UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from.....................to.....................
Commission File Number: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
12900 Preston Road, Suite 700, Dallas, Texas
75230
(Address of principal executive offices)
(Zip Code)
(972) 233-8242
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 1, 2003 was $97,852,305, based on the last sale price of
such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of May 15, 2003 was
3,829,051.
Documents Incorporated by Reference Part of Form 10-K
(1) Annual Report to Shareholders for the Year Ended Parts I and II; and
March 31, 2003 Part IV, Item 14(a)(1) and (2)
(2) Proxy Statement for Annual Meeting of Shareholders Part III
to be held July 21, 2003
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business......................................................1
Item 2. Properties....................................................1
Item 3. Legal Proceedings.............................................2
Item 4. Submission of Matters to a Vote of Security Holders...........2
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.........................................2
Item 6. Selected Financial Data.......................................2
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................2
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....2
Item 8. Financial Statements and Supplementary Data...................3
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure....................................3
PART III
Item 10. Directors and Executive Officers of the Registrant............3
Item 11. Executive Compensation........................................4
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................4
Item 13. Certain Relationships and Related Transactions................5
Item 14. Controls and Procedures.......................................5
Item 15. Principal Accountant Fees and Services........................5
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ...............................................5
Signatures ...................................................................6
Certifications..............................................................7-8
Exhibit Index..............................................................9-10
PART I
Item 1. Business
Capital Southwest Corporation (the "Company") was organized as a Texas
corporation on April 19, 1961. Until September 1969, the Company operated as a
licensee under the Small Business Investment Act of 1958. At that time, the
Company transferred to its wholly-owned subsidiary, Capital Southwest Venture
Corporation ("CSVC"), certain of its assets and its license as a small business
investment company ("SBIC"). CSVC is a closed-end, non-diversified investment
company of the management type registered under the Investment Company Act of
1940 (the "1940 Act"). Prior to March 30, 1988, the Company was registered as a
closed-end, non-diversified investment company under the 1940 Act. On that date,
the Company elected to become a business development company subject to the
provisions of Sections 55 through 65 of the 1940 Act, as amended by the Small
Business Incentive Act of 1980.
The Company is a venture capital investment company whose objective is
to achieve capital appreciation through long-term investments in businesses
believed to have favorable growth potential. The Company's investments are
focused on early-stage financings, expansion financings, management buyouts and
recapitalizations in a broad range of industry segments. The portfolio is a
composite of companies in which the Company has major interests as well as a
number of developing companies and marketable securities of established
publicly-owned companies. The Company makes available significant managerial
assistance to the companies in which it invests and believes that providing
material assistance to such investee companies is critical to its business
development activities.
The twelve largest investments of the Company had a combined cost of
$42,715,312 and a value of $251,201,091, representing 87.5% of the value of the
Company's consolidated investment portfolio at March 31, 2003. For a narrative
description of the twelve largest investments, see "Twelve Largest Investments -
March 31, 2003" on pages 8 through 10 of the Company's Annual Report to
Shareholders for the Year Ended March 31, 2003 (the "2003 Annual Report") which
is herein incorporated by reference. Certain of the information presented on the
twelve largest investments has been obtained from the respective companies and,
in certain cases, from public filings of such companies. The financial
information presented on each of the respective companies is from such
companies' financial statements, which in some instances are unaudited.
The Company competes for attractive investment opportunities with
venture capital partnerships and corporations, venture capital affiliates of
industrial and financial companies, SBICs and wealthy individuals.
The number of persons employed by the Company at March 31, 2003 was
seven.
The Company's internet website address is www.capitalsouthwest.com. You
can review the filings Capital Southwest Corporation has made with U.S.
Securities and Exchange Commission ("SEC"), free of charge by linking directly
from our website to NASDAQ, a database that links to EDGAR, the Electronic Data
Gathering, Analysis, and Retrieval System of the SEC. You should be able to
access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Item 2. Properties
The Company maintains its offices at 12900 Preston Road, Suite 700,
Dallas, Texas, 75230, where it rents approximately 3,700 square feet of office
space pursuant to a lease agreement expiring in February 2008. The Company
believes that its offices are adequate to meet its current and expected future
needs.
1
Item 3. Legal Proceedings
The Company has no material pending legal proceedings to which it is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended March 31, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information set forth under the captions "Shareholder Information -
Shareholders, Market Prices and Dividends" on page 33 of the 2003 Annual Report
is herein incorporated by reference.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 32 of the 2003 Annual
Report is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 29 through 31 of the Company's 2003 Annual Report are herein
incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to financial market risks, including changes in
marketable equity security prices. The Company does not use derivative financial
instruments to mitigate any of these risks. The return on the Company's
investments is not materially affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate
debt securities which totaled $3,351,750 at March 31, 2003, equivalent to 1.17%
of the value of the Company's total investments. Since these debt securities
usually have relatively high fixed rates of interest, minor changes in market
yields of publicly-traded debt securities have little or no effect on the values
of debt securities in the Company's portfolio and no effect on interest income.
The Company's 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 the Company's investment portfolio consists of debt and
equity securities of private companies. The Company anticipates 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 would 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 the
Company's investment portfolio also consists of restricted common stocks and
warrants to purchase 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 the Company's 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 the Company's investment in such security.
2
Item 8. Financial Statements and Supplementary Data
Pages 11 through 28 of the Company's 2003 Annual Report are herein
incorporated by reference. See also Item 16 of this Form 10-K - "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".
Selected Quarterly Financial Data (Unaudited)
---------------------------------
The following presents a summary of the unaudited quarterly
consolidated financial information for the years ended March 31, 2003 and 2002.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
2003
- ----
Net investment income $ 475 $ 484 $ 984 $ 356 $ 2,299
Net realized gain (loss) on investments (318) 37 13 1,614 1,346
Net increase (decrease) in unrealized
appreciation of investments (14,528) (32,274) 3,478 (2,048) (45,372)
Net increase (decrease) in net assets from
operations (14,371) (31,754) 4,476 (78) (41,727)
Net increase (decrease) in net assets from
operations per share (3.75) (8.30) 1.17 (0.02) (10.90)
2002
- ----
Net investment income $ 429 $ 383 $ 921 $ 309 $ 2,042
Net realized gain (loss) on investments -- (450) 1,084 (1,172) (538)
Net increase (decrease) in unrealized
appreciation of investments 15,310 (1,139) 7,296 2,707 24,174
Net increase (decrease) in net assets from
operations 15,739 (1,206) 9,301 1,844 25,678
Net increase (decrease) in net assets from
operations per share 4.11 (0.32) 2.43 0.48 6.70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On Form 8-K dated May 9, 2003, the Company reported the dismissal of
KPMG LLP as accountants for the fiscal year ending March 31, 2004 and the
appointment of Ernst & Young LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Proposal 1: Election of
Directors" in the Company's definitive Proxy Statement for Annual Meeting of
Shareholders to be held July 21, 2003, filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, on or about June 6, 2003 (the "2003 Proxy
Statement") is herein incorporated by reference.
Executive Officers of the Registrant
The officers of the Company, together with the offices in the Company
presently held by them, their business experience during the last five years and
their ages are as follows:
William M. Ashbaugh, age 48, has served as Vice President of the Company
since 2001. He previously served as Managing Director in the corporate
finance departments of Hoak Breedlove Wesneski & Co. from 1998 to 2001,
Principal Financial Securities from 1997 to 1998 and Southwest
Securities from 1995 to 1997.
3
Patrick F. Hamner, age 47, has served as Vice President of the Company
since 1986 and was an investment associate with the Company from 1982
to 1986.
Susan K. Hodgson, age 41, has served as Secretary-Treasurer of the Company
since 2001 and was the Controller of the Company from 1994.
Gary L. Martin, age 56, has been a director of the Company since July 1988
and has served as Vice President of the Company since 1984. He
previously served as Vice President of the Company from 1978 to 1980.
Since 1980, Mr. Martin has served as President of The Whitmore
Manufacturing Company, a wholly-owned portfolio company.
William R. Thomas, age 74, has served as Chairman of the Board of Directors
of the Company since 1982 and President of the Company since 1980. In
addition, he has been a director of the Company since 1972 and was
previously Senior Vice President of the Company from 1969 to 1980.
No family relationship exists between any of the above-listed officers,
and there are no arrangements or understandings between any of them and any
other person pursuant to which they were selected as an officer. All officers
are elected to hold office for one year, subject to earlier termination by the
Company's board of directors.
Item 11. Executive Compensation
The information set forth under the caption "Compensation of Directors
and Executive Officers" in the 2003 Proxy Statement is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth under the captions "Stock Ownership of
Certain Beneficial Owners" and "Proposal 1: Election of Directors" in the 2003
Proxy Statement is herein incorporated by reference.
The table below sets forth certain information as of March 31, 2003
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our stockholders, and (ii) were not
approved by our stockholders.
Equity Compensation Plan Information
Number of Securities
Number of Securities Remaining Available For
To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity
Plan Category Exercise of Price Of Outstanding Compensation Plans
- ------------- Outstanding Options, Options, (excluding securities reflected
Warrants And Rights Warrants And Rights in column (a)
------------------- ------------------- -------------
(a) (b) (c)
--- --- ---
Equity 82,500 $58.336 85,500
compensation plans
approved by security
holders(1)
Equity - - -
compensation plans
not approved by
security holders
-------- -------- --------
Total 82,500 $58.336 85,500
- ---------
(1) Includes the 1984 Incentive Stock Option Plan and the 1999 Stock Option
Plan. For a description of these plans, please refer to Footnote 6
contained in our consolidated financial statements.
4
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this
item during the fiscal year ended March 31, 2003 or proposed for the fiscal year
ending March 31, 2004.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our President and Chairman of the Board and Secretary-Treasurer have
reviewed and evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c) as
of a date within 90 days before the filing date of this annual report. Based on
that evaluation, the President and Chairman of the Board and Secretary-Treasurer
have concluded that the Company's current disclosure controls and procedures are
effective and timely, providing all material information relating to the Company
required to be disclosed in reports filed or submitted under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. We are not aware of any significant
deficiencies or material weaknesses, therefore no corrective actions were taken.
