30, 2019 through November 16, 2020. Additionally, the final maturity of the Credit Facility was extended from August 30, 2020 to November 16, 2021. Subsequent to March 31, 2018, on April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed under the accordion feature of the Credit Facility and increased total commitments from $180 million to $210 million.

 

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The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (1) certain reporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4) maintaining a minimum consolidated net worth, (5) maintaining an asset coverage of not less than 200%, (6) maintaining a consolidated interest coverage ratio of at least 2.5 to 1.0, and (7) at any time the outstanding advances exceed 90% of the borrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount.

The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change of control, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment.

The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of March 31, 2018, substantially all of the Company’s assets were pledged as collateral for the Credit Facility.

At March 31, 2018, CSWC had $40.0 million in borrowings outstanding under the Credit Facility. CSWC recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs of $3.7 million and $1.0 million, respectively, for the years ended March 31, 2018 and 2017. The weighted average interest rate on the Credit Facility was 4.66% and 4.28%, respectively, for the years ended March 31, 2018 and 2017. Average borrowings for the years ended March 31, 2018 and 2017 were $42.2 million and $17.8 million, respectively. As of March 31, 2018 and 2017, CSWC was in compliance with all financial covenants under the Credit Facility.

December 2022 Notes

In December 2017, the Company issued $57.5 million, including the underwriters’ full exercise of their option to purchase additional principal amounts to cover over-allotments, in aggregate principal amount of 5.95% Notes due 2022 (the “December 2022 Notes”). The December 2022 Notes mature on December 15, 2022 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after December 15, 2019. The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.

As of March 31, 2018, the carrying amount of the December 2022 Notes was $55.3 million. As of March 31, 2018, the fair value of the December 2022 Notes was $58.4 million. The fair value is based on the closing price of the security of The Nasdaq Global Select Market, which is a Level 1 input under ASC 820. The Company recognized interest expense related to the December 2022 Notes, including amortization of deferred issuance costs, of $1.2 million for the year ended March 31, 2018.

The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) a requirement that the Company comply with the asset coverage requirement of Section 61 of the 1940 Act or any successor provisions thereto, after giving effect to any exemptive relief granted to the Company by the SEC, (ii) a requirement, subject to a limited exception, that the Company will not declare any cash dividend, or declare any other cash distribution, upon a class of its capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, the Company has the minimum asset coverage required pursuant to Section 61 of the 1940 Act or any successor provision thereto after deducting the amount of such dividend, distribution or purchase price, as the case may be,

 

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giving effect to any exemptive relief granted to the Company by the SEC and (iii) a requirement to provide financial information to the holders of the December 2022 Notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Exchange Act. The indenture and supplement relating to the December 2022 Notes also provides for customary events of default. As of March 31, 2018, the Company was in compliance with all covenants of the December 2022 Notes.

Equity Capital Activities

In January 2016, our board of directors approved a share repurchase program authorizing us to repurchase up to $10 million in the aggregate of our outstanding common stock in the open market at certain thresholds below our net asset value per share, in accordance with Rules 10b-18 under the Exchange Act. As of March 31, 2018, we had repurchased a total of 35,911 shares of our common stock in the open market under the stock repurchase program, at an average price of $16.37, including commissions paid, leaving approximately $9.4 million available for additional repurchases under the program.

We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available borrowings under our Credit Facility and future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders. Our primary uses of funds will be investments in portfolio companies and operating expenses.

In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders, after consideration and application of our ability under the Code to carry forward certain excess undistributed taxable income from one tax year into the next tax year, substantially all of our taxable income.

OFF-BALANCE SHEET ARRANGEMENTS

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and fund equity capital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. At March 31, 2018, we had a total of approximately $11.6 million in currently unfunded commitments, consisting of $3.2 million in equity capital commitments to I-45 SLF LLC that had not been fully called, a $2.0 million revolver to Clickbooth.com, a $2.0 million revolver to ITA Holdings Group, LLC, a $0.9 million delayed draw term loan to LGM Pharma, a $1.5 million revolver to Prism Spectrum Holdings LLC, and a $2.0 million revolver to Zenfolio Inc. We believe our assets will provide adequate coverage to satisfy these commitments. As of March 31, 2018, we had cash and cash equivalents of $7.9 million and $140 million in available borrowings under the Credit Facility.

CONTRACTUAL OBLIGATIONS

As shown below, we had the following contractual obligations as of March 31, 2018. For information on our unfunded investment commitments, see Note 12 of the Notes to Consolidated Financial Statements.

 

     Payments Due By Period
(In thousands)
 

Contractual Obligations

   Total      Less than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 

Operating lease obligations

   $ 1,019      $ 248      $ 771      $      $  

Credit Facility(1)

     47,350        2,022        45,328                

December 2022 Notes(2)

     73,846        3,469        10,416        59,961         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 122,215      $ 5,739      $ 56,515      $ 59,961      $  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Amounts include interest payments calculated at an average rate 5.00% of outstanding Credit Facility borrowings, which were $40.0 million as of March 31, 2018.
(2)  Includes interest payments.

 

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RECENT DEVELOPMENTS

On April 2, 2018, CSWC paid regular dividends declared on February 28, 2018 in the amount of $4.5 million, or $0.28 per share.

On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed under the accordion feature of the Credit Facility and increased total commitments from $180 million to $210 million.

On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to the Company will be decreased from 200% to 150%, effective April 25, 2019. The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, effective April 25, 2019.

On June 1, 2018, the Company’s Board of Directors declared a $0.29 dividend per share for the quarter ended June 30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018.

On June 7, 2018, the Company’s Board of Directors declared a $0.60 supplemental dividend per share for the quarter ended June 30, 2018. The record date for the dividend is June 26, 2018. The payment date for the dividend is July 2, 2018.

 

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RATIO OF EARNINGS TO FIXED CHARGES

The following table contains our ratio of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges in connection with our financial statements, including the notes to those statements, included in this prospectus supplement and the accompanying prospectus.

 

     For the
Year
Ended
March 31,
2018
     For the
Year
Ended
March 31,
2017
     For the
Year
Ended
March 31,
2016
    For the
Year
Ended
March 31,
2015
    For the
Year
Ended
March 31,
2014
 

Earnings to Fixed Charges(1)

     9.10        26.53             (2)           (2)           (2) 

 

(1)  Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

 

    Excluding net realized and unrealized gains and losses, the earnings to fixed charges ratio would be 4.37 and 10.77 for the year ended March 31, 2018 and 2017, respectively, and unchanged for the years ended March 31, 2016, 2015, and 2014.

 

(2)  There were no fixed charges for the years ended March 31, 2016, 2015, and 2014.

 

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DESCRIPTION OF THE NOTES

On December 15, 2017, we and the trustee entered into the first supplemental indenture relating to our issuance, offer and sale of the Existing Notes. We will issue the Notes offered hereby under the same first supplemental indenture. The Notes offered hereby will be a further issuance of, be fungible with, rank equally in right of payment with, and form a single series for all purposes under the indenture, including, without limitation, waivers, amendments, consents, redemptions and other offers to purchase and voting, with the Existing Notes. We refer to the “Notes” and the “Existing Notes” separately within this prospectus supplement since only the Notes are being offered hereby, but any general discussion of the terms of the Notes would also apply to the Existing Notes since they are treated as the same under the indenture. We refer to the indenture and the first supplemental indenture collectively as the “indenture” and to U.S. Bank National Association as the “trustee.” The Notes are governed by the indenture, as required by federal law for all bonds and notes of companies that are publicly offered. An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under “— Events of Default — Remedies if an Event of Default Occurs” below. Second, the trustee performs certain administrative duties for us with respect to the Notes.

This section includes a summary description of the material terms of the Notes and the indenture. Because this section is a summary, however, it does not describe every aspect of the Notes and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of the Notes. The Base indenture has been attached as an exhibit to the registration statement of which this prospectus supplement is a part and the first supplemental indenture will be attached as an exhibit to a post-effective amendment to the registration statement of which this prospectus supplement is a part, in each case, as filed with the SEC. See “Available Information” in this prospectus supplement for information on how to obtain a copy of the indenture.

General

The Notes will mature on December 15, 2022. The principal payable at maturity will be 100% of the aggregate principal amount. The interest rate of the Notes is 5.95% per year and will be paid every March 15, June 15, September 15 and December 15, beginning on the first applicable interest payment date following a given purchase of the Notes under this prospectus supplement, except that, if you purchase Notes after the record date in a given interest period (or your settlement of a purchase of Notes otherwise occurs after such record date), the first interest payment will not occur until the applicable interest payment date at the end of the next interest period (i.e., you will not receive an interest payment on the interest payment date immediately following such record date). The regular record dates for interest payments will be every March 1, June 1, September 1 and December 1, commencing with the first such date to follow a given purchase of the Notes under this prospectus supplement. The interest payable on each interest payment date will be paid only to holders of record of the Notes at the close of business on the record date immediately preceding the applicable interest payment date. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. Interest on the Notes will accrue from the most recent interest payment date immediately preceding the date of issuance of the Notes from time to time, except that, if you purchase Notes after the record dates noted below (or your settlement of a purchase of Notes otherwise occurs after such record date), your Notes will not begin to accrue interest until the interest payment date immediately following such record date (i.e., your Notes will not accrue interest for the period from such purchase date to the interest payment date immediately following such record date). Subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be.

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof. The Notes will not be subject to any sinking fund and holders of the Notes will not have the option to have the Notes repaid prior to the stated maturity date.

