UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................... to .....................
Commission File Number: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
12900 Preston Road, Suite 700, Dallas, Texas 75230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-8242
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined
Rule 12b-2 of the Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,875,751 shares of Common Stock, $1 Par Value as of July 31, 2006
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
June 30, 2006 (Unaudited) and March 31, 2006.................3
Consolidated Statements of Operations (Unaudited)
For the three months ended June 30, 2006 and June 30, 2005...4
Consolidated Statements of Changes in Net Assets
For the three months ended June 30, 2006 (Unaudited) and
year ended March 31, 2006....................................5
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended June 30, 2006 and June 30, 2005...6
Notes to Consolidated Financial Statements........................7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................10
ITEM 3. Quantitative and Qualitative Disclosure About
Market Risk................................................12
ITEM 4. Controls and Procedures.......................................12
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors..................................................13
ITEM 6. Exhibits and Reports on Form 8-K..............................13
Signatures .................................................................14
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
----------------------------------------------
Assets June 30, 2006 March 31, 2006
------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: June 30, 2006 - $38,149,866
March 31, 2006 - $23,114,866) $364,627,985 $298,481,983
Companies 5% to 25% owned
(Cost: June 30, 2006 - $18,595,746,
March 31, 2006 - $18,595,746) 98,835,850 92,070,852
Companies less than 5% owned
(Cost: June 30, 2006 - $31,448,899,
March 31, 2006 - $46,886,344) 81,344,323 159,875,248
------------ ------------
Total investments
(Cost: June 30, 2006- $88,194,511
March 31, 2006 - $88,596,956) 544,808,158 550,428,083
Cash and cash equivalents 162,932,468 11,503,866
Receivables 151,758 135,887
Other assets 7,364,666 7,300,297
------------ ------------
Totals $715,257,050 $569,368,133
============ ============
Liabilities and Shareholders' Equity
Notes payable to bank $158,000,000 $ 8,000,000
Accrued interest and other liabilities 1,575,141 1,697,086
Income taxes payable 1,121,609 982,653
Deferred income taxes 159,885,485 162,070,285
------------ ------------
Total liabilities 320,582,235 172,750,024
------------ ------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,313,116 shares
at June 30, 2006 and 4,297,616 shares at
March 31, 2006 4,313,116 4,297,616
Additional capital 9,195,917 8,109,797
Undistributed net investment income 3,464,336 3,744,830
Undistributed net realized gain on investments 86,690,100 86,432,040
Unrealized appreciation of investments -
net of deferred income taxes 298,044,648 301,067,128
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------ ------------
Net assets at market or fair value, equivalent
to $101.83 per share at June 30, 2006 on the
3,875,751 shares outstanding and $102.74
per share at March 31, 2006 on the
3,860,251 shares outstanding 394,674,815 396,618,109
------------ ------------
Totals $715,257,050 $569,368,133
============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended
June 30
--------------------------
2006 2005
----------- -----------
Investment income:
Interest $ 205,852 $ 141,903
Dividends 782,566 782,246
Management and directors' fees 198,450 170,750
----------- -----------
1,186,868 1,094,899
----------- -----------
Operating expenses:
Salaries 343,465 233,000
Net pension benefit (29,187) (63,717)
Other operating expenses 221,228 202,458
----------- -----------
535,506 371,741
----------- -----------
Income before interest expense and income taxes 651,362 723,158
Interest expense 146,982 118,759
----------- -----------
Income before income taxes 504,380 604,399
Income tax expense 12,824 29,700
----------- -----------
Net investment income $ 491,556 $ 574,699
=========== ===========
Proceeds from disposition of investments $ 397,016 $ 6,884,240
Cost of investments sold -- 1,623,656
----------- -----------
Realized gain on investments before income taxes 397,016 5,260,584
Income tax expense 138,956 1,851,605
----------- -----------
Net realized gain on investments 258,060 3,408,979