Item 15. Principal Accountant Fees and Services
The information set forth under the caption "Audit and Other Fees" and
"Proposal 2: Ratification of Appointment of Independent Auditors" in the 2003
Proxy Statement is herein incorporated by reference.
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements included in pages 11 through 28
of the Company's 2003 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 2003
Consolidated Statements of Financial Condition - March 31, 2003
and 2002
Consolidated Statements of Operations - Years Ended March 31, 2003,
2002 and 2001
Consolidated Statements of Changes in Net Assets - Years Ended
March 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years Ended March 31, 2003,
2002 and 2001
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Independent Auditors' Report
(F) Portfolio Changes During the Year
(a)(2) All schedules are omitted because they are not applicable or not
required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index on page 9.
(b) The Company filed no reports on Form 8-K during the three months ended
March 31, 2003.
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
By: /s/ William R. Thomas
-----------------------------
William R. Thomas, President
and Chairman of the Board
Date: June 13, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ William R. Thomas
- ------------------------ President and Chairman June 13, 2003
William R. Thomas of the Board and Director
(chief executive officer)
/s/ Gary L. Martin
- ------------------------ Director June 13, 2003
Gary L. Martin
/s/ Graeme W. Henderson
- ------------------------ Director June 13, 2003
Graeme W. Henderson
/s/ James M. Nolan
- ------------------------ Director June 13, 2003
James M. Nolan
/s/ John H. Wilson
- ------------------------ Director June 13, 2003
John H. Wilson
/s/ Susan K. Hodgson
- ------------------------ Secretary-Treasurer June 13, 2003
Susan K. Hodgson (chief financial/accounting officer)
6
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, William R. Thomas, President and Chairman of the Board of the Company,
certify that:
1. I have reviewed this annual report on Form 10-K of Capital Southwest
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the consolidated financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual 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-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could aversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 13, 2003 By: /s/ William R. Thomas
------------- -----------------------------
William R. Thomas, President
and Chairman of the Board
7
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Susan K. Hodgson, Secretary-Treasurer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Capital Southwest
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the consolidated financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual 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-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could aversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 13, 2003 By: /s/ Susan K. Hodgson
------------- -------------------------------------
Susan K. Hodgson, Secretary-Treasurer
8
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with this
report.)
Exhibit No. Description
----------- -----------
3.1(a) Articles of Incorporation and Articles of Amendment
to Articles of Incorporation, dated June 25, 1969
(filed as Exhibit 1(a) and 1(b) to Amendment No. 3 to
Form N-2 for the fiscal year ended March 31, 1979).
3.1(b) Articles of Amendment to Articles of Incorporation,
dated July 20, 1987 (filed as an exhibit to Form
N-SAR for the six month period ended September 30,
1987).
3.2 By-Laws of the Company, as amended (filed as Exhibit
2 to Amendment No. 11 to Form N-2 for the fiscal year
ended March 31, 1987).
4.1 Specimen of Common Stock certificate (filed as
Exhibit 4.1 to Form 10-K for the fiscal year ended
March 31, 2002).
10.1 The RectorSeal Corporation and Jet-Lube, Inc.
Employee Stock Ownership Plan as revised and restated
effective April 1, 1998 (filed as Exhibit 10.1 to
Form 10-K for the fiscal year ended March 31, 2002).
10.2 Amendment No. I to The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan as
revised and restated effective April 1, 1998 (filed
as Exhibit 10.2 to Form 10-K for the fiscal year
ended March 31, 2002).
10.3* Amendment No. 2 to The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan as
revised and restated effective April 1, 1998.
10.4 Retirement Plan for Employees of Capital Southwest
Corporation and Its Affiliates as amended and
restated effective April 1, 1989 (filed as Exhibit
10.3 to Form 10-K for the fiscal year ended March 31,
1995).
10.5 Amendments One and Two to Retirement Plan for
Employees of Capital Southwest Corporation and Its
Affiliates as amended and restated effective April 1,
1989 (filed as Exhibit 10.4 to Form 10-K for the
fiscal year ended March 31, 1998).
10.6 Amendment Three to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989 (filed
as Exhibit 10.5 to Form 10-K for the fiscal year
ended March 31, 2002).
9
10.7* Amendment Four to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989.
10.8* Amendment Five to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989.
10.9* Amendment Six to Retirement Plan for Employees of
Capital Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989.
10.10 Capital Southwest Corporation and Its Affiliates
Restoration of Retirement Income Plan for certain
highly-compensated superseded plan participants
effective April 1, 1993 (filed as Exhibit 10.4 to
Form 10-K for the fiscal year ended March 31, 1995).
10.11 Amendment One to Capital Southwest Corporation and
Its Affiliates Restoration of Retirement Income Plan
for certain highly-compensated superceded plan
participants effective April 1, 1993 (filed as
Exhibit 10.6 to Form 10-K for the fiscal year ended
March 31, 1998).
10.12 Capital Southwest Corporation Retirement Income
Restoration Plan as amended and restated effective
April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for
the fiscal year ended March 31, 1995).
10.13 Form of Indemnification Agreement which has been
established with all directors and executive officers
of the Company (filed as Exhibit 10.9 to Form 8-K
dated February 10, 1994).
10.14 Capital Southwest Corporation 1984 Incentive Stock
Option Plan as amended and restated as of April 20,
1987 (filed as Exhibit 10.10 to Form 10-K for the
fiscal year ended March 31, 1990).
10.15 Capital Southwest Corporation 1999 Stock Option Plan
(filed as Exhibit 10.10 to Form 10-K for the fiscal
year ended March 31, 2000).
13.1* Annual Report to Shareholders for the fiscal year
ended March 31, 2003.
16.1 Letter Regarding Change of Certifying Accountant
(incorporated by reference to Exhibit 16 to Form 8-K
filed on May 9, 2003).
21.1 List of subsidiaries of the Company (filed as exhibit
21 to Form 10-K for the fiscal year ended March 31,
1998).
23.1* Independent Auditors' Consent.
99.1* Certificate Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the President and Chairman of the
Board of the Corporation.
99.2* Certificate Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Secretary-Treasurer of the
Corporation.
10
Exhibit 10.3
AMENDMENT NO. 2
TO
THE RECTORSEAL CORPORATION AND JET-LUBE, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Revised and Restated Effective April 1, 1998)
THIS AMENDMENT NO. 2, executed this __ day of November, 2002, and effective
as of the dates specified herein, by The RectorSeal Corporation, a Delaware
corporation, having its principal office in Houston, Texas (hereinafter referred
to as the "Company").
W I T N E S S E T H:
WHEREAS, the Company revised and restated The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan (the "Plan") effective April 1,
1998, except for certain provisions for which another effective date was
subsequently provided elsewhere in the terms of the Plan, to (i) incorporate the
prior amendment to the Plan and (ii) bring the Plan into compliance with the
Internal Revenue Code of 1986, as amended (the "Code"), as modified by the Small
Business Job Protection Act of 1996, the General Agreement on Tariffs and Trade
under the Uruguay Round Agreements Act, the Uniformed Services Employment and
Reemployment Rights Act of 1994, the Taxpayer Relief Act of 1997, the Internal
Revenue Service Restructuring and Reform Act of 1998, and the Community Renewal
Tax Relief Act of 2000, as well as all applicable rules, regulations and
administrative pronouncements enacted, promulgated or issued since the date the
Plan was last restated;
WHEREAS, the Company adopted Amendment No. 1 to the revised and restated
Plan, effective as of April 1, 2002, except as specifically provided otherwise
in Amendment No. 1, to (i) reflect certain provisions of the Economic Growth and
Tax Relief Reconciliation Act of 2001 ("EGTRRA") which generally became
applicable to the Plan effective as of April 1, 2002, and (ii) constitute good
faith compliance with the requirements of EGTRRA;
WHEREAS, final Treasury regulations were issued April 17, 2002 under
section 401(a)(9) of the Code relating to distributions under Section 11.4 of
the Plan (the "Final Distribution Regulations");
WHEREAS, the Pension and Welfare Benefits Administration of the Department
of Labor issued final regulations establishing new standards for processing
benefit claims of participants and beneficiaries under Section 11.6 of the Plan
which have been clarified by further guidance from the Pension and Welfare
Benefits Administration (collectively the "Final Claims Procedure Regulations");
and
WHEREAS, the Company now desires to adopt this Amendment No. 2 to (i)
revise Section 11.4 of the Plan, effective January 1, 2003, to reflect the Final
Distribution Regulations consistent with the Model Amendment provided by the
Internal Revenue Service in Rev. Proc. 2002-29, and (ii) revise Section 11.6 of
the Plan, effective April 1, 2002, to provide that the administrator of the Plan
shall process benefit claims of participants and beneficiaries pursuant to the
1
claims procedure specified in the summary plan description for the Plan which
shall comply with the Final Claims Procedure Regulations, as may be amended from
time to time;
NOW, THEREFORE, in consideration of the premises and the covenants herein
contained, the Company hereby adopts the following Amendment No. 2 to the Plan:
1. Section 11.4 of the Plan is hereby amended in its entirety, effective
January 1, 2003, to read as follows:
Sec. 11.4 Additional Requirements Relating to Benefit Payments and Death
Distributions. Notwithstanding any other provisions of the Plan, the following
provisions shall be applicable to the Plan for calendar years beginning with the
2003 calendar year:
(a) General Distribution Deadline. Distribution of benefits shall be made,
unless the Participant otherwise elects, not later than the 60th day after
the last day of the Year in which the latest of the following events
occurs:
(i) the Participant reaches the earlier of age 65 or his Normal
Retirement Date;
(ii) the tenth anniversary of the date on which the Participant
commenced participation in the Plan occurs, but not later than the
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2 if such Participant is a Five-Percent
Owner; or
(iii) the date the Participant's employment with his Employer and all
Affiliated Companies terminates, but in no event later than the April
1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2 if such Participant is a Five-Percent
Owner.