 

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The indenture does not limit the amount of debt (including secured debt) that may be issued by us or our subsidiaries under the indenture or otherwise, but does contain a covenant regarding our asset coverage that would have to be satisfied at the time of our incurrence of additional indebtedness. See “— Other Covenants” and “— Events of Default.” Other than the foregoing and as described under “— Other Covenants” and “— Events of Default” below, the indenture does not contain any financial covenants and does not restrict us from paying dividends or issuing or repurchasing our other securities. Other than restrictions described under “— Merger or Consolidation” below, the indenture does not contain any covenants or other provisions designed to afford holders of the Notes protection in the event of a highly leveraged transaction involving us or if our credit rating declines as the result of a takeover, recapitalization, highly leveraged transaction or similar restructuring involving us that could adversely affect your investment in the Notes.

We have the ability to issue indenture securities with terms different from the Notes and, without the consent of the holders of the Notes, to reopen the Notes and issue additional Notes.

Optional Redemption

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after December 15, 2019, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the Notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to the date fixed for redemption.

You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes. Any exercise of our option to redeem the Notes will be done in compliance with the 1940 Act, to the extent applicable.

If we redeem only some of the Notes, the trustee or, with respect to global securities, DTC will determine the method for selection of the particular Notes to be redeemed, in accordance with the indenture and the 1940 Act, to the extent applicable, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

Before redeeming any Notes, we would have to comply with certain requirements under our Credit Facility, to the extent such requirements remain in effect at such time, or otherwise obtain consent from the lenders.

Global Securities

Each Note will be issued in book-entry form and represented by a global security that we deposit with and register in the name of The Depository Trust Company, New York, New York, known as DTC, or its nominee. A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all the Notes represented by a global security, and investors will be permitted to own only beneficial interests in a global security. For more information about these arrangements, see “— Book-Entry Procedures” below.

Termination of a Global Security

If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated Notes

 

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directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders.

Payment and Paying Agents

We will pay interest to the person listed in the trustee’s records as the owner of the Notes at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the Note on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the “record date.” Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling the Notes must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the Notes to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called “accrued interest.”

Payments on Global Securities

We will make payments on the Notes so long as they are represented by a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants, as described under “— Book-Entry Procedures” below.

Payments on Certificated Securities

In the event the Notes become represented by certificated securities, we will make payments on the Notes as follows. We will pay interest that is due on an interest payment date to the holder of the Notes as shown on the trustee’s records as of the close of business on the regular record date. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in New York, New York and/or at other offices that may be specified in the indenture or a notice to holders against surrender of the Note.

Alternatively, at our option, we may pay any cash interest that becomes due on the Notes by mailing a check to the holder at his, her or its address shown on the trustee’s records as of the close of business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.

Payment When Offices Are Closed

If any payment is due on the Notes on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on the Notes.

Events of Default

You will have rights if an Event of Default occurs in respect of the Notes and the Event of Default is not cured, as described later in this subsection.

 

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The term “Event of Default” in respect of the Notes means any of the following:

 

    We do not pay the principal of, or any premium on, any Note when due and payable at maturity;

 

    We do not pay interest on any Note when due and payable, and such default is not cured within 30 days of its due date;

 

    We remain in breach of any other covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding Notes);

 

    We file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days; or

 

    On the last business day of each of twenty-four consecutive calendar months, the Notes have an asset coverage of less than 100%, giving effect to any exemptive relief granted to us by the SEC.

An Event of Default for the Notes may, but does not necessarily, constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of the Notes of any default, except in the payment of principal or interest, if it in good faith considers the withholding of notice to be in the best interests of the holders.

Remedies if an Event of Default Occurs

If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the Notes may declare the entire principal amount of all the Notes to be due and immediately payable, but this does not entitle any holder of Notes to any redemption payout or redemption premium. If an Event of Default referred to in the second to last bullet point above with respect to us has occurred, the entire principal amount of all of the Notes will automatically become due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes if (1) we have deposited with the trustee all amounts due and owing with respect to the Notes (other than principal or any payment that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.

Except in cases of default, where the trustee has some special duties, the trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an “indemnity”). If reasonable indemnity is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

Before you are allowed to bypass the trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the Notes, the following must occur:

 

    You must give the trustee written notice that an Event of Default has occurred and remains uncured;

 

    The holders of at least 25% in principal amount of all the Notes must make a written request that the trustee take action because of the default and must offer reasonable indemnity to the trustee against the cost and other liabilities of taking that action;

 

    The trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity; and

 

    The holders of a majority in principal amount of the Notes must not have given the trustee a direction inconsistent with the above notice during that 60-day period.

 

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However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date.

Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the Notes, or else specifying any default.

Waiver of Default

The holders of a majority in principal amount of the Notes may waive any past defaults other than a default:

 

    in the payment of principal (or premium, if any) or interest; or

 

    in respect of a covenant that cannot be modified or amended without the consent of each holder of the Notes.

Merger or Consolidation

Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met where:

 

    we merge out of existence or convey or transfer all or substantially all of our assets, the resulting entity must agree to be legally responsible for our obligations under the Notes;

 

    the merger or sale of assets must not cause a default on the Notes and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded; and

 

    we must deliver certain certificates and documents to the trustee.

Notwithstanding any of the foregoing and subject to the 1940 Act, any subsidiary of ours may consolidate with, merge into or transfer all or part of its property and assets to other subsidiaries of ours or to us. Additionally, this covenant shall not apply to: (1) our merger or the merger of one of our subsidiaries with an affiliate solely for the purpose of reincorporating in another jurisdiction; (2) any conversion by us or a subsidiary from an entity formed under the laws of one state to any entity formed under the laws of another state; or (3) any combination of (1) and (2) above.

Modification or Waiver

There are three types of changes we can make to the indenture and the Notes issued thereunder.

Changes Requiring Your Approval

First, there are changes that we cannot make to your Notes without your specific approval. The following is a list of those types of changes:

 

    change the stated maturity of the principal of (or premium, if any, on) or any installment of principal of or interest on the Notes;

 

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    reduce any amounts due on the Notes or reduce the rate of interest on the Notes;

 

    reduce the amount of principal payable upon acceleration of the maturity of a Note following a default;

 

    change the place or currency of payment on a Note;

 

    impair your right to sue for payment;

 

    reduce the percentage of holders of Notes whose consent is needed to modify or amend the indenture; and

 

    reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults or reduce the percentage of holders of Notes required to satisfy quorum or voting requirements at a meeting of holders of the Notes.

Changes Not Requiring Approval

The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect.

Changes Requiring Majority Approval

Any other change to the indenture and the Notes would require the following approval:

 

    if the change affects only the Notes, it must be approved by the holders of a majority in principal amount of the Notes; and

 

    if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

In each case, the required approval must be given by written consent.

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “— Changes Requiring Your Approval.”

Further Details Concerning Voting

When taking a vote, we will use the following rules to decide how much principal to attribute to the Notes:

The Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption or if we or any affiliate of ours own any Notes. The Notes will also not be eligible to vote if they have been fully defeased as described later under “— Defeasance — Full Defeasance” below.

We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to vote or take other action under the indenture. However, the record date may not be earlier than 30 days before the date of the first solicitation of holders to vote on or take such action and not later than the date such solicitation is completed. If we set a record date for a vote or other action to be taken by holders of the Notes, that vote or action may be taken only by persons who are holders of the Notes on the record date and must be taken within eleven months following the record date.

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the Notes or request a waiver.

 

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Satisfaction and Discharge

The indenture will be discharged and will cease to be of further effect with respect to the Notes when:

 

    Either

 

    all the Notes that have been authenticated have been delivered to the trustee for cancellation; or

 

    all the Notes that have not been delivered to the trustee for cancellation:

 

    have become due and payable, or

 

    will become due and payable at their stated maturity within one year, or

 

    are to be called for redemption,

and we, in the case of the first, second and third sub-bullets above, have irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the holders of the Notes, in amounts in the currency payable for the Notes as will be sufficient, to pay and discharge the entire indebtedness (including all principal, premium, if any, and interest) on such Notes delivered to the trustee for cancellation (in the case of Notes that have become due and payable on or prior to the date of such deposit) or to the stated maturity or redemption date, as the case may be;

 

    we have paid or caused to be paid all other sums payable by us under the indenture with respect to the Notes; and

 

    we have delivered to the trustee an officers’ certificate and legal opinion, each stating that all conditions precedent provided for in the indenture relating to the satisfaction and discharge of the indenture and the Notes have been complied with.

Defeasance

The following provisions will be applicable to the Notes. “Defeasance” means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on the Notes when due and satisfying any additional conditions noted below, we will be deemed to have been discharged from our obligations under the Notes. In the event of a “covenant defeasance,” upon depositing such funds and satisfying similar conditions discussed below we would be released from certain covenants under the indenture relating to the Notes.

Covenant Defeasance

Under current U.S. federal income tax law and the indenture, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your Notes. In order to achieve covenant defeasance, the following must occur:

 

    Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of cash and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;

 

    We must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;

 

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    We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with;

 

    Defeasance must not result in a breach or violation of, or result in a default under, the indenture or any of our other material agreements or instruments; and

 

    No default or event of default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. In fact, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

Full Defeasance

If there is a change in U.S. federal income tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:

 

    Since the Notes are denominated in U.S. dollars, we must deposit in trust for the benefit of all holders of the Notes a combination of money and U.S. government or U.S. government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates;

 

    We must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an Internal Revenue Service (“IRS”) ruling that allows us to make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit;

 

    We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, and a legal opinion and officers’ certificate stating that all conditions precedent to defeasance have been complied with;

 

    Defeasance must not result in a breach or violation of, or constitute a default under, the indenture or any of our other material agreements or instruments; and

 

    No default or event of default with respect to the Notes shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days.

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent.

Other Covenants

In addition to any other covenants described in this prospectus supplement and the accompanying prospectus, as well as standard covenants relating to payment of principal and interest, maintaining an office where payments may be made or securities can be surrendered for payment, payment of taxes by the Company and related matters, the following covenants will apply to the Notes:

 

   

We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether

 

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or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from incurring additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% on or after April 25, 2019) after such borrowings. See “Supplementary Risk Factors — Risks Related to the Notes — Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company” in this prospectus supplement.