----------- -----------
Increase (decrease) in unrealized appreciation of
investments before income taxes (5,217,480) 4,141,571
Increase (decrease) in deferred income taxes on
appreciation of investments (2,195,000) 1,450,000
----------- -----------
Net increase (decrease) in unrealized appreciation
of investments (3,022,480) 2,691,571
----------- -----------
Net realized and unrealized gain (loss)
on investments $(2,764,420) $ 6,100,550
=========== ===========
Increase (decrease) in net assets from operations $(2,272,864) $ 6,675,249
=========== ===========
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consoliedated Statements of Changes in Net Assets
-------------------------------------------------
Three Months Ended Year Ended
June 30, 2006 March 31, 2006
------------------ --------------
(Unaudited)
Operations
Net investment income $ 491,556 $ 2,389,256
Net realized gain on investments 258,060 13,115,874
Net increase (decrease) in unrealized appreciation
of investments (3,022,480) 80,685,303
------------ ------------
Increase (decrease) in net assets from operations (2,272,864) 96,190,433
Distributions from:
Undistributed net investment income (772,050) (2,314,231)
Capital share transactions
Exercise of employee stock options 1,097,500 208,000
Stock option expense 4,120 --
------------ ------------
Increase (decrease) in net assets (1,943,294) 94,084,202
Net assets, beginning of period 396,618,109 302,533,907
------------ ------------
Net assets, end of period $394,674,815 $396,618,109
============ ============
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended
June 30
---------------------------
2006 2005
------------ -----------
Cash flows from operating activities
Increase (decrease) in net assets from operations $ (2,272,864) $ 6,675,249
Adjustments to reconcile increase (decrease) in net
assets from operations to net cash provided by
operating activities:
Proceeds from disposition of investments 397,016 6,884,240
Purchases of securities -- (2,805,201)
Maturities of securities 402,445 --
Depreciation and amortization 3,865 3,925
Net pension benefit (29,187) (63,717)
Realized gain on investments before income taxes (397,016) (5,260,584)
Deferred taxes on realized gain on investments 138,956 1,851,605
Net (increase) decrease in unrealized appreciation of
investments 3,022,480 (2,691,571)
Stock option expense 4,120 --
Increase in receivables (15,871) (78,223)
(Increase) decrease in other assets (19,943) 5,425
Decrease in accrued interest
and other liabilities (106,582) (159,435)
Decrease in accrued pension cost (34,467) (38,668)
Deferred income taxes 10,200 22,200
------------ -----------
Net cash provided by operating activities 1,103,152 4,345,245
------------ -----------
Cash flows from financing activities
Increase in notes payable to bank 150,000,000 --
Decrease in note payable to portfolio company -- (5,000,000)
Distributions from undistributed net investment income (772,050) (771,410)
Proceeds from exercise of employee stock options 1,097,500 --
------------ -----------
Net cash provided by (used in) financing activities 150,325,450 (5,771,410)
------------ -----------
Net increase (decrease) in cash and cash equivalents 151,428,602 (1,426,165)
Cash and cash equivalents at beginning
of period 11,503,866 5,104,935
------------ -----------
Cash and cash equivalents at end of period $162,932,468 $ 3,678,770
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $123,763 $118,681
Income taxes $ 20,000 $ 7,500
(See Notes to Consolidated Financial Statements)
6
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Basis of Presentation
Principles of Consolidation. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for investment companies. Under rules and regulations
applicable to investment companies, we are precluded from consolidating any
entity other than another investment company. An exception to this general
principle occurs if the investment company has an investment in an operating
company that provides services to the investment company. Our consolidated
financial statements include our management company.
The financial statements included herein have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Article
6 of Regulation S-X. The financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended March 31, 2006. Certain information and
footnotes normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted, although we believe that the disclosures are adequate for
a fair presentation. The information reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the interim periods.