If a Participant is entitled to receive a distribution of all or a portion
of his Individual Account pursuant to Article VII, VIII, IX or X, he may
elect to defer the date of distribution of that amount, but not beyond his
Required Beginning Date. If the Participant fails to consent to a
distribution at a time when any part of the balance of the Individual
Account could be distributed prior to the Participant's Normal Retirement
Date, such failure shall be deemed to be an election to defer the date of
distribution of any benefit under this Section 11.4(a); provided that in no
event shall he receive distribution of the vested portion of his Individual
Account later than his Required Beginning Date.
2
(b) Required Compliance with Code and Treasury Regulations. All
distributions required under this Article XI shall be determined and made
in accordance with Section 401(a)(9) of the Code and the Treasury
regulations thereunder.
(c) Time and Manner of Distribution.
(i) Required Beginning Date and Election to Defer Distribution Date.
The Participant's entire Individual Account shall be distributed to
the Participant no later than the Participant's Required Beginning
Date. An election of a Participant to defer the distribution date
shall be made by submitting to the Administrator a written statement
signed by the Participant describing the benefits and the date on
which the Participant requests that the distribution of his benefits
be made; provided, however, a Participant may not elect to defer
receipt of benefits beyond his Required Beginning Date.
(ii) Death of Participant Before Distribution to Him. If the
Participant dies before distribution to him of his entire Individual
Account under Section 11.1, the Participant's entire Individual
Account shall be distributed no later than as follows:
(A) If the Participant's surviving spouse is the Participant's
sole Designated Beneficiary, then, except as elected by the
surviving spouse as provided below, distribution to the surviving
spouse shall be made by December 31 of the calendar year
immediately following the calendar year in which the Participant
died, or by December 31 of the calendar year in which the
Participant would have attained age 70 1/2, if later.
(B) If the Participant's surviving spouse is not the
Participant's sole Designated Beneficiary, then, except as
provided below, distribution to the Designated Beneficiary shall
be made by December 31 of the calendar year immediately following
the calendar year in which the Participant died.
(C) If there is no Designated Beneficiary of the Participant as
of September 30 of the year following the year of the
Participant's death, the Participant's entire Individual Account
shall be distributed by December 31 of the calendar year
containing the fifth anniversary of the Participant's death.
(D) If the Participant's surviving spouse is the Participant's
sole Designated Beneficiary and the surviving spouse dies after
the Participant but before distribution to the surviving spouse
has been made, this Section 11.4(c)(ii), other than Section
11.4(c)(ii)(A), shall apply as if the surviving spouse were the
Participant.
3
If the Participant dies before distribution to him of his entire Individual
Account and there is a Designated Beneficiary, distribution to the
Designated Beneficiary is not required to be made by the date specified
above in this Section 11.4(c)(ii), but the Participant's entire Individual
Account shall be distributed to the Designated Beneficiary by December 31
of the calendar year containing the fifth anniversary of the Participant's
death. If the Participant's surviving spouse is the Participant's
Designated Beneficiary, the surviving spouse may elect to apply the
distribution requirement of Section 11.4(c)(ii) without regard to the prior
sentence. If the Participant's surviving spouse is the Participant's sole
Designated Beneficiary and the surviving spouse dies after the Participant
but before distribution to either the Participant or the surviving spouse
has been made, this election shall apply as if the surviving spouse were
the Participant. For purposes of this Section 11.4(c)(ii), unless Section
11.4(c)(ii)(D) applies, distributions are considered to be made on the
Participant's Required Beginning Date. If Section 11.4(c)(ii)(D) applies,
distributions are considered to be made on the date distributions are
required to be made to the surviving spouse under Section 11.4(c)(ii)(A).
(d) Definitions. For purposes of this Section 11.4, the following terms
shall have the meanings set forth below:
(i) "Designated Beneficiary" means the individual who is designated as
the Beneficiary under Section 1.7 and is the designated beneficiary
under Section 401(a)(9) of the Code and Treas. Reg. ss.1.401(a)(9)-1,
Q&A-4.
(ii) "Five-Percent Owner" means a Participant who is a five-percent
owner of the Company within the meaning of Section 416(i)(1)(B)(i) of
the Code (determined in accordance with Section 416 of the Code but
without regard to whether the Plan is top heavy) at any time during
the Year ending with or within the calendar year in which such owner
attains age 70 1/2 or any subsequent Year.
(iii) "Required Beginning Date" of a Participant means the date
determined as follows:
(A) if the Participant is not a Five-Percent Owner and has not
attained age 70 1/2 prior to April 1, 2002, his Required
Beginning Date is the April 1 of the calendar year following the
later of (1) the calendar year in which the Participant attains
age 70 1/2 or (2) the calendar year in which the Participant
retires; or
(B) if the Participant is a Five Percent-Owner, or if the
Participant has attained age 70 1/2 prior to April 1, 2002, his
Required Beginning Date is the April 1 of the calendar year
following the calendar year in which the Participant attains age
70 1/2 even if he has not retired.
4
2. Section 11.6 of the Plan is hereby amended in its entirety to read as
follows:
Sec. 11.6 Claims Procedure. The Administrator shall process all benefit
claims of Participants, Former Participants and Beneficiaries pursuant to the
claims procedure specified in the summary plan description for the Plan and
shall act in a manner which is consistent with regulations published from time
to time by the Department of Labor.
IN WITNESS WHEREOF, the Company, acting by and through its duly authorized
officers, has caused this Amendment No. 2 to be executed as of the day and year
first above written.
THE RECTORSEAL CORPORATION
By:
-----------------------
COMPANY
5
Exhibit 10.7
AMENDMENT FOUR TO
RETIREMENT PLAN FOR EMPLOYEES OF
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
As Amended and Restated Effective April 1, 1989
WHEREAS, effective as of April 1, 1989, the Retirement Plan for Employees
of Capital Southwest Corporation and Its Affiliates (the "Plan") was amended and
restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the Plan, the Plan may be amended;
and
WHEREAS, it is necessary that certain technical amendments be made to the
Plan in order to comply with the Economic Growth and Tax Relief Reconciliation
Act of 2001, to adopt the 1994 GAR mortality table for purposes of complying
with section 417(e)(3) and section 415(b) of the Internal Revenue Code, to
eliminate the description of claims procedures from the plan document, and to
include "deemed section 125 compensation" in the definition of compensation for
purposes of benefit accrual and complying with section 415 of the Internal
Revenue Code;
NOW, THEREFORE, the Plan is hereby amended, effective as of the dates
specified below, as follows:
EXCEPT AS QUALIFIED BY THE CONTEXT OR OTHERWISE INDICATED, THE TERMS USED IN
THIS AMENDMENT FOUR SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE PLAN.
1. Effective as of the dates specified below, the Plan is amended to
incorporate the following provisions under Internal Revenue Notice 2001-57 in
compliance with the requirement to adopt good faith EGTRRA plan amendments:
AMENDMENT OF THE PLAN FOR EGTRRA
PREAMBLE
1. Adoption and Effective Date of Amendment. This amendment of the
Plan is adopted to reflect certain provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This
amendment is intended as good faith compliance with the
requirements of EGTRRA and is to be construed in accordance with
EGTRRA and guidance issued thereunder. Except as otherwise
1
provided, this amendment shall be effective as of the first day
of the first Plan Year beginning after December 31, 2001.
2. Supersession of Inconsistent Provisions. This amendment shall
supersede the provisions of the Plan to the extent those
provisions are inconsistent with the provisions of this
amendment.
3. Definition of "Code." When used herein, the term "Code" shall
mean the Internal Revenue Code of 1986, as amended.
4. Expiration of Amendment. Notwithstanding any provision hereof to
the contrary, this amendment of the Plan to reflect certain
provisions of EGTRRA shall expire and cease to be effective after
December 31, 2010, unless such provisions of EGTRRA are extended
by law.
SECTION A. LIMITATIONS ON BENEFITS
1. Effective Date. This section shall be effective for limitation
years ending after December 31, 2001.
2. Effect on Participants. Benefit increases resulting from the
increase in the limitations of section 415(b) of the Code will be
provided to all Employees participating in the Plan who have one
hour of service on or after the first day of the first limitation
year ending after December 31, 2001.
3. Definitions.
3.1 Defined Benefit Dollar Limitation. The "defined benefit dollar
limitation" is $160,000, as adjusted, effective January 1 of each
year, under section 415(d) of the Code in such manner as the
Secretary shall prescribe, and payable in the form of a straight
life annuity. A limitation as adjusted under section 415(d) will
apply to limitation years ending with or within the calendar year
for which the adjustment applies.
3.2 Maximum Permissible Benefit. The "maximum permissible benefit" is
the lesser of the defined benefit dollar limitation or the
defined benefit compensation limitation (both adjusted where
required, as provided in (a) and, if applicable, in (b) or (c)
below).
(a) If the Participant has fewer than 10 years of participation
in the Plan, the defined benefit dollar limitation shall be
multiplied by a fraction, (i) the numerator of which is the
number of years (or part thereof) of participation in the
Plan and (ii) the denominator of which is 10. In the case of
a Participant who has fewer than 10 years of service with
Controlled Group Members, the defined benefit compensation
limitation shall be multiplied by a fraction, (i) the
numerator of which is the number of years (or part thereof)
of service with the Controlled Group Members and (ii) the
denominator of which is 10.
2
(b) If the benefit of a Participant begins prior to age 62, the
defined benefit dollar limitation applicable to the
Participant at such earlier age is an annual benefit payable
in the form of a straight life annuity beginning at the
earlier age that is the actuarial equivalent of the defined
benefit dollar limitation applicable to the Participant at
age 62 (adjusted under (a) above, if required). The defined
benefit dollar limitation applicable at an age prior to age
62 is determined as the lesser of (i) the actuarial
equivalent (at such age) of the defined benefit dollar
limitation computed using the interest rate and mortality
table (or other tabular factor) specified in Section
1.1(B)(1) of the Plan and (ii) the actuarial equivalent (at
such age) of the defined benefit dollar limitation computed
using a 5 percent interest rate and the applicable mortality
table as defined in Section 4.1(A)(2) of the Plan. Any
decrease in the defined benefit dollar limitation determined
in accordance with this paragraph (b) shall not reflect a
mortality decrement if benefits are not forfeited upon the
death of the Participant. If any benefits are forfeited upon
death, the full mortality decrement is taken into account.