 

    We agree that, for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(B) as modified by (i) Section 61(a)(1) of the 1940 Act or any successor provisions and after giving effect to any exemptive relief granted to us by the SEC and (ii) the two other exceptions set forth below. These statutory provisions of the 1940 Act are not currently applicable to us and will not be applicable to us as a result of this offering. However, if Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act were currently applicable to us in connection with this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 200% (or 150% on or after April 25, 2019) at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase. Under the covenant, we will be permitted to declare a cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but only up to such amount as is necessary for us to maintain our status as a RIC under Subchapter M of the Code. Furthermore, the covenant will not be triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions (after giving effect to any exemptive relief granted to us by the SEC) for more than six consecutive months. See “Supplementary Risk Factors — Risks Related to the Notes — Recent legislation may allow us to incur additional leverage, which could increase the risk of investing in the Company” in this prospectus supplement.

 

    If, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, we agree to furnish to holders of the Notes and the trustee, for the period of time during which the Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable U.S. GAAP.

Form, Exchange and Transfer of Certificated Registered Securities

If registered Notes cease to be issued in book-entry form, they will be issued:

 

    only in fully registered certificated form;

 

    without interest coupons; and

 

    unless we indicate otherwise, in denominations of $25 and amounts that are multiples of $25.

Holders may exchange their certificated securities for Notes of smaller denominations or combined into fewer Notes of larger denominations, as long as the total principal amount is not changed and as long as the denomination is equal to or greater than $25.

Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent for registering Notes in the names of holders transferring Notes. We may appoint another entity to perform these functions or perform them ourselves.

 

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Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holder’s proof of legal ownership.

We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.

If any certificated securities of a particular series are redeemable and we redeem less than all the Notes, we may block the transfer or exchange of those Notes selected for redemption during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated Notes selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any Note that will be partially redeemed.

If registered Notes are issued in book-entry form, only the depositary will be entitled to transfer and exchange the Notes as described in this subsection, since it will be the sole holder of the Notes.

Resignation of Trustee

The trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

Indenture Provisions — Ranking

The Notes will be our direct unsecured obligations and will rank:

 

    pari passu with our existing and future unsubordinated unsecured indebtedness, including, without limitation, the Existing Notes;

 

    senior to any of our future indebtedness that expressly provides it is subordinated to the Notes; and

 

    effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including, without limitation, borrowings under our Credit Facility; and

 

    structurally subordinated to all future indebtedness and other obligations of any of our subsidiaries.

Book-Entry Procedures

The Notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each issuance of the Notes, in the aggregate principal amount thereof, and will be deposited with DTC. Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in

 

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immediately available funds. None of the Company, the trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s Ratings Services’ highest rating: AAA. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC’s records. The ownership interest of each actual purchaser of each security, or the “Beneficial Owner,” is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Notes, except in the event that use of the book-entry system for the Notes is discontinued.

To facilitate subsequent transfers, all Notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of the Notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

 

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Redemption notices shall be sent to DTC. If less than all of the Notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Redemption proceeds, distributions, and interest payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

 

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PLAN OF DISTRIBUTION

The Agent is acting as our sales agent in connection with the offer and sale of the Notes pursuant to this prospectus supplement and the accompanying prospectus. Upon written instructions from us, the Agent will use its commercially reasonable efforts consistent with its sales and trading practices to sell, as our sales agent, the Notes under the terms and subject to the conditions set forth in our Distribution Agreement with the Agent dated June 8, 2018. We will instruct the Agent as to the amount of the Notes to be sold by it. We may instruct the Agent not to sell the Notes if the sales cannot be effected at or above the price designated by us in any instruction. We will instruct the Agent not to sell the Notes if the sales cannot be effected at or above prices that will allow the Notes to be treated as “fungible” with the Existing Notes for U.S. federal income tax purposes. We or the Agent may suspend the offering of Notes upon proper notice and subject to other conditions.

Sales of the Notes, if any, under this prospectus supplement and the accompanying prospectus may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act. If any of the Notes are sold at prices above par, the effective yield on such Notes to the purchasers may be less than 5.95%.

The Agent will provide written confirmation of a sale to us no later than the opening of the trading day on The Nasdaq Global Select Market following each trading day in which the Notes are sold under the Distribution Agreement. Each confirmation will include the principal amount of Notes sold on the preceding day, the sales price of Notes sold, the aggregate gross sales proceeds of such Notes, the net proceeds to us and the compensation payable by us to the Agent in connection with the sales.

The Agent will receive a commission from us equal to up to 2.0% of the gross sales of any Notes sold through the Agent under the Distribution Agreement. We estimate that the total expenses for the offering, excluding compensation payable to the Agent under the terms of the Distribution Agreement, will be approximately $0.3 million. This estimate includes the reimbursement by the Company of approximately $40,000 for the reasonable fees and expenses of the Agent in connection with the transactions contemplated by the Distribution Agreement.

Settlement for sales of the Notes will occur on the third trading day following the date on which such sales are made, or on some other date that is agreed upon by us and the Agent in connection with a particular transaction, in return for payment of the net proceeds to us. There is no arrangement for funds to be received in an escrow, trust or similar arrangement.

We will report at least quarterly the principal amount of Notes sold through the Agent under the Distribution Agreement, the net proceeds to us and the compensation paid by us to the Agent, if any.

In connection with the sale of the Notes on our behalf, the Agent will be deemed to be an “underwriter” within the meaning of the Securities Act, and the compensation of the Agent will be deemed to be underwriting commissions or discounts. We have agreed to provide indemnification and contribution to the Agent against certain civil liabilities, including liabilities under the Securities Act.

The offering of the Notes pursuant to the Distribution Agreement will terminate upon the earlier of (i) the sale of the dollar amount of Notes subject to the Distribution Agreement or (ii) the termination of the Distribution Agreement as permitted therein.

 

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Other Relationships

The Agent and certain of its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The Agent and certain of its affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for the Company and our affiliates, for which they received or may in the future receive customary fees and expenses.

In the ordinary course of its various business activities, the Agent and certain of its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the Company or our affiliates. If the Agent or its affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The Agent and its affiliates may hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the Notes offered hereby. Any such credit default swaps or short positions could adversely affect future trading prices of the Notes offered hereby. The Agent and certain of its affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

The principal business address of the Agent is 299 Park Avenue, 7th Floor, New York, NY 10171.

 

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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES

The following summary describes certain U.S. federal income tax consequences applicable to an investment in the Notes. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. The summary is based upon the Code, U.S. Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus supplement and all of which are subject to change, potentially with retroactive effect, or to different interpretations. We cannot assure you that the Internal Revenue Services, or IRS, will not challenge one or more of the tax consequences described in this summary, and we have not obtained, nor do we intend to obtain, any ruling from the IRS or opinion of counsel with respect to the tax consequences of an investment in the Notes. Investors should consult their own tax advisors with respect to tax considerations that pertain to their investment in the Notes.

This summary discusses only Notes held as capital assets within the meaning of the Code (generally, property held for investment purposes) and does not purport to address persons in special tax situations, such as banks and other financial institutions, insurance companies, controlled foreign corporations, passive foreign investment companies, real estate investment trusts and regulated investment companies (and shareholders of such corporations), dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the Notes as a position in a “straddle,” “hedge,” “constructive sale transaction,” “conversion transaction,” “wash sale” or other integrated transaction for U.S. federal income tax purposes, entities that are tax-exempt for U.S. federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for U.S. federal income tax purposes) and beneficial owners of pass-through entities, or U.S. holders (as defined below) whose functional currency (as defined in the Code) is not the U.S. dollar. It also does not address beneficial owners of the Notes other than original purchasers of the Notes who acquire the Notes in this offering for cash at a price equal to their issue price (i.e., the first price at which a substantial amount of the Notes is sold for money to investors (other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placements agents or wholesalers)). This discussion also does not address the U.S. federal income tax consequences to beneficial owners of the Notes subject to the special tax accounting rules under Section 451(b) of the Code. In addition, this summary only addresses U.S. federal income tax consequences, and does not address other U.S. federal tax consequences, including, for example, estate or gift tax consequences. This summary also does not address any U.S. state or local or non-U.S. tax consequences. Investors considering purchasing the Notes should consult their own tax advisors concerning the application of the U.S. federal income tax laws to their individual circumstances, as well as any consequences to such investors relating to purchasing, owning and disposing of the Notes under the laws of any state, local, foreign or other taxing jurisdiction.

If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds any Notes, the U.S. federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partnerships holding Notes, and persons holding interests in such partnerships, should each consult their own tax advisors as to the consequences of investing in the Notes in their individual circumstances.

Taxation of U.S. Holders

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of a Note that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

 

   

a trust (i) the administration of which is subject to the primary supervision of a U.S. court and that has one or more “United States persons” (within the meaning of the Code) that have the authority to control all

 

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substantial decisions of the trust or (ii) that has made a valid election under applicable U.S. Treasury regulations to be treated as a “United States person” (within the meaning of the Code); or

 

    an estate the income of which is subject to U.S. federal income taxation regardless of its source.

Payments of Interest

Payments or accruals of interest on a Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.

Sale, Exchange, Redemption, Retirement or Other Taxable Disposition of a Note

Upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption, retirement or other taxable disposition (excluding amounts representing accrued and unpaid interest, which are treated as ordinary interest income to the extent not previously included in income) and the U.S. holder’s adjusted tax basis in the Note. A U.S. holder’s adjusted tax basis in a Note generally will equal the U.S. holder’s initial investment in the Note. Capital gain or loss generally will be long-term capital gain or loss if the Note was held for more than one year. Long-term capital gains recognized by individuals and certain other non-corporate U.S. holders generally are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations under the Code.