2. Stock-Based Compensation
Effective April 1, 2003, we adopted the fair value method of recording
compensation expense related to all stock options granted after March 31, 2003,
in accordance with Financial Accounting Standards ("FASB") Statement Nos. 123
and 148. The only options granted during this period were on July 19, 2004 to a
new investment associate who resigned on December 31, 2004 with no options
vested.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS 123R"), which revised SFAS 123. SFAS 123R also
supersedes APB 25 and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R
eliminates the alternative to account for employee stock options under APB 25
and requires the fair value of all share-based payments to employees, including
the fair value of grants of employee stock options, be recognized in the income
statement, generally over the vesting period.
In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 107, which provides additional implementation
guidance for SFAS 123R. Among other things, SAB 107 provides guidance on
share-based payment valuations, income statement classification and
presentation, capitalization of costs and related income tax accounting.
Effective April 1, 2006 we adopted SFAS 123R using the modified
prospective transition method. We will recognize compensation cost over the
straight-line method for all share-based payments granted on or after that date
and for all awards granted to employees prior to April 1, 2006 that remain
unvested on that date. The fair value of stock options are determined on the
date of grant using the Black-Scholes pricing model and will be expensed over
the vesting period of the related stock options. Accordingly, for the quarter
ended June 30, 2006 we recognized compensation expense of $4,120.
7
Notes to Consolidated Financial Statements
(continued)
SFAS 123 R also requires the benefits of tax deductions in excess of
recognized compensation cost be reported as a financing cash flow. As a
regulated investment company, we are subject to no tax effect as the majority of
our options granted are incentive stock options and our net investment income
equals the dividends that we pay out. Therefore, we do not incur any tax
expense.
The following table illustrates the effect on net asset value and net
asset value per share for the three months ended June 30, 2005 if we had applied
the fair value recognition provisions of FASB Statement No. 123 to stock-based
compensation for options granted prior to the implementation of FASB Statement
No. 123.
June 30, June 30,
2006 2005
------------ ------------
Net asset value, as reported $394,674,815 $308,437,746
Deduct: Total fair value computed
stock-based compensation -- 37,734
------------ ------------
Pro forma net asset value $394,674,815 $308,400,012
============ ============
Net asset value per share:
Basic - as reported $101.83 $79.97
======= ======
Basic - pro forma $ -- $79.96
======= ======
Diluted - as reported $101.71 $79.89
======= ======
Diluted - pro forma $ -- $79.88
======= ======
As of June 30, 2006, the total remaining unrecognized compensation cost
related to non-vested stock options was $1,096,333, which will be amortized over
the weighted-average service period of approximately 8.41 years.
3. Employee Stock Option Plan
On July 19, 1999, shareholders approved the 1999 Stock Option ("Plan"),
which provides for the granting of stock options to employees and officers and
authorizes the issuance of common stock upon the exercise of such options for up
to 140,000 shares of common stock. All options are granted at or above market
price and generally expire ten years from the date of grant and are generally
exercisable on or after the first anniversary of the date of grant in five to
ten annual installments.
At June 30, 2006, there were 66,000 shares available for grant under
the Plan. The per share weighted-average fair value of the stock options granted
on May 15, 2006 was $31.276 per option using the Black-Scholes pricing model
with the following assumptions: expected dividend yield of .64%, risk-free
interest rate of 5.08%, expected volatility of 21.1%, and expected life of 7
years.
The following summarizes activity in the stock option plan since March
31, 2006:
Number Weighted-Average
of shares Exercise Price
--------- ----------------
Balance at March 31, 2006 45,300 $68.411
Granted 50,000 93.490
Exercised (15,500) 70.806
Canceled (24,500) 89.482
------- -------
Balance at June 30, 2006 55,300 81.080
======= =======
At June 30, 2006, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $65.00 to $93.49 and 7.63
years, respectively. The total intrinsic value of options exercised during the
8
Notes to Consolidated Financial Statements
(continued)
three months ended June 30, 2006 was $349,636 with the exercise prices ranging
from $65.00 to $77.00 per share. New shares were issued for the $1,097,500 cash
received from option exercises for the three months ended June 30, 2006.
At June 30, 2006, the number of options exercisable was 14,000 and the
weighted-average exercise price of those options was $67.01.