(c) If the benefit of a Participant begins after the Participant
attains age 65, the defined benefit dollar limitation
applicable to the Participant at the later age is the annual
benefit payable in the form of a straight life annuity
beginning at the later age that is actuarially equivalent to
the defined benefit dollar limitation applicable to the
Participant at age 65 (adjusted under (a) above, if
required). The actuarial equivalent of the defined benefit
dollar limitation applicable at an age after age 65 is
determined as (i) the lesser of the actuarial equivalent (at
such age) of the defined benefit dollar limitation computed
using the interest rate and mortality table (or other
tabular factor) specified in Section 1.1(B)(1) of the Plan
and (ii) the actuarial equivalent (at such age) of the
defined benefit dollar limitation computed using a 5 percent
interest rate assumption and the applicable mortality table
as defined in Section 4.1(A)(2) of the Plan. For these
purposes, mortality between age 65 and the age at which
benefits commence shall be ignored.
(d) For purposes of applying the compensation limit under
section 415(b)(1)(B) of the Code to the Plan, a
multiemployer plan to which a Controlled Group Member
contributes shall not be combined or aggregated with the
Plan.
3
SECTION B. INCREASE IN COMPENSATION LIMIT
1. Increase in Limit. The annual Compensation of each
Participant taken into account in determining benefit
accruals in any Plan Year beginning after December 31, 2001,
shall not exceed $200,000. Annual Compensation means
Compensation during the Plan Year or such other consecutive
12-month period over which Compensation is otherwise
determined under the Plan (the determination period). For
purposes of determining benefit accruals in a Plan Year
beginning after December 31, 2001, Compensation for
determination periods beginning before January 1, 2002,
shall be $200,000.
2. Cost-of-living Adjustment. The $200,000 limit on annual
Compensation in paragraph 1 shall be adjusted for
cost-of-living increases in accordance with section
401(a)(17)(B) of the Code. The cost-of-living adjustment in
effect for a calendar year applies to annual Compensation
for the determination period that begins with or within such
calendar year.
SECTION C. MODIFICATION OF TOP-HEAVY RULES
1. Effective Date. This section shall apply for purposes of
determining whether the Plan is a top-heavy plan under
section 416(g) of the Code for Plan Years beginning after
December 31, 2001, and whether the Plan satisfies the
minimum benefits requirements of section 416(c) of the Code
for such years. This section amends Section 4.6 of the Plan.
2. Determination of Top-heavy Status.
2.1 Key Employee. Key employee means any Employee or former
Employee (including any deceased Employee) who at any time
during the Plan Year that includes the determination date
was an officer of a Controlled Group Member having annual
compensation greater than $130,000 (as adjusted under
section 416(i)(1) of the Code for Plan Years beginning after
December 31, 2002), a 5-percent owner of a Controlled Group
Member, or a 1-percent owner of a Controlled Group Member
having annual compensation of more than $150,000. For this
purpose, annual compensation means compensation within the
meaning of section 415(c)(3) of the Code. The determination
of who is a key employee will be made in accordance with
section 416(i)(1) of the Code and the applicable regulations
and other guidance of general applicability issued
thereunder.
2.2 Determination of Present Values and Amounts. This section
2.2 shall apply for purposes of determining the present
values of accrued benefits and the amounts of account
balances of employees as of the determination date.
2.2.1Distributions During Year Ending on the Determination Date.
The present values of accrued benefits and the amounts of
account balances of an employee as of the determination date
shall be increased by the distributions made with respect to
the employee under the Plan and any plan aggregated with the
Plan under section 416(g)(2) of the Code during the 1-year
period ending on the determination date. The preceding
sentence shall also apply to distributions under a
terminated plan which, had it not been terminated, would
have been aggregated with the Plan under section
416(g)(2)(A)(i) of the Code. In the case of a distribution
made for a reason other than separation from service, death,
or disability, this provision shall be applied by
substituting "5-year period" for "1-year period."
2.2.2Employees Not Performing Services During Year Ending on the
Determination Date. The accrued benefits and accounts of any
individual who has not performed services for a Controlled
Group Member during the 1-year period ending on the
determination date shall not be taken into account.
4
3. Minimum Benefits. For purposes of satisfying the minimum
benefit requirements of section 416(c)(1) of the Code and
the Plan, in determining years of service with a Controlled
Group Member, any service with a Controlled Group Member
shall be disregarded to the extent that such service occurs
during a Plan Year when the Plan benefits (within the
meaning of section 410(b) of the Code) no key employee or
former key employee.
SECTION D. DIRECT ROLLOVERS OF PLAN DISTRIBUTIONS
1. Effective Date. This section shall apply to distributions
made after December 31, 2001.
2. Modification of Definition of Eligible Retirement Plan. For
purposes of the direct rollover provisions in Section 4.1(I)
of the Plan, an eligible retirement plan shall also mean an
annuity contract described in section 403(b) of the Code and
an eligible plan under section 457(b) of the Code which is
maintained by a state, political subdivision of a state, or
any agency or instrumentality of a state or political
subdivision of a state and which agrees to separately
account for amounts transferred into such plan from this
Plan. The definition of eligible retirement plan shall also
apply in the case of a distribution to a surviving spouse,
or to a spouse or former spouse who is the alternate payee
under a qualified domestic relation order, as defined in
section 414(p) of the Code.
5
2. Effective as of December 31, 2002, the Plan is amended to incorporate
the following provisions to comply with section 415 and section 417(e) of the
Internal Revenue Code, as required under Rev. Rul. 2001-62:
ADOPTION OF 1994 GAR MORTALITY TABLE
1. Effective Date. This section shall apply to distributions
with Annuity Starting Dates on or after December 31, 2002.
2. Notwithstanding any other Plan provisions to the contrary,
the applicable mortality table used for purposes of
adjusting any benefit or limitation under ss. 415(b)(2)(B),
(C), or (D) of the Internal Revenue Code as set forth in
Section 4.1(A) of the Plan and the applicable mortality
table used for purposes of satisfying the requirements of
ss. 417(e) of the Internal Revenue Code as set forth in
Section 1.1(B)(2) of the Plan is the table prescribed in
Rev. Rul. 2001-62.
3. Effective as of January 1, 2002, Section 5.11 of the Plan is amended to
read in its entirety as follows:
"5.11 - APPEAL TO COMMITTEE
A Participant or Beneficiary who feels he is being denied
any benefit or right provided under the Plan must file a written
claim with the Committee. All such claims shall be submitted on a
form provided by the Committee which shall be signed by the
claimant and shall be considered filed on the date the claim is
received by the Committee.
The Committee shall establish claims procedures in
compliance with applicable law, and such claims procedures shall
be set forth in the summary plan description for the Plan."
4. Effective as of January 1, 1998, the Plan is amended to incorporate the
following provisions to comply with Rev. Rul. 2002-27 concerning "deemed section
125 compensation":
INCLUSION OF "DEEMED SECTION 125 COMPENSATION"
1. Effective Date. This section shall apply to plan years and
limitation years beginning on and after January 1, 1998.
2. For purposes of the definition of compensation under Section
1.1(A)(6) and Section 4.1(A)(4)(b) of the plan, amounts
6
under section 125 include any amounts not available to a
participant in cash in lieu of group health coverage because
the participant is unable to certify that he or she has
other health coverage. An amount will be treated as an
amount under section 125 only if the Employer does not
request or collect information regarding the participant's
other health coverage as part of the enrollment process for
the health plan.
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this ____ day of
__________________, 20___.
CAPITAL SOUTHWEST CORPORATION
By___________________________
Title:_______________________
7
Exhibit 10.8
AMENDMENT FIVE TO
RETIREMENT PLAN FOR EMPLOYEES OF
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
As Amended and Restated Effective April 1, 1989
WHEREAS, effective as of April 1, 1989, the Retirement Plan for Employees
of Capital Southwest Corporation and Its Affiliates (the "Plan") was amended and
restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the amended and restated Plan, said
Plan may be amended by Capital Southwest Corporation (the "Sponsoring
Employer");
WHEREAS, the Sponsoring Employer has determined that the Plan shall be
amended to reduce the amount of bonus to be included in compensation for
purposes of computing final average monthly compensation; and
WHEREAS, the Board of Directors of the Sponsoring Employer has approved and
adopted this Amendment Five to the Plan;
NOW, THEREFORE, the last paragraph of Section 1.1(A)(15) of the Plan is
hereby amended, effective as of January 1, 2003, to read in its entirety as
follows:
"Notwithstanding any provision of this Section 1.1(A)(15) to the contrary,
for purposes of determining a Participant's average monthly rate of
Compensation on or after April 1, 1998, the Participant's Compensation for
a calendar year shall not include the portion of any bonus or aggregated
bonuses paid in such calendar year which exceeds (a) 40% of the
Participant's total base pay in the calendar year, for years prior to 2003,
and (b) 25% of the Participant's total base pay in the calendar year, for
years after 2002. Provided, however, that the Participant's retirement
benefits under the Plan on and after January 1, 2003 shall not be less than
the Accrued Deferred Monthly Retirement Income Commencing at Normal
Retirement Date that the Participant has accrued as of December 31, 2002
using 'Final Average Monthly Compensation' determined as of such date
without regard to clause (b) of the preceding sentence."