Additional Tax on Net Investment Income

An additional tax of 3.8% is imposed on certain “net investment income” (or “undistributed net investment income,” in the case of certain U.S. holders that are estates and trusts) received by certain U.S. holders with adjusted gross income above certain threshold amounts. “Net investment income” generally includes interest payments on, and gain recognized from the sale, exchange, redemption, retirement or other taxable disposition of, the Notes, less certain deductions. U.S. holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of the Notes.

Backup Withholding and Information Reporting

In general, a U.S. holder will be subject to U.S. federal backup withholding tax at the applicable rate with respect to payments on the Notes and the proceeds of a sale, exchange, redemption, retirement or other taxable disposition of the Notes, unless the U.S. holder is an exempt recipient and appropriately establishes that exemption, or provides its taxpayer identification number to the paying agent and certifies, under penalty of perjury, that it is not subject to backup withholding on an Internal Revenue Service (“IRS”) Form W-9 and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. holder may be allowed as a credit against such U.S. holder’s U.S. federal income tax liability and may entitle such U.S. holder to a refund, provided the required information is furnished to the IRS in a timely manner. In addition, payments on the Notes made to, and the proceeds of a sale, exchange, redemption, retirement or other taxable disposition by, a U.S. holder generally will be subject to information reporting requirements, unless such U.S. holder is an exempt recipient and appropriately establishes that exemption.

Taxation of Non-U.S. Holders

For purposes of this discussion, the term “non-U.S. holder” means a beneficial owner of a Note that is neither a U.S. holder nor a partnership for U.S. federal income tax purposes.

 

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Interest on the Notes

Subject to the discussions of backup withholding and Foreign Account Tax Compliance Act, or FATCA, withholding below, payments to a non-U.S. holder of interest on the Notes generally will not be subject to U.S. federal income tax and will be exempt from withholding of U.S. federal income tax under the “portfolio interest” exemption if such non-U.S. holder properly certifies as to such non-U.S. holder’s foreign status, as described below, and:

 

    such non-U.S. holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of our stock entitled to vote;

 

    such non-U.S. holder is not a “controlled foreign corporation” that is related to us (actually or constructively);

 

    such non-U.S. holder is not a bank whose receipt of interest on the Notes is in connection with an extension of credit made pursuant to a loan agreement entered into in the ordinary course of such non-U.S. holder’s trade or business; and

 

    interest on the Notes is not effectively connected with such non-U.S. holder’s conduct of a U.S. trade or business (or, in the case of an applicable income tax treaty, such interest is not attributable to a permanent establishment maintained by such non-U.S. holder in the United States).

The portfolio interest exemption generally applies only if a non-U.S. holder also appropriately certifies as to such non-U.S. holder’s foreign status. A non-U.S. holder can generally meet the certification requirement by providing a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) to the applicable withholding agent. If a non-U.S. holder holds the Notes through a financial institution or other agent acting on such non-U.S. holder’s behalf, such non-U.S. holder may be required to provide appropriate certifications to the agent. Such non-U.S. holder’s agent will then generally be required to provide appropriate certifications to the applicable withholding agent, either directly or through other intermediaries.

If a non-U.S. holder cannot satisfy the requirements described above, payments of interest made to such non-U.S. holder will be subject to U.S. federal withholding tax at a 30% rate, unless (i) such non-U.S. holder provides the applicable withholding agent with a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) claiming an exemption from (or a reduction of) withholding under the benefits of an income tax treaty, or (ii) the payments of such interest are effectively connected with such non-U.S. holder’s conduct of a trade or business in the United States and such non-U.S. holder meets the certification requirements described below. See “— Income or Gain Effectively Connected with a U.S. Trade or Business” below.

Disposition of the Notes

Subject to the discussions of backup withholding and FATCA withholding below, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the sale, redemption, exchange, retirement, or other taxable disposition of a Note unless:

 

    the gain is effectively connected with the conduct by such non-U.S. holder of a U.S. trade or business (and, if required by an applicable income tax treaty, such non-U.S. holder maintains a permanent establishment in the United States to which such gain is attributable); or

 

    such non-U.S. holder is a non-resident alien individual who has been present in the United States for 183 days or more in the taxable year of disposition and certain other requirements are met.

If a non-U.S. holder’s gain is described in the first bullet point above, such non-U.S. holder generally will be subject to U.S. federal income tax in the manner described under “— Income or Gain Effectively Connected with a U.S. Trade or Business” below. A non-U.S. holder described in the second bullet point above will be subject to a flat 30% (or lower applicable income tax treaty rate) U.S. federal income tax on the gain derived from the sale

 

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or other disposition, which may be offset by certain U.S. source capital losses. To the extent that any portion of the amount realized on a sale, redemption, exchange, retirement or other taxable disposition of a Note is attributable to accrued but unpaid interest on the Note, this amount generally will be taxed in the same manner as described above in “— Interest on the Notes.”

Income or Gain Effectively Connected with a U.S. Trade or Business

If any interest on the Notes or gain from the sale, redemption, exchange, retirement, or other taxable disposition of the Notes is effectively connected with a non-U.S. holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, such non-U.S. holder maintains a permanent establishment in the United States to which such interest or gain is attributable), then the interest income or gain will be subject to U.S. federal income tax at regular graduated income tax rates generally in the same manner as if such non-U.S. holder were a U.S. holder (but without regard to the additional tax on net investment income described above). Effectively connected interest income will not be subject to U.S. federal withholding tax if a non-U.S. holder satisfies certain certification requirements by providing to the applicable withholding agent a properly executed IRS Form W-8ECI (or successor form). In addition, if a non-U.S. holder is a corporation, that portion of such non-U.S. holder’s earnings and profits that are effectively connected with such non-U.S. holder’s conduct of a U.S. trade or business may also be subject to a “branch profits tax” at a 30% rate, unless an applicable income tax treaty provides for a lower rate. For this purpose, interest received on a Note and gain recognized on the disposition of a Note will be included in earnings and profits if the interest or gain is effectively connected with the conduct by such non-U.S. holder of a U.S. trade or business.

Backup Withholding and Information Reporting

Under current U.S. Treasury regulations, the amount of interest paid to a non-U.S. holder and the amount of tax withheld, if any, from those payments must be reported annually to the IRS and each non-U.S. holder. These reporting requirements apply regardless of whether U.S. withholding tax on such payments was reduced or eliminated by any applicable tax treaty or otherwise. Copies of the information returns reporting those payments and the amounts withheld may also be made available to the tax authorities in the country where a non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.

Backup withholding generally will not apply to payments of interest to a non-U.S. holder on a Note if the certification described above in “— Interest on the Notes” is duly provided or such non-U.S. holder otherwise establishes an exemption.

Additionally, the gross proceeds from a non-U.S. holder’s disposition of Notes may be subject under certain circumstances to information reporting and backup withholding unless the non-U.S. holder provides an IRS Form W-8BEN or W-8BEN-E (or other applicable form) certifying that the non-U.S. holder is not a United States person or otherwise qualifies for an exemption.

Non-U.S. holders should consult their own tax advisors regarding application of the backup withholding rules to their particular circumstances and the availability of and procedure for obtaining an exemption from backup withholding. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be credited against a non-U.S. holder’s U.S. federal income tax liability (which may result in such non-U.S. holder being entitled to a refund of U.S. federal income tax), provided that the required information is timely provided to the IRS.

FATCA

Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either (i) enter into an agreement with the U.S. Treasury to report certain required information

 

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with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the United States to collect and share such information and are in compliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the tax include U.S. source interest (including interest on a Note) and dividends and, after December 31, 2018, the gross proceeds from the sale of any property that could produce U.S. source interest (such as a Note) or dividends. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holder’s account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not FFIs unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a beneficial owner and the status of the intermediary through which it holds the Notes, a beneficial owner could be subject to this 30% withholding tax with respect to interest paid on the Notes and proceeds from the sale of the Notes. Under certain circumstances, a beneficial owner might be eligible for a refund or credit of such taxes.

Holders and beneficial owners should consult their own tax advisors regarding FATCA and whether it may be relevant to their acquisition, ownership and disposition of the Notes.

You should consult your own tax advisor with respect to the particular tax consequences to you of an investment in the Notes, including the possible effect of any pending legislation or proposed regulations.

 

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LEGAL MATTERS

Certain legal matters regarding the Notes offered hereby will be passed upon for us by Eversheds Sutherland (US) LLP, Washington, D.C., and certain legal matters in connection with this offering will be passed upon for the Agent by Duane Morris LLP, New York, New York.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The audited consolidated financial statements, including the selected per share data and ratios and Schedule 12-14 as of March 31, 2017 and March 31, 2016 and senior securities table as of March 31, 2017 of Capital Southwest Corporation and its subsidiaries included in this prospectus supplement, the accompanying prospectus and elsewhere in the registration statement have been so included in reliance upon the reports of Grant Thornton LLP, independent registered public accountants, as stated in their reports appearing herein. Grant Thornton LLP’s principal business address is 171 N. Clark Street, Chicago, Illinois, 60601.

The consolidated financial statements and the related consolidated financial statement schedule of Capital Southwest Corporation and its subsidiaries as of and for the year ended March 31, 2018 and the effectiveness of internal control over financial reporting as of March 31, 2018 incorporated in this prospectus supplement by reference from the Capital Southwest Corporation’s Annual Report on Form 10-K for the year ended March 31, 2018 have been audited by RSM US LLP, an independent registered public accounting firm, as stated in their reports thereon (which report expresses an unqualified opinion), and included in this prospectus supplement in reliance upon such reports and upon the authority of such firm as experts in accounting and auditing.

The audited consolidated financial statements of I-45 SLF LLC and its subsidiary included in this prospectus supplement and the accompanying prospectus have been so included in reliance upon the reports of RSM US LLP, independent registered public accountants, as stated in their reports appearing herein. RSM US LLP’s principal business address is 1 South Wacker, Chicago, Illinois 60606.