On July 17, 2006, a stock option to purchase 7,500 shares of common
stock was issued to a new investment associate who joined the company on July
12, 2006.
4. Summary of Per Share Information
Three Months Ended
June 30
------------------
2006 2005
------- ------
Investment income $ .31 $ .28
Operating expenses (.14) (.09)
Interest expense (.04) (.03)
Income taxes -- (.01)
------- ------
Net investment income .13 .15
Distributions from undistributed
net investment income (.20) (.20)
Net realized gain on investments .07 .88
Net increase (decrease) in unrealized appreciation
of investments after deferred taxes (.78) .70
Exercise of employee stock options* (.13) --
Stock option expense -- --
------- ------
Increase (decrease) in net asset value (.91) 1.53
Net asset value:
Beginning of period 102.74 78.44
------- ------
End of period $101.83 $79.97
======= ======
Increase (decrease) in deferred taxes on unrealized
appreciation $ (.74) $ 0.37
Deferred taxes on unrealized appreciation:
Beginning of period 41.65 30.36
------- ------
End of period $ 40.91 $30.73
======= ======
Shares outstanding at end of period
(000s omitted) 3,875 3,857
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
5. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued
Interpretation No. 48 (FIN48), which clarifies the accounting for uncertainty in
income taxes recognized in an entity's financial statements in accordance with
FASB Statement 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. We have evaluated the positions in the tax returns we have filed and
do not believe that FIN 48 will have a material impact on our financial
statements.
The state of Texas recently passed House Bill 3 (HB3), which revises
the existing francise tax system to create a new tax on virtually all Texas
businesses. Starting in the fical year 2007, HB3 changes the franchise tax base,
lowers the tax rate and extends coverage to active businesses receiving state
law liability protection. We have been subject to an immaterial amount of Texas
franchise taxes and expect the HB3 to have some affect, but have not determined
the extent of this impact.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at June 30, 2006 was $394,674,815, equivalent to
$101.83 per share after deducting an allowance of $40.91 per share for deferred
taxes on net unrealized appreciation of investments. Assuming reinvestment of
all dividends and tax credits on retained long-term capital gains, this
represents a decrease of 0.7% during the past three months and an increase of
29.9% during the past twelve months.
June 30, June 30,
2006 2005
------------ ------------
Net assets $394,674,815 $308,437,746
Shares outstanding 3,875,751 3,857,051
Net assets per share $101.83 $79.97
Results of Operations
The composite measure of our financial performance in the Consolidated
Statements of Operations is captioned "Increase (decrease) in net assets from
operations" and consists of three elements. The first is "Net investment
income", which is the difference between our income from interest, dividends and
fees and our combined operating and interest expenses, net of applicable income
taxes. The second element is "Net realized gain on investments", which is the
difference between the proceeds received from disposition of portfolio
securities and their stated cost, net of applicable income tax expense. The
third element is the "Net increase (decrease) in unrealized appreciation of
investments", which is the net change in the market or fair value of our
investment portfolio, compared with stated cost, net of an increase or decrease
in deferred income taxes which would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio. It should be noted that the "Net realized gain on
investments" and "Net increase (decrease) in unrealized appreciation of
investments" are directly related in that when an appreciated portfolio security
is sold to realize a gain, a corresponding decrease in net unrealized
appreciation occurs by transferring the gain associated with the transaction
from being "unrealized" to being "realized". Conversely, when a loss is realized
on a depreciated portfolio security, an increase in net unrealized appreciation
occurs.