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this ____ day of
________________, 2002, to be effective January 1, 2003.
CAPITAL SOUTHWEST CORPORATION
By___________________________
Title:_______________________
Exhibit 10.9
AMENDMENT SIX TO
RETIREMENT PLAN FOR EMPLOYEES OF
CAPITAL SOUTHWEST CORPORATION AND ITS AFFILIATES
As Amended and Restated Effective April 1, 1989
WHEREAS, effective as of April 1, 1989, the Retirement Plan for Employees
of Capital Southwest Corporation and Its Affiliates (the "Plan") was amended and
restated in its entirety;
WHEREAS, by the terms of Section 6.4 of the Plan, the Plan may be amended;
and
WHEREAS, it is necessary that certain technical amendments be made to the
Plan in order to obtain approval of the Internal Revenue Code for the continued
qualification of the Plan;
NOW, THEREFORE, the Plan is hereby amended, effective as of the dates
specified below, as follows:
1. Effective as of April 1, 1997, Section 1.6 is amended to read in its
entirety as follows:
"1.6 - PARTICIPATION AND BENEFITS FOR FORMER LEASED EMPLOYEES
A "Leased Employee" as defined under Section 414(n) of the Internal
Revenue Code is any person (other than an employee of the recipient) who
pursuant to an agreement between the recipient and any other person
("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Internal
Revenue Code Section 414(n)(6)) on a substantially full-time basis for a
period of at least 1 year, and such services are performed under the
recipient's primary direction or control. Any such Leased Employee of an
Employer or Designated Nonparticipating Employer shall not be deemed for
any purposes of the Plan to be an employee of such Employer or Designated
Nonparticipating Employer. However, in the event that any such former
Leased Employee qualifies as an Employee as defined herein on or after the
Effective Date of the Plan, unless the Plan is otherwise excluded by
applicable regulations from the requirements of Section 414(n) of the
Internal Revenue Code, the total period that he provided services to the
Employer or Designated Nonparticipating Employer as a Leased Employee shall
be treated under the Plan in determining his nonforfeitable right to his
accrued benefits and his eligibility to become a Participant in the Plan in
the manner described in Section 1.5(A) hereof as though he had been an
employee of a Designated Nonparticipating Employer during such period of
service (but such service shall not be included in the service that is used
to calculate any benefits that he accrues under the Plan)."
1
2. Effective as of January 1, 1995, the first sentence of Section 4.1(A)(2)
of the Plan is amended to read as follows:
"The mortality assumptions that are used to compute the actuarially
equivalent maximum amount of retirement income permitted under this Section
4.1(A) on and after January 1, 1995 shall be based upon the mortality table
prescribed by the Secretary of Treasury pursuant to Section 415(b)(2(E) of
the Internal Revenue Code (which as of January 1, 1995 is based upon a
fixed blend of 50% of the male mortality rates and 50% of the female
mortality rates from the 1983 Group Annuity Mortality Table)."
IN WITNESS WHEREOF, CAPITAL SOUTHWEST CORPORATION has caused this
instrument to be executed by its duly authorized officer on this ____ day of
________________, 20___.
CAPITAL SOUTHWEST CORPORATION
By___________________________
Title:_______________________
2
EXHIBIT 13.1
Twelve Largest Investments - March 31, 2003
================================================================================
Palm Harbor Homes, Inc. $70,696,000
- --------------------------------------------------------------------------------
Palm Harbor Homes, Dallas, Texas, is an integrated manufacturer and
retailer of manufactured and modular housing produced in 19 plants and sold in
29 states by 153 company-owned retail stores and over 100 independent dealers.
The company provides financing through its subsidiary, CountryPlace Mortgage,
and through its jointly-owned mortgage banking company, BSM Financial, and sells
insurance through its subsidiary, Standard Casualty. Palm Harbor's high-quality
homes are designed to meet the need for attractive, affordable housing.
During the year ended March 28, 2003, Palm Harbor earned $3,221,000 ($0.14
per share) on net sales of $573,130,000, compared with earnings of $19,448,000
($0.85 per share) on net sales of $627,380,000 in the previous year. The March
31, 2003 closing Nasdaq bid price of Palm Harbor's common stock was $14.19 per
share.
At March 31, 2003, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $70,696,000 ($9.00 per share),
consisting of 7,855,121 restricted shares of common stock, representing a
fully-diluted equity interest of 34.1%.
================================================================================
The RectorSeal Corporation $55,000,000
- --------------------------------------------------------------------------------
The RectorSeal Corporation, Houston, Texas, with two plants in Texas and a
plant in New York, manufactures specialty chemical products including pipe
thread sealants, firestop sealants, plastic cements and other formulations for
plumbing and industrial applications. RectorSeal's subsidiary, Jet-Lube, Inc.,
with plants in Texas, England and Canada, produces anti-seize compounds,
specialty lubricants and other products used in industrial and oil field
applications. Another subsidiary produces a line of automotive chemical products
sold under the Cargo and Blue Magic trade names. RectorSeal also owns a 20%
equity interest in The Whitmore Manufacturing Company (described on page 9).
During the year ended March 31, 2003, RectorSeal earned $6,799,000 on
revenues of $63,161,000, compared with earnings of $5,277,000 on revenues of
$57,338,000 in the previous year. RectorSeal's earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.
At March 31, 2003, Capital Southwest owned 100% of RectorSeal's common
stock having a cost of $52,600 and a value of $55,000,000.
================================================================================
Skylawn Corporation $38,000,000
- --------------------------------------------------------------------------------
Skylawn Corporation, Hayward, California, owns and operates cemeteries,
mausoleums and mortuaries. Skylawn's operations, all of which are in California,
include a major cemetery in San Mateo, a mausoleum and an adjacent mortuary in
Oakland and cemeteries, mausoleums and mortuaries in Hayward, Sacramento and
Napa. The company recently acquired a funeral home in San Bruno and will soon
begin building a major funeral home on the grounds of its San Mateo County
cemetery. Its insurance company and funeral and cemetery trusts enable Skylawn's
clients to make pre-need arrangements.
For the fiscal year ended March 31, 2003, Skylawn earned $3,299,000 on
revenues of $24,871,000, compared with earnings of $3,772,000 on revenues of
$26,928,000 in the previous year.
At March 31, 2003, Capital Southwest owned 100% of Skylawn Corporation's
common stock, which had a cost of $4,510,400 and was valued at $38,000,000.
================================================================================
Alamo Group Inc. $22,570,000
- --------------------------------------------------------------------------------
Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and
distributor of heavy-duty, tractor-mounted mowing and other vegetation
maintenance equipment, street-sweeping equipment and replacement parts. Founded
in 1969, Alamo Group operates 13 manufacturing facilities and serves
governmental, industrial and agricultural markets in the U.S., Europe, Canada
and Australia.
For the year ended December 31, 2002, Alamo reported consolidated earnings
of $6,382,000 ($0.65 per share) on net sales of $259,435,000, compared with
earnings of $10,812,000 ($1.11 per share) on net sales of $246,047,000 in the
previous year. The March 31, 2003 closing NYSE market price of Alamo's common
stock was $11.66 per share.
At March 31, 2003, the $2,065,047 investment in Alamo by Capital Southwest
and its subsidiary was valued at $22,570,000 ($8.00 per share), consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 27.2%.
================================================================================
Encore Wire Corporation $13,623,000
- --------------------------------------------------------------------------------
Encore Wire Corporation, McKinney, Texas, manufactures a broad line of
copper electrical building wire and cable including non-metallic sheathed,
underground feeder and THHN wire and cable for residential, commercial and
industrial construction. Encore's products are sold through large-volume
distributors and building materials retailers.
For the year ended December 31, 2002, Encore reported net income of
$5,964,000 ($0.39 per share) on net sales of $285,207,000, compared with net
income of $9,130,000 ($0.60 per share) on net sales of $281,010,000 in the
previous year. The March 31, 2003 closing Nasdaq bid price of Encore's common
stock was $8.50 per share.
At March 31, 2003, the $5,800,000 investment in 2,724,500 shares of
Encore's restricted common stock by Capital Southwest and its subsidiary was
valued at $13,623,000 ($5.00 per share), representing a fully-diluted equity
interest of 17.1%.
================================================================================
Media Recovery, Inc. $10,000,000
- --------------------------------------------------------------------------------
Media Recovery, Inc., Graham, Texas, distributes computer and office
automation supplies and accessories to corporate customers through its direct
sales force with 27 offices in 22 states. Its Shockwatch division manufactures
impact and tilt monitoring devices used to detect mishandled shipments. Media
Recovery's subsidiary, The Damage Prevention Company, Denver, Colorado,
manufactures dunnage products used to prevent damage in trucking, rail and
export container shipments.
During the year ended September 30, 2002, Media Recovery reported net
income of $1,817,000 on net sales of $97,866,000, compared with net income of
$3,007,000 on net sales of $110,840,000 in the previous year.
At March 31, 2003, the $5,415,000 investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $10,000,000, consisting of 4,800,000
shares of Series A convertible preferred stock, representing a fully-diluted
equity interest of 71.2%.
================================================================================
The Whitmore Manufacturing Company $10,000,000
- --------------------------------------------------------------------------------
The Whitmore Manufacturing Company, with plants in Rockwall, Texas and
Cleveland, Ohio, manufactures specialty lubricants for heavy equipment used in
surface mining, railroads and other industries, and produces water-based
coatings for the automotive and primary metals industries. Whitmore's
subsidiary, Fluid Protection Corporation, manufactures fluid contamination
control devices.
During the year ended March 31, 2003, Whitmore reported net income of
$149,000 on net sales of $12,521,000, compared with net income of $88,000 on net
sales of $12,151,000 in the previous year. The company is owned 80% by Capital
Southwest and 20% by Capital Southwest's subsidiary, The RectorSeal Corporation
(described on page 8).
At March 31, 2003, the direct investment in Whitmore by Capital Southwest
was valued at $10,000,000 and had a cost of $1,600,000.
================================================================================
All Components, Inc. $8,700,000
- --------------------------------------------------------------------------------
All Components, Inc., Farmers Branch, Texas, distributes and produces
memory and other components for personal computer manufacturers, retailers and
value-added resellers. Through its Dallas-based sales and distribution center
and its contract manufacturing plants in Austin, Texas and Boise, Idaho, the
company serves over 2,000 customers throughout the United States.
During the year ended August 31, 2002, All Components reported net income
of $1,605,000 on net sales of $135,936,000, compared with net income of
$5,220,000 on net sales of $152,757,000 in the previous year.
At March 31, 2003, the $150,000 investment in All Components by Capital
Southwest's subsidiary was valued at $8,700,000 consisting of 150,000 shares of
Series A convertible preferred stock, representing a 29.0% fully-diluted equity
interest.