The audited financial statements of TitanLiner, Inc. included in this prospectus supplement have been so included in reliance upon the report of Weaver and Tidwell, LLP, independent auditors, as stated in their report appearing herein. Weaver and Tidwell LLP’s principal business address is 2821 W. Seventh Street, Suite 700, Fort Worth, Texas 76107.

CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

On June 12, 2017, the Audit Committee of Capital Southwest Corporation, following careful deliberation, approved the decision to change independent registered public accounting firms. On June 12, 2017, the Company notified Grant Thornton LLP, or Grant Thornton, of its decision to dismiss Grant Thornton as the Company’s independent registered public accounting firm, effective as of that date.

The reports of Grant Thornton on the Company’s consolidated financial statements for the fiscal years ended March 31, 2017 and 2016 did not contain an adverse opinion or a disclaimer of opinion, and they were not qualified or modified as to uncertainty, audit scope, or accounting principles.

On June 12, 2017, the Company engaged RSM US LLP, or RSM, as its new independent registered public accounting firm, effective immediately. The decision to engage RSM as the Company’s independent registered public accounting firm was approved by the Company’s Audit Committee. During the years ended March 31, 2017 and 2016, and during the subsequent interim period preceding RSM’s engagement, neither the Company nor anyone on its behalf has consulted with RSM regarding either: (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and no written report or oral advice was provided that RSM concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (2) any matter that was either the subject of a “disagreement,” as that term is defined in Item 304(a)(1)(iv) of Regulation S-K or a “reportable event,” as that term is defined in Item 304 (a)(1)(v) of Regulation S-K. RSM US LLP’s principal business address is 1 South Wacker, Chicago, Illinois 60606.

 

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AVAILABLE INFORMATION

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to the Notes offered by this prospectus supplement. The registration statement contains additional information about us and the Notes being offered by this prospectus supplement.

We file with or submit to the SEC annual, quarterly and current reports, proxy statements, code of ethics and other information meeting the informational requirements of the Exchange Act. This information is available free of charge by calling us at (214) 238-5700 or on our website at www.capitalsouthwest.com. Information contained on our website is not incorporated into this prospectus supplement and you should not consider such information to be part of this document. You also may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on the SEC’s website at www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

 

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INDEX TO FINANCIAL STATEMENTS

 

     Page  

Reports of Independent Registered Public Accounting Firm

     SF-2  

Consolidated Statements of Assets and Liabilities as of March  31, 2018 and 2017

     SF-6  

Consolidated Statements of Operations for Years Ended March  31, 2018, 2017 and 2016

     SF-7  

Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2018, 2017 and 2016

     SF-8  

Consolidated Statements of Cash Flows for Years Ended March  31, 2018, 2017 and 2016

     SF-9  

Consolidated Schedules of Investments as of March 31, 2018 and 2017

     SF-10  

Notes to Consolidated Financial Statements

     SF-18  

INDEX TO OTHER FINANCIAL STATEMENTS

 

I-45 SLF LLC   
     Page  

Independent Auditor’s Report

     SF-65  

Consolidated Statements of Assets, Liabilities and Members’ Equity

     SF-66  

Consolidated Schedules of Investments

     SF-67  

Consolidated Statements of Operations

     SF-72  

Consolidated Statements of Changes in Members’ Equity

     SF-73  

Consolidated Statements of Cash Flows

     SF-74  

Notes to Consolidated Financial Statements

     SF-75  

 

TitanLiner, Inc.

  
     Page  

Independent Auditor’s Report

     SF-83  

Balance Sheets

     SF-84  

Statements of Operations

     SF-85  

Statements of Changes in Stockholders’ Equity

     SF-86  

Statements of Cash Flows

     SF-87  

Notes to Financial Statements

     SF-88  

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Capital Southwest Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Capital Southwest Corporation and Subsidiaries (the Company) as of March 31, 2018, and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended, the related notes to the consolidated financial statements, and the Schedule of Investments in and Advances to Affiliates of the Company listed in Schedule 12-14 (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018, and the results of its operations and its cash flows for the year ended March 31, 2018 in conformity with accounting principles generally accepted in the United States of America, and in our opinion, the related Schedule of Investments in and Advances to Affiliates, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated June 5, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of investments owned as of March 31, 2018, by correspondence with the custodians, portfolio companies or agents or by other appropriate procedures where replies from custodians, portfolio companies or agents were not received. We believe that our audit provides a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company’s auditor since 2017.

Chicago, Illinois

June 5, 2018

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Capital Southwest Corporation

Opinion on the Internal Control Over Financial Reporting

We have audited Capital Southwest Corporation and Subsidiaries’ (the Company) internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of assets and liabilities, including the consolidated schedules of investments, of the Company as of March 31, 2018, and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended, the related notes to the consolidated financial statements, and our report dated June 5, 2018 expressed an unqualified opinion.

Basis for Opinion

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 in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

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.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

Chicago, Illinois

June 5, 2018

 

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Capital Southwest Corporation

We have audited the accompanying consolidated statements of assets and liabilities of Capital Southwest Corporation (a Texas corporation) and subsidiaries (the “Company”), including the consolidated schedules of investments, as of March 31, 2017, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the two years in the period ended March 31, 2017 and the selected per share data and ratios for each of the four years in the period ended March 31, 2017. Our audits of the basic consolidated financial statements included the Schedule of Investments In and Advances to Affiliates listed in the index appearing under Item 15(2). These financial statements, per share data and ratios, and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements, per share data and ratios, and financial statement schedule 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, including the consolidated schedules of investments, referred to above present fairly, in all material respects, the financial position of Capital Southwest Corporation and subsidiaries as of March 31, 2017, and the results of their operations, changes in their net assets and their cash flows for each of the two years in the period ended March 31, 2017, and the selected per share data and ratios for each of the four years in the period ended March 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Grant Thornton LLP

Dallas, Texas

June 1, 2017

 

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(In thousands except share and per share data)

 

     March 31,
2018
    March 31,
2017
 

Assets

    

Investments at fair value:

    

Non-control/Non-affiliate investments (Cost: $200,981 and $172,437, respectively)

   $ 199,949     $ 175,731  

Affiliate investments (Cost: $51,648 and $5,925, respectively)

     53,198       7,138  

Control investments (Cost: $82,768 and $72,178, respectively)

     139,948       104,011  
  

 

 

   

 

 

 

Total investments (Cost: $335,397 and $250,540, respectively)

     393,095       286,880  

Cash and cash equivalents

     7,907       22,386  

Receivables:

    

Dividends and interest

     5,219       3,137  

Escrow

     119       545  

Other

     447       626  

Income tax receivable

     109        

Deferred tax asset

     2,050       2,017  

Debt issuance costs (net of accumulated amortization of $1,041 and $366, respectively)

     2,575       2,137  

Other assets

     5,969       8,024  
  

 

 

   

 

 

 

Total assets

   $ 417,490     $ 325,752  
  

 

 

   

 

 

 

Liabilities

    

Notes (Par value: $57,500 and $—, respectively)

   $ 55,305     $  

Credit facility

     40,000       25,000  

Other liabilities

     6,245       5,996  

Dividends payable

     4,525       7,191  

Accrued restoration plan liability

     2,937       2,170  

Deferred income taxes

     190       323  
  

 

 

   

 

 

 

Total liabilities

     109,202       40,680  
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Net Assets

    

Common stock, $0.25 par value per share: authorized, 25,000,000 shares; issued, 18,501,298 shares at March 31, 2018 and 18,350,808 shares at March 31, 2017

     4,625       4,588  

Additional capital

     260,713       261,472  

Accumulated net investment income (loss)

     6,147       (1,457

Accumulated net realized gain

     3,231       8,390  

Unrealized appreciation on investments, net of income taxes

     57,509       36,016  

Treasury stock — at cost, 2,339,512 shares

     (23,937     (23,937
  

 

 

   

 

 

 

Total net assets

     308,288       285,072  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 417,490     $ 325,752  
  

 

 

   

 

 

 

Net asset value per share (16,161,786 shares outstanding at March 31, 2018 and 16,011,296 shares outstanding at March 31, 2017)

   $ 19.08     $ 17.80  
  

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except share and per share data)

 

     Years Ended March 31,  
     2018     2017     2016  

Investment income

      

Interest income:

      

Non-control/Non-affiliate investments

   $ 18,257     $ 11,739     $ 4,172  

Affiliate investments

     3,513       560       135  

Control investments

     82       116       237  

Dividend income:

      

Non-control/Non-affiliate investments

           20        

Affiliate investments

     127       163        

Control investments

     12,254       9,726       3,489  

Interest income from cash and cash equivalents

     21       166       386  

Fees and other income

     872       984       741  
  

 

 

   

 

 

   

 

 

 

Total investment income

     35,126       23,474       9,160  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Compensation

     7,013       6,330       7,310  

Spin-off compensation plan

     517       690       1,303  

Share-based compensation

     1,708       1,197       1,181  

Interest

     4,875       989        

Professional fees

     1,580       1,774       1,749  

Net pension expense (benefit)

     164       166       (99

Spin-off professional fees

                 7,040  

General and administrative

     2,841       2,661       2,641  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     18,698       13,807       21,125  
  

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

     16,428       9,667       (11,965

Income tax expense (benefit)

     195       1,779       (1,278
  

 

 

   

 

 

   

 

 

 

Net investment income (loss)

   $ 16,233     $ 7,888     $ (10,687
  

 

 

   

 

 

   

 

 

 

Realized gain (loss)

      

Non-control/Non-affiliate investments

     1,492       3,992       (9,575

Affiliate investments

     90       3,876       (1,458

Control investments

           28       231  
  

 

 

   

 

 

   

 

 

 