Net Investment Income
Interest income of $205,852 in the three months ended June 30, 2006
increased from $141,903 in the year-ago period primarily because of an increase
in interest rates. During the three months ended June 30, 2006 and 2005, we
recorded dividend income from the following sources:
Three Months Ended
June 30
2006 2005
-------- --------
Alamo Group Inc. $169,278 $169,278
Dennis Tool Company 37,499 37,499
Kimberly-Clark Corporation 37,818 34,731
Lifemark Group 150,000 150,000
PalletOne, Inc. 44,921 44,921
The RectorSeal Corporation 240,000 240,000
Sprint Nextel Corporation 2,250 11,250
TCI Holdings, Inc. 20,318 20,318
The Whitmore Manufacturing Company 60,000 60,000
Other 20,482 14,249
-------- --------
$782,566 $782,246
======== ========
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(continued)
Net Increase (Decrease) in Unrealized Appreciation of Investments
Set forth in the following table are the significant increases and
decreases in unrealized appreciation (before the related change in deferred
income taxes and excluding the effect of gains or losses realized during the
periods) by portfolio company:
Three Months Ended
June 30
--------------------------
2006 2005
----------- -----------
Alamo Group Inc. $ -- $(8,463,000)
Encore Wire Corporation 8,174,000 --
Palm Harbor Homes, Inc. (7,855,000) 11,783,000
During the three months ended June 30, 2006, the value of our
investment in Encore Wire Corporation was increased due to an increase in the
company's earnings and its stock price. The value of our investment in Palm
Harbor Homes, Inc. was decreased due to a less favorable outlook in the
manufactured housing industry and a decrease in its stock price. There was no
change in the value of our investment in Alamo Group Inc.
Portfolio Investments
During the quarter ended June 30, 2006, we made no additional
investments.
We have agreed, subject to certain conditions, to invest up to
$7,191,154 in four portfolio companies.
Financial Liquidity and Capital Resources
At June 30, 2006, we had cash and cash equivalents of approximately
$12.9 million (excluding the $150 million quarter-end borrowing). Pursuant to
Small Business Administration (SBA) regulations, cash and cash equivalents of
$0.6 million held by Capital Southwest Venture Corporation (CSVC) may not be
transferred or advanced to us without the consent of the SBA. Under current SBA
regulations and subject to SBA's approval of its credit application, CSVC would
be entitled to borrow up to $69.7 million. We also have an unsecured $25.0
million revolving line of credit from a commercial bank, of which $17.0 million
was available at June 30, 2006. With the exception of a capital gain
distribution made in the form of a distribution of the stock of a portfolio
company in the fiscal year ended March 31, 1996, we have elected to retain all
gains realized during the past 38 years. Retention of future gains is viewed as
an important source of funds to sustain our investment activity. Approximately
$62.9 million of our investment portfolio is represented by unrestricted
publicly-traded securities, and represent a source of liquidity.
On June 30, 2006, we borrowed $150 million from JPMorgan Chase in order
to maintain our tax status as a regulated investment company. On July 3, 2006,
we repaid the $150 miillion note payable to bank from our cash and cash
equivalents.
Funds to be used by us for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Lifemark
Group, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies, to the extent of their available cash reserves
and borrowing capacities.
Management believes that our cash and cash equivalents and cash
available from other sources described above are adequate to meet our expected
requirements. Consistent with our long-term strategy, the disposition of
investments from time to time may also be an important source of funds for
future investment activities.
11
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are subject to financial market risks, including changes in
marketable equity security prices. We do not use derivative financial
instruments to mitigate any of these risks.
Our investment performance is a function of our portfolio companies'
profitability, which may be affected by economic cycles, competitive forces,
foreign currency fluctuations and production costs including labor rates, raw
material prices and certain commodity prices. Most of the companies in our
investment portfolio do not hedge their exposure to raw material and commodity
price fluctuations. However, the portfolio company with the greatest exposure to
foreign currency fluctuations generally hedges its exposure. All of these
factors may have an adverse effect on the value of our investments and on our
net asset value.
Our investment in portfolio securities includes fixed rate debt
securities which totaled $5,933,428 at June 30, 2006, equivalent to 1.1% of the
value of our total investments. Generally these debt securities are below
investment grade and have relatively high fixed rates of interest; therefore,
minor changes in market yields of publicly-traded debt securities have little or
no effect on the values of debt securities in our portfolio and no effect on
interest income. Our investments in debt securities are generally held to
maturity and their fair values are determined on the basis of the terms of the
debt security and the financial condition of the issuer.