================================================================================
Liberty Media Corporation $6,859,747
- --------------------------------------------------------------------------------
Liberty Media Corporation, Englewood, Colorado, acquired by AT&T as part of
Tele-Communications, Inc. in 1999 and now an independent company, produces,
acquires and distributes entertainment, sports and informational programming
services and electronic retailing services, which are delivered via cable
television and other technologies to viewers in the United States and overseas.
For the year ended December 31, 2002, Liberty Media reported a net loss of
$5.330 billion ($2.06 per share) on net sales of $2.084 billion, compared with a
net loss of $6.203 billion ($2.40 per share) on net sales of $2.059 billion in
the previous year. The March 31, 2003 closing NYSE market price of Series A
common stock was $9.73 per share.
At March 31, 2003, Capital Southwest owned 705,010 unrestricted shares of
Series A common stock, having a total cost of $165,613 and a market value of
$6,859,747 ($9.73 per share).
================================================================================
PETsMART, Inc. $5,723,171
- --------------------------------------------------------------------------------
PETsMART, Inc., Phoenix, Arizona, is the largest specialty retailer of
services and solutions for the lifetime needs of pets. The company operates more
than 500 pet superstores in the United States and Canada and is the leading
direct marketer of pet products through its e-commerce site and its pet and
equine catalog business.
For the year ended February 2, 2003, PETsMART, Inc. reported net income of
$88,855,000 ($0.63 per share) on net sales of $2.695 billion, compared with net
income of $39,567,000 ($0.35 per share) on net sales of $2.501 billion in the
previous year. The March 31, 2003 closing Nasdaq bid price of PETsMART's common
stock was $12.60 per share.
At March 31, 2003, Capital Southwest and its subsidiary owned 454,220
unrestricted shares of common stock, having a cost of $1,995,524 and a market
value of $5,723,171 ($12.60 per share).
================================================================================
AmPro Mortgage Corporation $5,029,167
- --------------------------------------------------------------------------------
AmPro Mortgage Corporation, Dallas, Texas, is a newly formed company which
acquired the production facility (but not the servicing operations) of Matrix
Financial Services Corporation ("Matrix") on February 28, 2003. AmPro
originates, acquires, sells and services residential mortgage loans through nine
traditional wholesale offices and one wholesale sub-prime office in Santa Ana,
California. The wholesale offices are located in Sacramento, Dallas, Houston,
Chicago, St Louis, Phoenix, Denver, Atlanta and Jacksonville. In 2002, Matrix
originated over $3.6 billion in mortgages.
At March 31, 2003, the investment in AmPro by Capital Southwest was valued
at its cost of $5,029,167 and consisted of 5,000 shares of Series A cumulative
preferred stock and 29,167 shares of Series A common stock, representing a
fully-diluted equity interest of 29.2%.
================================================================================
Texas Capital Bancshares, Inc. $5,000,006
- --------------------------------------------------------------------------------
Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has raised
a total of $133.2 million through three private placements and now has total
assets of approximately $1.8 billion. With banks in Dallas, Fort Worth, Austin
and San Antonio, Texas Capital Bancshares conducts its business through its
wholly-owned subsidiary, Texas Capital Bank, N.A., which primarily targets
middle market commercial and wealthy private client customers in Texas.
For the year ended December 31, 2002, Texas Capital reported net income of
$7,343,000 ($0.32 per share), compared with net income of $5,844,000 ($0.30 per
share) in the previous year.
At March 31, 2003, the investment in Texas Capital Bancshares by Capital
Southwest was valued at its cost of $5,000,006, consisting of 689,656 shares of
common stock, representing a fully-diluted equity interest of 2.9%.
Portfolio of Investments - March 31, 2003
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
+AT&T CORP. <1% ++26,649 shares common
New York, New York stock (acquired 3-9-99) $ 12 $ 431,714
Major provider of voice
and data communications services
including business and consumer
long distance and Internet.
- ------------------------------------------------------------------------------------------------------------------------------------
+AT&T WIRELESS SERVICES, INC. <1% ++42,878 shares common stock
Redmond, Washington (acquired 7-9-01) 10 282,995
Provider of wireless voice and data
services and products in the cellular
and PCS markets.
- ------------------------------------------------------------------------------------------------------------------------------------
+ALAMO GROUP INC. 27.2% 2,821,300 shares common stock
Seguin, Texas (acquired 4-1-73 thru 10-4-99) 2,065,047 22,570,000
Tractor-mounted mowing and vegetation
maintenance equipment for governmental,
industrial and agricultural markets;
street-sweeping equipment for municipalities.
- ------------------------------------------------------------------------------------------------------------------------------------
ALL COMPONENTS, INC. 29.0% 150,000 shares Series A convertible
Farmers Branch, Texas preferred stock, convertible into
Distribution and production of memory and 600,000 shares of common stock
other components for personal computer at $0.25 per share
manufacturers, retailers and value-added (acquired 9-16-94) 150,000 8,700,000
resellers; electronics contract manufacturing.
- ------------------------------------------------------------------------------------------------------------------------------------
+ALLTEL CORPORATION <1% ++8,880 shares common stock
Little Rock, Arkansas (acquired 7-1-98) 108,355 397,469
Wireline and wireless communications
and information services.
- ------------------------------------------------------------------------------------------------------------------------------------
AMPRO MORTGAGE CORPORATION 29.2% 5,000 shares Series A cumulative
Dallas, Texas preferred stock
Originator and banker of residential (acquired 2-28-03) 5,000,000 5,000,000
mortgage loans. 29,167 shares Series A common stock
(acquired 2-28-03) 29,167 29,167
--------- ---------
5,029,167 5,029,167
- ------------------------------------------------------------------------------------------------------------------------------------
BALCO, INC. 89.7% 445,000 shares common stock
Wichita, Kansas and 60,920 shares Class B
Specialty architectural products non-voting common stock
used in the construction and remodeling (acquired 10-25-83 and 5-30-02) 624,920 5,000,000
of commercial and institutional buildings.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
BOXX TECHNOLOGIES, INC. 16.3% 3,125,354 shares Series B
Austin, Texas convertible preferred stock,
Workstations for computer graphics convertible into 3,125,354
imaging and design. shares of common stock at
$0.50 per share (acquired
8-20-99 thru 8-8-01) $ 1,500,000 $ 2
Warrants to purchase 80,000
shares of Series B preferred
stock at $0.50 per share,
expiring 2005 (acquired 8-24-00) -- --
----------- ------------
1,500,000 2
- ------------------------------------------------------------------------------------------------------------------------------------
CMI HOLDING COMPANY, INC. 14.0% 1,745,744 shares Series
Richardson, Texas A preferred stock
Owns Chase Medical, which develops (acquired 8-21-02) 3,000,000 3,000,000
and sells devices used in cardiac surgery
including proprietary devices for surgical
intervention to relieve congestive
heart failure.
- ------------------------------------------------------------------------------------------------------------------------------------
CASHWORKS, INC. 33.8% 1,500,000 shares Series
Dallas, Texas B convertible preferred stock,
Provides an ATM based system to convenience convertible into 1,500,000
stores and other retail outlets for paycheck shares of common stock at $2.00
cashing and other financial services. per share (acquired 1-31-03) 3,000,000 3,000,000
Warrant to purchase 375,000 shares
of Series B preferred
stock at $0.85 per share,
expiring 2007
(acquired 1-31-03) -- --
----------- ------------
3,000,000 3,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
+COMCAST CORPORATION <1% ++43,104 shares common stock 21 1,234,068
Philadelphia, PA (acquired 11-18-02)
Development, management and operation of
broadband cable networks, electronic
retailing and programming.
- ------------------------------------------------------------------------------------------------------------------------------------
+CONCERT INDUSTRIES LTD. 7.5% 2,833,485 shares common stock
Vancouver, British Columbia (acquired 5-31-00 thru 6-1-01) 9,131,224 443,000
Manufacture and sale of latex, Warrants to purchase 373,758 shares
thermal and multi-bonded air-laid of common stock at C$8.00
nonwoven fabrics having superabsorbent (US$5.442) per share, expiring
properties. 2003 (acquired 6-1-01) 188,900 --
----------- ------------
9,320,124 443,000
- ------------------------------------------------------------------------------------------------------------------------------------
DENNIS TOOL COMPANY 66.8% 20,725 shares 5% convertible preferred
Houston, Texas stock, convertible into 20,725 shares
Polycrystalline diamond compacts of common stock at $48.25 per share
(PDCs) used in oil field drill (acquired 8-10-98) 999,981 999,981
bits and in mining and industrial 140,137 shares common stock
applications. (acquired 3-7-94 and 8-10-98) 2,329,963 500,000
----------- ------------
3,329,944 1,499,981
- ------------------------------------------------------------------------------------------------------------------------------------
+ENCORE WIRE CORPORATION 17.1% 2,724,500 shares common stock
McKinney, Texas (acquired 7-16-92 thru 10-7-98) 5,800,000 13,623,000
Electric wire and cable for residential
and commercial use.
- ------------------------------------------------------------------------------------------------------------------------------------
EXOPACK HOLDING CORP. 1.5% 5,190 shares common stock
Spartanburg, South Carolina (acquired 7-27-01 and 8-8-02) 523,830 523,830
Paper and plastic flexible packaging for products
such as pet food, building materials, chemicals
and other commodities.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
EXTREME INTERNATIONAL, INC. 43.6% 12% subordinated notes,
Sugar Land, Texas payable 2003 to 2004
Owns Bill Young Productions, Texas (acquired 10-21-96 thru 4-30-01) $ 4,176,750 $ 1,551,750
Video and Post, and Extreme Communications, 375 shares 8% Series A convertible
which produce radio and television preferred stock, convertible into
commercials and corporate communications videos. 1,500,000 shares of common stock at
$0.25 per share (acquired 10-21-96) 375,000 --
Warrants to purchase 1,303,500 shares
of common stock at $0.25 per share,
expiring 2005 and 2008 (acquired
8-11-98 thru 12-31-01) -- --
----------- ---------
4,551,750 1,551,750
- ------------------------------------------------------------------------------------------------------------------------------------
+FMC CORPORATION <1% ++6,430 shares common stock
Chicago, Illinois (acquired 6-6-86) 66,726 100,821
Chemicals for agricultural, industrial
and consumer markets.