Total net realized gain (loss) on investments before income tax

     1,582       7,896       (10,802

Change in unrealized appreciation of investments

      

Non-control/Non-affiliate investments

     (4,325     (884     5,585  

Affiliate investments

     337       184       2,860  

Control investments

     25,347       8,713       7,644  

Income tax provision

     133       (323      
  

 

 

   

 

 

   

 

 

 

Total net change in unrealized appreciation of investments, net of tax

     21,492       7,690       16,089  
  

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains on investments

   $ 23,074     $ 15,586     $ 5,287  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets from operations

   $ 39,307     $ 23,474     $ (5,400
  

 

 

   

 

 

   

 

 

 

Pre-tax net investment income (loss) per share — basic and diluted

   $ 1.02     $ 0.61     $ (0.76
  

 

 

   

 

 

   

 

 

 

Net investment income (loss) per share — basic and diluted

   $ 1.01     $ 0.50     $ (0.68
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets from operations — basic and diluted

   $ 2.45     $ 1.48     $ (0.35
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding — basic

     16,073,642       15,824,879       15,635,597  
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding — diluted

     16,138,541       15,877,331       15,723,617  
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

SF-7


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(In thousands)

 

     Years Ended March 31,  
     2018     2017     2016  

Operations:

      

Net investment income (loss)

   $ 16,233     $ 7,888     $ (10,687

Net realized gain (loss) on investments

     1,582       7,896       (10,802

Net change in unrealized appreciation on investments, net of tax

     21,492       7,690       16,089  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets from operations

     39,307       23,474       (5,400

Distributions from:

      

Undistributed net investment income

     (12,905     (8,132     (625

Realized gains

     (3,015     (4,428     (1,544

Taxes incurred on deemed capital gain distributions

                 (2,948

Distributions of CSW Industrials, Inc.

      

Decrease in unrealized appreciation related to spin-off investments

                 (458,338

Distribution from additional capital for spin-off

                 (26,279

Spin-Off Compensation Plan distribution, net of tax of $—, $692 and $— for the years ended March 31, 2018, 2017 and 2016, respectively

     (517     (1,175     (1,261

Capital share transactions:

      

Change in restoration plan liability

     (813     (6      

Exercise of employee stock options

     125       1,507       431  

Share-based compensation expense

     1,708       1,197       1,181  

Common stock withheld for payroll taxes upon vesting of restricted stock

     (86            

Repurchase of common stock

     (588            
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in net assets

     23,216       12,437       (494,783

Net assets, beginning of year

     285,072       272,635       767,418  
  

 

 

   

 

 

   

 

 

 

Net assets, end of year

   $ 308,288     $ 285,072     $ 272,635  
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

SF-8


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Years Ended March 31,  
    2018     2017     2016  

Cash flows from operating activities

     

Net increase (decrease) in net assets from operations

  $ 39,307     $ 23,474     $ (5,400

Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in operating activities:

     

Purchases and originations of investments

    (166,181     (145,778     (123,014

Proceeds from sales and repayments of debt investments in portfolio companies

    82,489       44,568       529  

Proceeds from sales and return of capital of equity investments in portfolio companies

    104       7,692       19,637  

Payment of accreted original issue discounts

    1,477       1,218       12  

Depreciation and amortization

    927       459       86  

Net pension benefit

    (46     (41     (308

Realized (gain) loss on investments before income tax

    (1,582     (7,896     10,802  

Net change in unrealized appreciation on investments

    (21,359     (8,013     (16,089

Accretion of discounts on investments

    (857     (434     (96

Payment-in-kind interest and dividends

    (306     (63      

Stock option and restricted awards expense

    1,708       1,197       1,181  

Deferred income taxes

    (537     1,813       (363

Changes in other assets and liabilities:

     

(Increase) decrease in dividend and interest receivable

    (2,082     (1,385     (1,675

Decrease (increase) in escrow receivables

    426       2,860       (570

Decrease (increase) in other receivables

    180       (127     1,173  

(Increase) decrease in tax receivable

    (109     1,010       (915

Decrease (increase) in other assets

    1,958       (6,775     (601

Increase in other liabilities

    620       602       165  

Increase (decrease) in payable for unsettled transaction

          (3,940     3,940  
 

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

    (63,863     (89,559     (111,506
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

     

Borrowings under credit facility

    76,000       25,000        

Repayments of credit facility

    (61,000            

Debt issuance costs paid

    (1,739     (2,503      

Proceeds from notes

    55,775              

Taxes incurred on deemed capital gain distribution

                (2,948

Dividends to shareholders

    (18,586     (5,994     (1,544

Proceeds from exercise of employee stock options

    125       1,507       431  

Common stock withheld for payroll taxes upon vesting of restricted stock

    (86            

Repurchase of common stock

    (588            

Spin-off Compensation Plan distribution

    (517     (2,034     (1,261

Cash distribution to CSW Industrials, Inc.

                (13,000
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    49,384       15,976       (18,322
 

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (14,479     (73,583     (129,828

Cash and cash equivalents at beginning of year

    22,386       95,969       225,797  
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

  $ 7,907     $ 22,386     $ 95,969  
 

 

 

   

 

 

   

 

 

 

Supplemental cash flow disclosures:

     

Cash paid for income taxes

  $ 708     $ 289     $ 2,948  

Cash paid for interest

    3,405       325        

Supplemental disclosure of noncash financing activities:

     

Dividends declared, not yet paid

  $ 4,525     $ 7,191     $ 625  

Noncash adjustment to realized gain for escrow receivable

          118        

Cost of Investments spun-off1

                6,981  

Decrease in unrealized appreciation due to spin-off of CSWI1

                458,338  

Net pension assets1

                9,687  

Change in deferred tax liabilities1

                3,391  

Spin-off Compensation Plan distribution accrued, not yet paid

          345       513  

 

1 These non-cash items are related to the spin-off of CSW Industrials, Inc. at September 30, 2015.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

SF-9


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2018

 

Portfolio Company1

 

Type of Investment2

 

Industry

 

Current
Interest Rate3

  Maturity     Principal     Cost     Fair
Value4
 

Non-control/Non-affiliate Investments5

             
AAC HOLDINGS, INC.   First Lien   Healthcare services   L+6.75% (Floor 1.00%), Current Coupon 8.52%     6/30/2023     $ 9,321,875     $ 9,110,902     $ 9,485,008  
AG KINGS HOLDINGS INC.8   First Lien   Food, agriculture & beverage   L+9.40% (Floor 1.00%), Current Coupon 11.21%     8/8/2021       9,650,000       9,507,562       9,437,700  

ALLIANCE SPORTS GROUP, L.P.

  Senior subordinated debt   Consumer products & retail   11.00%     2/1/2023       10,100,000       9,916,216       9,807,100  
  2.65% membership interest                     2,500,000       1,996,000  
           

 

 

   

 

 

 
              12,416,216       11,803,100  

AMERICAN TELECONFERENCING SERVICES, LTD.

  First Lien   Telecommunications   L+6.50% (Floor 1.00%), Current Coupon 8.29%     12/8/2021       6,378,173       6,238,734       6,376,578  
  Second Lien     L+9.50% (Floor 1.00%), Current Coupon 11.20%     6/6/2022       2,005,714       1,941,047       1,918,806  
           

 

 

   

 

 

 
              8,179,781       8,295,384  

AMWARE FULFILLMENT LLC17

  First Lien   Distribution   L+12.00% (Floor 1.00%), Current Coupon 14.02%     5/21/2019       13,478,333       13,284,488       12,939,200  

BINSWANGER HOLDING CORP.

  First Lien   Distribution   L+8.00% (Floor 1.00%), Current Coupon 10.02%     3/9/2022       13,036,418       12,817,614       12,899,536  
  900,000 shares of common stock                     900,000       874,000  
           

 

 

   

 

 

 
              13,717,614       13,773,536  

CALIFORNIA PIZZA KITCHEN, INC.

  First Lien   Restaurants   L+6.00% (Floor 1.00%), Current Coupon 7.88%     8/23/2022       4,925,000       4,886,550       4,836,350  

CAPITAL PAWN HOLDINGS, LLC

  First Lien   Consumer products & retail   L+9.50%, Current Coupon 11.19%     7/8/2020       12,922,365       12,669,652       12,767,297  

CLICKBOOTH.COM, LLC

  First Lien   Media, marketing & entertainment   L+8.50% (Floor 1.00%), Current Coupon 10.19%     12/5/2022       17,390,625       17,059,608       17,442,797  
  Revolving Loan15     L+8.50% (Floor 1.00%)     12/5/2022             (18,719      
           

 

 

   

 

 

 
              17,040,889       17,442,797  
DEEPWATER CORROSION SERVICES, INC.   127,004 shares of Series A convertible preferred stock   Energy services (upstream)                   8,000,000       4,629,000  
DELPHI INTERMEDIATE HEALTHCO, LLC   First Lien   Healthcare services   L+7.50% (Floor 1.00%), Current Coupon 9.27%     10/3/2022       7,406,250       7,336,879       7,265,531  

 

SF-10


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

March 31, 2018

 

Portfolio Company1

 

Type of Investment2

 

Industry

 

Current
Interest Rate3

  Maturity   Principal     Cost     Fair
Value4
 
DIGITAL RIVER, INC.   First Lien   Software & IT services   L+6.50% (Floor 1.00%), Current Coupon 8.61%   2/12/2021     6,285,443       6,273,415       6,285,443  
DUNN PAPER, INC.   Second Lien   Paper & forest products   L+8.75% (Floor 1.00%), Current Coupon 10.63%   8/26/2023     3,000,000       2,949,611       3,000,000  
LGM PHARMA, LLC13   First Lien   Healthcare products   L+8.50% (Floor 1.00%), Current Coupon 10.17%   11/15/2022     9,975,000       9,787,481       9,955,050  
  Delayed Draw Term Loan18     L+8.50% (Floor 1.00%), Current Coupon 10.29%   11/15/2022     1,300,000       1,274,815       1,297,400  
  110,000 units of Class A common stock9                 1,100,000       1,100,000  
           