A portion of our investment portfolio consists of debt and equity
securities of private companies. We anticipate little or no effect on the values
of these investments from modest changes in public market equity valuations.
Should significant changes in market valuations of comparable publicly-owned
companies occur, there may be a corresponding effect on valuations of private
companies, which would affect the value and the amount and timing of proceeds
eventually realized from these investments. A portion of our investment
portfolio also consists of restricted common stocks of publicly-owned companies.
The fair values of these restricted securities are influenced by the nature of
applicable resale restrictions, the underlying earnings and financial condition
of the issuers of such restricted securities and the market valuations of
comparable publicly-owned companies. A portion of our investment portfolio also
consists of unrestricted, freely marketable common stocks of publicly-owned
companies. These freely marketable investments, which are valued at the public
market price, are directly exposed to equity price risks, in that a change in an
issuer's public market equity price would result in an identical change in the
fair value of our investment in such security.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was
performed under the supervision and with the participation of our management,
including the President and Chairman of the Board and Secretary-Treasurer, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act
of 1934). Based on that evaluation, the President and Chairman of the Board and
Secretary-Treasurer concluded that our disclosure controls and procedures are
effective to ensure that the information required to be disclosed is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and is accumulated and
communicated to management, including the President and Chairman of the Board
and Secretary-Treasurer, as appropriate, to allow timely decisions regarding
such disclosure.
During the fiscal quarter ended June 30, 2006, there were no changes to
the internal controls over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
12
PART II. OTHER INFORMATION
- ---------------------------
Item 1A. Risk Factors
There have been no material changes to our risk factors as disclosed in
Item 1A, "Risk Factors", in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2006.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1- Certification of President and Chairman of the
Board required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
filed herewith.
Exhibit 31.2- Certification of Secretary-Treasurer required by
Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed
herewith.
Exhibit 32.1- Certification of President and Chairman of the
Board required by Rule 13a-14(b) or Rule 15d-14(b) of the
Exchange Act and Section 1350 of Chapter 63 of Title 18 of the
United States Code, furnished herewith.
Exhibit 32.2- Certification of Secretary-Treasurer required by
Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code,
furnished herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
Date: August 4, 2006 By: /s/ William R. Thomas
---------------- -----------------------------------------
William R. Thomas, President and Chairman
of the Board (chief executive officer)
Date: August 4, 2006 By: /s/ Susan K. Hodgson
---------------- -----------------------------------------
Susan K. Hodgson, Secretary-Treasurer
(chief financial/accounting officer)
14
Exhibit 31.1
CERTIFICATIONS
I, William R. Thomas, President and Chairman of the Board of Capital Southwest
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Southwest
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 4, 2006 By: /s/ William R. Thomas
-------------- --------------------------------
William R. Thomas, President and
Chairman of the Board
Exhibit 31.2
CERTIFICATIONS
I, Susan K. Hodgson, Secretary-Treasurer of Capital Southwest Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Capital Southwest
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 4, 2006 By: /s/ Susan K. Hodgson
-------------- -------------------------------------
Susan K. Hodgson, Secretary-Treasurer
Exhibit 32.1
Certification of President and Chairman of the Board
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
I, William R. Thomas, President and Chairman of the Board of Capital
Southwest Corporation, certify that, to my knowledge:
1. the Form 10-Q, filed with the Securities and Exchange Commission on
August 4, 2006 ("accompanied report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the accompanied report fairly presents,
in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: August 4, 2006 By: /s/ William R. Thomas
-------------- --------------------------------
William R. Thomas, President and
Chairman of the Board
Exhibit 32.2
Certification of Secretary-Treasurer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
I, Susan K. Hodgson, Secretary-Treasurer of Capital Southwest
Corporation, certify that, to my knowledge:
1. the Form 10-Q, filed with the Securities and Exchange Commission on
August 4, 2006 ("accompanied report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the accompanied report fairly presents,
in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: August 4, 2006 By: /s/ Susan K. Hodgson
-------------- -------------------------------------
Susan K. Hodgson, Secretary-Treasurer