- ------------------------------------------------------------------------------------------------------------------------------------
+FMC TECHNOLOGIES, INC. <1% ++11,057 shares common stock
Chicago, Illinois (acquired 1-2-02) 57,051 212,294
Equipment and systems for the energy,
food processing and air transportation
industries.
- ------------------------------------------------------------------------------------------------------------------------------------
HEELING, INC. 43.0% 10% subordinated debenture due 2006
Carrollton, Texas (acquired 10-30-00 thru 12-7-00) 1,800,000 1,800,000
Heelys stealth skate shoes ("one wheel in 1,745,455 shares Series A preferred
the heel") sold through specialty skate, stock (acquired 5-26-00) 480,000 480,000
lifestyle and sporting goods stores, 436,364 shares Series B convertible
footwear chains, department stores preferred stock, convertible into
and over the Internet at Heelys.com. 436,364 shares of common stock at
$0.275 per share (acquired 5-26-00) 120,000 120,000
----------- ---------
2,400,000 2,400,000
- ------------------------------------------------------------------------------------------------------------------------------------
+HOLOGIC, INC. <1% ++158,205 shares common stock
Bedford, Massachusetts (acquired 8-27-99) 220,000 1,370,055
Medical instruments including bone
densitometers, mammography devices
and digital radiography systems.
- ------------------------------------------------------------------------------------------------------------------------------------
+KIMBERLY-CLARK CORPORATION <1% ++77,180 shares common stock
Dallas, Texas (acquired 12-18-97) 2,396,926 3,508,603
Manufacturer of tissue, personal care
and health care products.
- ------------------------------------------------------------------------------------------------------------------------------------
+LIBERTY MEDIA CORPORATION <1% ++705,010 shares Series A
Englewood, Colorado common stock (acquired 3-9-99
Global media and entertainment company thru 12-12-02) 165,613 6,859,747
owning interests in video programming
and communications businesses.
- ------------------------------------------------------------------------------------------------------------------------------------
+MAIL-WELL, INC. 3.8% ++2,096,588 shares common stock
Englewood, Colorado (acquired 2-18-94 thru 11-10-98) 2,986,870 4,256,074
Envelopes and commercial printing.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
MEDIA RECOVERY, INC. 71.2% 4,800,000 shares Series A convertible
Graham, Texas preferred stock, convertible
Computer and office automation supplies into 4,800,000 shares of common
and accessories; impact and tilt monitoring stock at $1.00 per share
devices to detect mishandled (acquired 11-4-97) $ 5,415,000 $ 10,000,000
shipments; dunnage for protecting shipments.
- ------------------------------------------------------------------------------------------------------------------------------------
ORGANIZED LIVING, INC. 6.1% 3,333,335 shares Series D
Lenexa, Kansas convertible preferred stock,
Specialty retailer of products designed convertible into 3,333,335
to provide home and office storage and shares of common stock at
organization solutions. $1.80 per share
(acquired 1-7-00 and 10-30-00) 6,000,000 1
- ------------------------------------------------------------------------------------------------------------------------------------
PALLET ONE, INC. 8.8% 150,000 shares common stock
Bartow, Florida (acquired 10-18-01) 150,000 150,000
Wood pallet manufacturer with 12 1,485,000 shares Series A
manufacturing facilities. preferred stock
(acquired 10-18-01) 1,350,000 1,350,000
----------- ------------
1,500,000 1,500,000
- ------------------------------------------------------------------------------------------------------------------------------------
+PALM HARBOR HOMES, INC. 34.1% 7,855,121 shares common stock
Dallas, Texas (acquired 1-3-85 thru 7-31-95) 10,931,955 70,696,000
Integrated manufacturing, retailing,
financing and insuring of manufactured
housing and modular homes.
- ------------------------------------------------------------------------------------------------------------------------------------
+PETSMART, INC. <1% ++454,220 shares common stock
Phoenix, Arizona (acquired 6-1-95) 1,995,524 5,723,171
Retail chain of more than 500 stores selling
pet foods, supplies and services.
- ------------------------------------------------------------------------------------------------------------------------------------
THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock
Houston, Texas (acquired 1-5-73 and 3-31-73) 52,600 55,000,000
Specialty chemical products for plumbing,
HVAC, electrical, construction, industrial,
oil field and automotive applications;
owns 20% of Whitmore Manufacturing Company.
- ------------------------------------------------------------------------------------------------------------------------------------
SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock
Hayward, California (acquired 7-16-69) 4,510,400 38,000,000
Cemeteries, mausoleums and mortuaries
located in northern California.
- ------------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION - FON Group <1% ++72,000 shares common stock
Westwood, Kansas (acquired 6-20-84) 449,654 846,000
Diversified telecommunications company.
- ------------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION - PCS Group <1% ++36,000 shares common stock
Overland Park, Kansas (acquired 11-23-98) 53,991 156,960
Domestic wireless telephony services.
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- ------------------------------------------------------------------------------------------------------------------------------------
TCI HOLDINGS, INC. - 21 shares 12% Series C cumulative
Denver, Colorado compounding preferred stock
Cable television systems and (acquired 1-30-90) $ -- $ 677,250
microwave relay systems.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS CAPITAL BANCSHARES, INC. 2.9% 689,656 shares common stock
Dallas, Texas (acquired 5-1-00) 5,000,006 5,000,006
Regional bank holding company with
banking operations in four Texas cities.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS PETROCHEMICAL HOLDINGS, INC. 5.1% 30,000 shares common stock
Houston, Texas (acquired 6-27-96) 3,000,000 1
Butadiene for synthetic rubber, MTBE for
gasoline octane enhancement and
butylenes for varied applications.
- ------------------------------------------------------------------------------------------------------------------------------------
TEXAS SHREDDER, INC. 53.3% 750 shares Series B convertible
San Antonio, Texas preferred stock, convertible
Design and manufacture of heavy-duty into 750,000 shares of common
shredder systems for recycling steel stock at $0.10 per share
and other materials from junk automobiles. (acquired 3-6-91) 75,000 1,800,000
- ------------------------------------------------------------------------------------------------------------------------------------
VOCALDATA, INC. 2.8% 1,300,002 shares Series A convertible
Richardson, Texas preferred stock, convertible into
Hardware and software for customer 1,300,002 shares of common
premises telephony equipment based stock at $0.875 per share
on Voice Over Internet Protocol. (acquired 11-4-99 and 12-3-99) 1,137,500 1
200,287 shares Series B convertible
preferred stock, convertible into
200,287 shares of common stock
at $1.759 per share
(acquired 10-26-00) 352,305 1
----------- ------------
1,489,805 2
- ------------------------------------------------------------------------------------------------------------------------------------
THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock
Rockwall, Texas (acquired 8-31-79) 1,600,000 10,000,000
Specialized mining and industrial lubricants;
automotive transit coatings.
- ------------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS -- Diamond State Ventures, L.P.
- 1.9% limited partnership
interest (acquired 10-12-99
thru 1-3-03) 184,375 184,375
-- First Capital Group of Texas III,
L.P. - 3.3% limited partnership
interest (acquired 12-26-00
thru 11-14-02) 400,000 400,000
100.0% Humac Company - 1,041,000 shares
common stock (acquired 1-31-75
and 12-31-75) -- 128,000
-- STARTech Seed Fund I - 12.6% limited
partnership interest
(acquired 4-17-98 thru 1-5-00) 178,066 1
-- STARTech Seed Fund II - 3.1% limited
partnership interest
(acquired 4-28-00 thru 2-28-02) 750,000 375,000
-- Sterling Group Partners I, L.P. -
1.7% limited partnership
interest (acquired 4-20-01
thru 2-19-03) 579,100 579,100
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $91,461,842 $287,060,437
=========== ============
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Notes to Portfolio of Investments
(a) The percentages in the "Equity" column express the potential equity
interests held by Capital Southwest Corporation and Capital Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the issuer's common stock the Company owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all outstanding warrants, convertible securities and employee stock options.
The symbol "<1%" indicates that the Company holds a potential equity interest of
less than one percent.
(b) Unrestricted securities (indicated by ++) are freely marketable securities
having readily available market quotations. All other securities are restricted
securities which are subject to one or more restrictions on resale and are not
freely marketable. At March 31, 2003, restricted securities represented
approximately 91.2% of the value of the consolidated investment portfolio.
(c) Under the valuation policy of the Company, unrestricted securities are
valued at the closing sale price for listed securities and at the lower of the
closing bid price or the last sale price for Nasdaq securities on the valuation
date. Restricted securities, including securities of publicly-owned companies
which are subject to restrictions on resale, are valued at fair value as
determined by the Board of Directors. Fair value is considered to be the amount
which the Company may reasonably expect to receive for portfolio securities if
such securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities, the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
(d) Agreements between certain issuers and the Company provide that the issuers
will bear substantially all costs in connection with the disposition of common
stocks, including those costs involved in registration under the Securities Act
of 1933 but excluding underwriting discounts and commissions. These agreements,
which cover common stocks owned at March 31, 2003 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks, apply to restricted securities of all issuers in the
investment portfolio of the Company except securities of the following issuers,
which are not obligated to bear registration costs: Humac Company, Skylawn
Corporation and The Whitmore Manufacturing Company.
(e) The descriptions of the companies and ownership percentages shown in the
portfolio of investments were obtained from published reports and other sources
believed to be reliable, are supplemental and are not covered by the report of
independent auditors. Acquisition dates indicated are the dates specific
securities were acquired. Certain securities were received in exchange for or
upon conversion or exercise of other securities previously acquired.