 

 

   

 

 

 
              12,162,296       12,352,450  
LIGHTING RETROFIT INTERNATIONAL, LLC   First Lien   Environmental services   L+9.25% (Floor 1.00%), Current Coupon 10.94%   6/30/2022     14,625,000       14,487,144       14,361,750  
  396,825 shares of Series B preferred stock                 500,000       376,000  
           

 

 

   

 

 

 
              14,987,144       14,737,750  
PRE-PAID LEGAL SERVICES, INC.   Second Lien   Consumer services   L+9.00% (Floor 1.25%), Current Coupon 10.88%   7/1/2020     5,000,000       4,967,603       5,000,000  
RESEARCH NOW GROUP, INC.   Second Lien   Business services   L+9.50% (Floor 1.00%), Current Coupon 11.28%   12/20/2025     10,500,000       9,778,956       9,817,500  
RESTAURANT TECHNOLOGIES, INC.   Second Lien   Business services   L+8.75% (Floor 1.00%), Current Coupon 10.69%   11/23/2023     3,500,000       3,454,894       3,493,000  
JVMC HOLDINGS CORP. 14   First Lien   Financial services   L+8.02% (Floor 1.00%), Current Coupon 9.90%   5/5/2022     7,218,750       7,156,878       7,215,141  
TAX ADVISORS GROUP, LLC13   Senior subordinated debt   Financial services   10.00% / 2.00% PIK   12/23/2022     4,600,000       4,517,884       4,600,000  
  143.3 Class A units9                 541,176       886,000  
           

 

 

   

 

 

 
              5,059,060       5,486,000  

 

SF-11


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

March 31, 2018

 

Portfolio Company1

 

Type of Investment2

 

Industry

 

Current
Interest Rate3

  Maturity   Principal     Cost     Fair
Value4
 
VISTAR MEDIA INC.   First Lien   Media, marketing & entertainment   L+10.00% (Floor 1.00%), Current Coupon 12.02%   2/16/2022     8,112,500       7,434,072       8,193,625  
  Warrants (Expiration — February 17, 2027)                 886,000       1,682,000  
           

 

 

   

 

 

 
              8,320,072       9,875,625  
WASTEWATER SPECIALTIES, LLC   First Lien16   Industrial services   L+12.25% (Floor 1.00%), Current Coupon 13.90%   4/18/2022     9,863,582       9,720,600       10,011,536  
           

 

 

   

 

 

 

Total Non-control/Non-affiliate Investments Affiliate Investments6

            $ 200,981,062     $ 199,949,348  
           

 

 

   

 

 

 
CHANDLER SIGNS, LLC13   Senior subordinated debt   Business services   12.00% / 1.00% PIK   7/4/2021   $ 4,511,259     $ 4,450,704     $ 4,375,922  
  1,500,000 units of Class A-1 common stock9                 1,500,000       1,934,000  
           

 

 

   

 

 

 
              5,950,704       6,309,922  

ELITE SEM, INC.8

 

First Lien

  Media, marketing & entertainment   L+9.90% (Floor 1.00%), Current Coupon 12.10%   2/1/2022     17,500,000       17,103,533       17,500,000  
  1,089 Preferred units     12% PIK             1,235,651       1,879,000  
           

 

 

   

 

 

 
              18,339,184       19,379,000  
           

 

 

   

 

 

 

ITA HOLDINGS GROUP, LLC13

 

First Lien

  Transportation & logistics   L+8.50% (Floor 1.00%, Current Coupon 10.32%)   2/14/2023     9,500,000       9,313,995       9,313,995  
  Revolving Loan19     L+8.50% (Floor 1.00%)   2/14/2023           (9,748      
  Delayed Draw Term Loan     L+8.50% (Floor 1.00%, Current Coupon 10.32%)   2/14/2023     1,500,000       1,470,378       1,470,378  
  9.25% Class A Membership Interest9                 1,500,000       1,500,000  
           

 

 

   

 

 

 
              12,274,625       12,284,373  
           

 

 

   

 

 

 

 

SF-12


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

March 31, 2018

 

Portfolio Company1

 

Type of Investment2

 

Industry

 

Current
Interest Rate3

  Maturity     Principal     Cost     Fair
Value4
 

ZENFOLIO INC.

 

First Lien

 

Business services

  L+9.00% (Floor 1.00%), Current Coupon 10.69%     7/17/2022     $ 13,432,500     $ 13,200,549     $ 13,325,040  
  Revolving Loan15     L+9.00% (Floor 1.00%)     7/17/2022             (17,174      
  190 shares of common stock                     1,900,000       1,900,000  
           

 

 

   

 

 

 
              15,083,375       15,225,040  
           

 

 

   

 

 

 
Total Affiliate Investments             $ 51,647,888     $ 53,198,335  
           

 

 

   

 

 

 

Control Investments7

             

I-45 SLF LLC9, 10, 11

 

80% LLC equity interest

 

Multi-sector holdings

                $ 64,800,000     $ 67,113,368  

MEDIA RECOVERY, INC.11

 

800,000 shares of Series A convertible

preferred stock

 

Industrial products

                  800,000       6,370,748  
 

4,000,002 shares of common stock

                    4,615,000       36,751,252  
           

 

 

   

 

 

 
              5,415,000       43,122,000  
           

 

 

   

 

 

 

PRISM SPECTRUM HOLDINGS, LLC13

 

First Lien

 

Environmental

services

  L+9.50% (Floor 2.25%), Current Coupon 11.75%     2/6/2023       4,325,177       4,240,522       4,240,522  
 

Revolving Loan20

    L+9.50% (Floor 2.25%), Current Coupon 11.75%     2/6/2023       500,000       490,290       490,290  
  57.25 Class A units9                     1,691,674       1,691,674  
           

 

 

   

 

 

 
              6,422,486       6,422,486  
           

 

 

   

 

 

 

TITANLINER, INC.

 

1,189,609 shares of Series B convertible

preferred stock

 

Energy services

(upstream)

  6% PIK                 2,925,960       11,362,000  
 

339,277 shares of Series A convertible

preferred stock

                    3,204,222       11,928,000  
           

 

 

   

 

 

 
              6,130,182       23,290,000  
           

 

 

   

 

 

 

Total Control Investments

            $ 82,767,668     $ 139,947,854  
           

 

 

   

 

 

 

TOTAL INVESTMENTS12

            $ 335,396,618     $ 393,095,537  
           

 

 

   

 

 

 

 

1 All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.
2 All of the Company’s investments, unless otherwise noted, are encumbered as security for the Company’s senior secured credit facility.

 

SF-13


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

March 31, 2018

 

3  The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at March 31, 2018. Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind (“PIK”) interest.
4  Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fair value of our Investment portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors. See Note 4 to the consolidated financial statements.
5  Non-Control/Non-Affiliate investments are generally defined by the 1940 Act as investments that are neither control investments nor affiliate investments. At March 31, 2018, approximately 50.9% of the Company’s investment assets were non-control/non-affiliate investments. The fair value of these investments as a percent of net assets is 64.9%.
6  Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are not classified as control investments. At March 31, 2018, approximately 13.5% of the Company’s investment assets were affiliate investments. The fair value of these investments as a percent of net assets is 17.3%.
7  Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where greater than 50% of the board representation is maintained. At March 31, 2018, approximately 35.6% of the Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is 45.4%.
8  The investment is structured as a first lien last out term loan.
9  Indicates assets that are considered “non-qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. As of March 31, 2018, approximately 18.0% of the Company’s investment assets are non-qualifying assets.
10  The investment has approximately $3.2 million unfunded commitment as of March 31, 2018.
11  Income producing through dividends on distributions.
12  As of March 31, 2018, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $62.4 million; cumulative gross unrealized depreciation for federal income tax purposes is $4.9 million. Cumulative net unrealized appreciation is $57.5 million, based on a tax cost of $335.6 million.
13  ITA Holdings Group, LLC membership interest, LGM Pharma, LLC Class A common stock, Prism Spectrum Holdings LLC Class A units, Tax Advisors Group, LLC Class A units and Chandler Signs, LP Class A-1 common stock are held through a wholly-owned taxable subsidiary.
14  The investment is structured as a first lien first out term loan.
15  The investment has approximately $2.0 million unfunded commitment as of March 31, 2018.
16  As of March 31, 2018, the investment is paying default interest at a rate of 3.0% per annum.
17  As of March 31, 2018, the investment is paying default interest at a rate of 2.5% per annum.
18  The investment has approximately $0.9 million unfunded commitment as of March 31, 2018.
19  The investment has approximately $2.0 million unfunded commitment as of March 31, 2018.
20  The investment has approximately $1.5 million unfunded commitment as of March 31, 2018.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

SF-14


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2017

 

Portfolio Company1

  

Type of
Investment

   Industry    

Current
Interest Rate2

   Maturity      Principal      Cost      Fair
Value3
 

Non-control/Non-affiliate Investments4

                   
AG KINGS HOLDINGS8    First Lien     
Food, agriculture &
beverage
 
 
  L+8.50% (Floor 1.00%)      8/10/2021      $ 9,900,000      $ 9,720,743      $ 9,900,000  
AMERICAN TELECONFERENCING    First Lien      Telecommunications     L+6.50% (Floor 1.00%)      12/8/2021        6,733,503        6,559,616        6,720,709  
   Second Lien      L+9.50% (Floor 1.00%)      6/6/2022        2,005,714        1,929,670        1,965,600  
AMWARE FULFILLMENT    First Lien      Distribution     L+9.50% (Floor 1.00%)      5/21/2019        13,065,000        12,858,885        12,934,350  
ARGON MEDICAL DEVICES    Second Lien      Healthcare products     L+9.50% (Floor 1.00%)      6/23/2022        5,000,000        4,871,024        5,000,000  
BINSWANGER CORP.    First Lien     
Consumer
products & retail
 
 
  L+8.00% (Floor 1.00%)      3/9/2022        13,251,760        12,988,847        12,988,848  
   900,000 shares of common stock                 900,000        900,000  
                

 

 

    

 

 

 
                   13,888,847        13,888,848  
CALIFORNIA PIZZA KITCHEN    First Lien      Restaurants     L+6.00% (Floor 1.00%)      8/23/2022        4,975,000        4,929,234        4,975,995  
CAST AND CREW PAYROLL, LLC    Second Lien     
Media, marketing &
entertainment
 
 
  L+7.75% (Floor 1.00%)      8/12/2023        3,705,263        3,685,537        3,671,916  
DEEPWATER CORROSION SERVICES, INC.    127,004 shares of Series A convertible preferred stock     
Energy services
(upstream)
 
 
                     8,000,000        9,956,000  
DIGITAL RIVER, INC.    First Lien     
Software & IT
services
 
 
  L+6.50% (Floor 1.00%)      2/12/2021        7,032,285        7,001,500        7,067,446  
DIGITAL ROOM INC.    Second Lien     
Paper & forest
products
 
 
  L+10.00% (Floor 1.00%)      5/21/2023        7,000,000        6,864,682        6,864,682  
DUNN PAPER, INC.    Second Lien     
Paper & forest
products
 
 
  L+8.75% (Floor 1.00%)      8/26/2023        3,000,000        2,942,972        2,970,000  
ELITE SEM, INC.8    First Lien     
Media, marketing &
entertainment
 
 
  L+8.50% (Floor 1.00%)      2/1/2022        12,150,000        11,864,161        11,864,161  
   1,000 Preferred units      12% PIK                    1,019,667        1,020,000  
                

 

 

    

 

 

 
                   12,883,828        12,884,161  

 

SF-15


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

March 31, 2017

 

Portfolio Company1

  

Type of
Investment

   Industry     

Current
Interest Rate2

   Maturity    Principal      Cost      Fair
Value3
 
IMAGINE! PRINT SOLUTIONS, INC.    First Lien     
Media, marketing &
entertainment
 
 
   L+6.00% (Floor 1.00%)    3/30/2022      4,853,233        4,800,146        4,913,898  
INFOGROUP INC.    First Lien     
Software & IT
services
 
 
   L+5.50% (Floor 1.50%)    5/26/2018      4,895,007        4,822,951        4,890,112  
LIGHTING RETROFIT INTERNATIONAL    First Lien     
Environmental
services
 
 
   L+9.75% (Floor 0.5%)    9/28/2021      10,222,222        10,126,394        10,126,394  
LTI HOLDINGS, INC.    Second Lien      Industrial products      L+9.25% (Floor 1.00%)    4/17/2023      7,000,000        6,853,685        6,825,000  
PREPAID LEGAL SERVICES, INC.    Second Lien      Consumer services      L+9.00% (Floor 1.25%)    7/1/2020      5,000,000        4,955,404        5,029,000  
REDBOX AUTOMATED RETAIL    First Lien      Gaming & leisure      L+7.50% (Floor 1.00%)    9/27/2021      8,750,000        8,505,558        8,761,375  
RESEARCH NOW GROUP, INC.    Second Lien      Business services      L+8.75% (Floor 1.00%)    3/18/2022      7,000,000        6,918,134        6,860,000  
RESTAURANT TECHNOLOGIES, INC.    Second Lien      Restaurants      L+8.75% (Floor 1.00%)    11/23/2023      3,500,000        3,449,262        3,482,500  

TAXACT, INC.

  

First Lien

     Financial services      L+6.00%
(Floor 1.00%)
   12/31/2022      2,775,000        2,722,263        2,775,000  

VISTAR MEDIA INC.

  

First Lien

    

Media, marketing &

entertainment

 

 

   L+10.00%
(Floor 1.00%)
   2/16/2022      11,000,000        9,898,494        9,898,494  
  

Warrants

                 886,000        886,000  
                 

 

 

    

 

 

 
                    10,784,494        10,784,494  

WATER PIK, INC.

  

Second Lien

    

Consumer products &

retail

 

 

   L+8.75%
(Floor 1.00%)
   2/8/2021      4,473,684        4,385,853        4,507,237  

WINZER CORPORATION

  

Senior

subordinated

debt

     Distribution      11.00%    6/1/2021      8,100,000        7,976,347        7,976,347  
                 

 

 

    

 

 

 

Total Non-control/Non-affiliate Investments Affiliate Investments6

                  $ 172,437,029      $ 175,731,064  
                 

 

 

    

 

 

 

CHANDLER SIGNS, LP13

  

Senior

subordinated

debt

     Business services      12.00%    7/4/2021    $ 4,500,000      $ 4,425,310      $ 4,477,500  
  

1,500,000

units of

Class A-1

common

stock

                     1,500,000        2,661,000  
                 

 

 

    

 

 

 
                    5,925,310        7,138,500  
                 

 

 

    

 

 

 

Total Affiliate Investments

                  $ 5,925,310      $ 7,138,500  
                 

 

 

    

 

 

 

 

SF-16


Table of Contents

CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

March 31, 2017

 

Portfolio Company1

  

Type of
Investment

   Industry    

Current
Interest Rate2

   Maturity    Principal      Cost      Fair
Value3
 

Control Investments7

                   

I-45 SLF LLC9, 10, 11

  

80% LLC equity interest

    
Multi-sector
holdings
 
 
               $ 60,800,000      $ 63,394,679  

MEDIA RECOVERY, INC.11

  

800,000 shares of Series A

convertible

preferred stock

     Industrial products                    800,000        5,590,249  
  

4,000,002 shares of

common stock

                    4,615,000        32,248,751  
                

 

 

    

 

 

 
                   5,415,000        37,839,000  
                

 

 

    

 

 

 

TITANLINER, INC.

  

1,189,609 shares of Series

B convertible

preferred stock

    

Energy services

(upstream)

 

 

  6% PIK                2,758,528        2,777,000  
  

339,277 shares of Series A

convertible

preferred stock

                    3,204,222         
                

 

 

    

 

 

 
                   5,962,750        2,777,000  
                

 

 

    

 

 

 

Total Control Investments

                 $ 72,177,750      $ 104,010,679  
                

 

 

    

 

 

 

TOTAL INVESTMENTS12

                 $ 250,540,089      $ 286,880,243  
                

 

 

    

 

 

 

 

1 All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.
2 All of the Company’s investments, unless otherwise noted, are encumbered as security for the Company’s senior secured credit facility.
3 The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at March 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor.
4 Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fair value of our Investment portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors. See Note 4 to the consolidated financial statements.
5 Non-Control/Non-Affiliate investments are generally defined by the 1940 Act as investments that are neither control investments nor affiliate investments. At March 31, 2017, approximately 61.3% of the Company’s investment assets were non-control/non-affiliate investments.
6 Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are not classified as control investments. At March 31, 2017, approximately 2.5% of the Company’s investment assets were affiliate investments.
7 Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or maintains greater than 50% of the board representation. At March 31, 2017, approximately 36.2% of the Company’s investment assets were control investments.
8 The investment is structured as a first lien last out term loan and earns interest in addition to the stated rate.
9 Indicates assets that the Company believes do not represent “qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets.
10 The investment has approximately $7.2 million unfunded commitment as of March 31, 2017.
11 Income producing through dividends on distributions.
12  As of March 31, 2017, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $40.1 million; cumulative gross unrealized depreciation for federal income tax purposes is $3.4 million. Cumulative net unrealized appreciation is $36.7 million, based on a tax cost of $250.1 million.
13  Chandler Signs, LP Class A-1 common stock is held through a wholly-owned taxable subsidiary.

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

SF-17


Table of Contents

Notes to Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

References in this Annual Report on Form 10-K to “we,” “our,” “us,” “CSWC,” or the “Company” refer to Capital Southwest Corporation, unless the context requires otherwise.

Organization

Capital Southwest Corporation is an internally managed investment company that specializes in providing customized financing to middle market companies in a broad range of industry segments located primarily in the United States. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.”

CSWC was organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a Small Business Investment Company (“SBIC”) licensed under the Small Business Investment Act of 1958. At that time, CSWC transferred to its then wholly-owned subsidiary, Capital Southwest Venture Corporation (“CSVC”), certain assets including our license as a “SBIC”. CSVC was a closed-end, non-diversified investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). Effective June 14, 2016, CSVC was dissolved and its SBIC license was surrendered. All assets held in CSVC were transferred to CSWC upon dissolution. Prior to March 30, 1988, CSWC was registered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to be treated as a business development company (“BDC”) subject to the provisions of the 1940 Act, as amended by the Small Business Incentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940 Act, including investing at least 70% of our assets in eligible portfolio companies and limiting the amount of leverage we incur.

We have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal Revenue Code of 1986 (the “Code”). As such, we are not required to pay corporate-level U.S federal income tax on our investment income. We intend to maintain our RIC status, which requires that we qualify annually as a RIC by meeting certain specified requirements.

Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the management company for CSWC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for day-to-day operations.

CSWC also has a direct wholly owned subsidiary that has been elected to be a taxable entity (the “Taxable Subsidiary”). The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still allow us to satisfy the RIC tax requirement that at least 90% of our gross income for federal income tax purposes must consist of qualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.

We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We target senior and subordinated investments in the lower middle market, as well as first and second lien syndicated loans in upper middle market companies. Our target lower middle market (“LMM”) companies typically have annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our upper middle market (“UMM”) investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million and typically range in size from $5.0 million to $15.0 million. We make available significant managerial assistance to the companies in which we invest as we believe that providing managerial assistance to an investee company is critical to its business development activities.