Portfolio Changes During the Year
New Investments and Additions to Previous Investments
Amount
-----------
AmPro Mortgage Corporation ................................ $ 5,029,167
CMI Holding Company, Inc. ................................. 3,000,000
CashWorks, Inc. ........................................... 3,000,000
Diamond State Ventures, L.P. .............................. 18,750
Exopack Holding Corp. ..................................... 73,830
First Capital Group of Texas III, L.P. .................... 152,071
Liberty Media Corporation ................................. 165,588
Sterling Group Partners I, L.P. ........................... 260,000
StarTech Seed Fund II ..................................... 150,000
Miscellaneous ............................................. 55,233
-----------
$11,904,639
===========
Dispositions
Amount
Cost Received
---------- ----------
Concert Industries Ltd. ......... $ 47,525 $ --
Drew Scientific Group PLC........ 182,689 11,168
MESC Holdings ................... -- 56,678
Mylan Laboratories, Inc......... 200,000 2,697,985
PETsMART, Inc. .................. 441,604 1,448,052
Photon Dynamics, Inc. ........... -- 20,280
Sprockets.com, Inc. ............. 1,300,000 --
Texas Shredder, Inc. ............ 329,600 329,600
Miscellaneous ................... 55,233 --
---------- ----------
$2,556,651 $4,563,763
========== ==========
Repayments Received ............. $ 80,000
==========
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Financial Condition
March 31
---------------------------
Assets 2003 2002
------------ ------------
Investments at market or fair value (Notes
1, 2 and 10)
Companies more than 25% owned
(Cost: 2003 - $23,114,865,
2002 - $23,194,865) ........................ $202,893,981 $243,024,999
Companies 5% to 25% owned
(Cost: 2003 - $30,120,124,
2002 - $27,167,649) ........................ 18,566,004 34,943,003
Companies less than 5% owned
(Cost: 2003 - $38,226,853,
2002 - $31,831,341) ........................ 65,600,452 69,513,064
------------ ------------
Total investments
(Cost: 2003 - $91,461,842,
2002 - $82,193,855) ........................ 287,060,437 347,481,066
Cash and cash equivalents ....................... 4,650,388 1,977,180
Receivables ..................................... 297,664 1,753,297
Other assets (Note 8) ........................... 6,481,383 5,971,361
------------ ------------
Totals........................................ $298,489,872 $357,182,904
============ ============
March 31
------------------------------
Liabilities and Shareholders' Equity 2003 2002
------------- -------------
Note payable to bank (Note 4) ................... $ 15,500,000 $ 6,500,000
Notes payable to portfolio company (Note 4) ..... 7,500,000 2,500,000
Accrued interest and other liabilities (Note 8) . 1,868,991 2,018,140
Deferred income taxes (Note 3) .................. 67,153,906 90,673,722
Subordinated debenture (Note 5) ................. -- 5,000,000
------------- -------------
Total liabilities ........... 92,022,897 106,691,862
------------- -------------
Shareholders' equity (Notes 3 and 6)
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,266,416
shares at March 31, 2003 and
March 31, 2002 ............................. 4,266,416 4,266,416
Additional capital ........................... 6,935,497 6,935,497
Undistributed net investment
income ..................................... 3,299,659 3,297,838
Undistributed net realized gain on
investments ................................ 71,190,108 69,844,380
Unrealized appreciation of investments -
net of deferred income taxes ............... 127,808,597 173,180,213
Treasury stock - at cost
(437,365 shares) ........................... (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $53.92 per share at March 31, 2003,
and $65.42 per share at March 31, 2002,
on the 3,829,051 shares outstanding ........ 206,466,975 250,491,042
------------- -------------
Totals ....................................... $ 298,489,872 $ 357,182,904
============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended March 31
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Investment income (Note 9):
Interest ........................................................................ $ 204,490 $ 322,521 $ 542,241
Dividends ....................................................................... 3,360,990 3,293,633 2,955,833
Management and directors' fees .................................................. 495,900 530,400 530,400
------------ ------------ ------------
4,061,380 4,146,554 4,028,474
------------ ------------ ------------
Operating expenses:
Salaries ........................................................................ 911,671 894,612 850,959
Net pension benefit (Note 8) .................................................... (387,923) (504,536) (486,174)
Other operating expenses (Notes 7 and 11) ....................................... 626,106 633,254 614,861
------------ ------------ ------------
1,149,854 1,023,330 979,646
------------ ------------ ------------
Income before interest expense and income taxes .................................... 2,911,526 3,123,224 3,048,828
Interest expense ................................................................... 476,761 929,372 1,144,337
------------ ------------ ------------
Income before income taxes ......................................................... 2,434,765 2,193,852 1,904,491
Income tax expense (Note 3) ........................................................ 135,513 151,956 181,991
------------ ------------ ------------
Net investment income .............................................................. $ 2,299,252 $ 2,041,896 $ 1,722,500
============ ============ ============
Proceeds from disposition of investments ........................................... $ 4,563,763 $ 5,923,165 $ 7,657,377
Cost of investments sold (Note 1) .................................................. 2,556,651 6,685,279 12,782,870
------------ ------------ ------------
Realized gain (loss) on investments before income taxes (Note 9) ................... 2,007,112 (762,114) (5,125,493)
Income tax expense (benefit) ....................................................... 661,384 (224,180) (1,894,506)
------------ ------------ ------------
Net realized gain (loss) on investments ............................................ 1,345,728 (537,934) (3,230,987)
------------ ------------ ------------
Increase (decrease) in unrealized appreciation of investments before income taxes .. (69,688,616) 36,971,348 (10,310,835)
Increase (decrease) in deferred income taxes on appreciation of investments (Note 3) (24,317,000) 12,797,000 (3,841,000)
------------ ------------ ------------
Net increase (decrease) in unrealized appreciation of investments .................. (45,371,616) 24,174,348 (6,469,835)
------------ ------------ ------------
Net realized and unrealized gain (loss) on investments ............................. $(44,025,888) $ 23,636,414 $ (9,700,822)
============ ============ ============
Increase (decrease) in net assets from operations .................................. $(41,726,636) $ 25,678,310 $ (7,978,322)
============ ============ ============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
Years Ended March 31
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Operations
Net investment income ........................................... $ 2,299,252 $ 2,041,896 $ 1,722,500
Net realized gain (loss) on investments ......................... 1,345,728 (537,934) (3,230,987)
Net increase (decrease) in unrealized appreciation of investments (45,371,616) 24,174,348 (6,469,835)
------------- ------------- -------------
Increase (decrease) in net assets from operations ............... (41,726,636) 25,678,310 (7,978,322)
Distributions from:
Undistributed net investment income ............................. (2,297,431) (2,294,631) (2,289,031)
Capital share transactions
Exercise of employee stock options .............................. -- 498,750 --
------------- ------------- -------------
Increase (decrease) in net assets ............................. (44,024,067) 23,882,429 (10,267,353)
Net assets, beginning of year ..................................... 250,491,042 226,608,613 236,875,966
------------- ------------- -------------
Net assets, end of year ........................................... $ 206,466,975 $ 250,491,042 $ 226,608,613
============= ============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended March 31
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities
Increase (decrease) in net assets from operations ................... $(41,726,636) $ 25,678,310 $ (7,978,322)
Adjustments to reconcile increase (decrease) in net assets from
operations to net cash provided by (used in) operating activities:
Depreciation and amortization .................................... 21,668 26,258 29,891
Net pension benefit .............................................. (387,923) (504,536) (486,174)
Net realized and unrealized (gain) loss on investments ........... 44,025,888 (23,636,414) 9,700,822
(Increase) decrease in receivables ............................... 1,455,633 (1,488,920) (25,783)
Increase in other assets ......................................... (29,447) (17,922) (8,923)
Decrease in accrued interest and other liabilities ............... (96,188) (44,479) (27,179)
Decrease in accrued pension cost ................................. (167,280) (199,280) (209,947)
Deferred income taxes ............................................ 135,800 176,600 170,400
------------ ------------ ------------
Net cash provided by (used in) operating activities ................. 3,231,515 (10,383) 1,164,785
------------ ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments ............................ 4,563,763 5,923,165 7,657,377
Purchases of securities ............................................. (11,904,639) (3,545,458) (15,922,079)
Maturities of securities ............................................ 80,000 2,267,970 540,000
------------ ------------ ------------
Net cash provided by (used in) investing activities ................. (7,260,876) 4,645,677 (7,724,702)
------------ ------------ ------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank ........................ 9,000,000 1,500,000 (55,000,000)
Increase (decrease) in notes payable to portfolio companies ......... 5,000,000 (3,500,000) 1,000,000
Decrease in subordinated debenture .................................. (5,000,000) -- --
Distributions from undistributed net investment income .............. (2,297,431) (2,294,631) (2,289,031)
Proceeds from exercise of employee stock options .................... -- 498,750 --
------------ ------------ ------------
Net cash provided by (used in) financing activities ................. 6,702,569 (3,795,881) (56,289,031)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................ 2,673,208 839,413 (62,848,948)
Cash and cash equivalents at beginning of year ...................... 1,977,180 1,137,767 63,986,715
------------ ------------ ------------
Cash and cash equivalents at end of year ............................ $ 4,650,388 $ 1,977,180 $ 1,137,767
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest ............................. $ 606,722 $ 922,011 $ 1,144,558
Income taxes ......................... $ -- $ 287 $ 11,591
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Capital Southwest Corporation ("CSC") is a business development company
subject to regulation under the Investment Company Act of 1940. Capital
Southwest Venture Corporation ("CSVC"), a wholly-owned subsidiary of CSC, is a
Federal licensee under the Small Business Investment Act of 1958. Capital
Southwest Management Corporation ("CSMC"), a wholly-owned subsidiary of CSC, is
the management company for CSC and CSVC. The following is a summary of
significant accounting policies followed in the preparation of the consolidated
financial statements of CSC, CSVC and CSMC (together, the "Company"):
Principles of Consolidation. The consolidated financial statements have
been prepared on the value method of accounting in accordance with accounting
principles generally accepted in the United States of America for investment
companies. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.
Investments. Investments are stated at market or fair value determined by
the Board of Directors as described in the Notes to Portfolio of Investments and
Note 2 below. The average cost method is used in determining cost of investments
sold. Investments are recorded on a trade date basis. Dividends are recognized
on the ex-dividend date and interest income is accrued daily.
Segment Information. The Company operates and manages its business in a
singular segment. As an investment company, the Company invests in portfolio
companies in various industries and geographic areas as presented in the
portfolio of investments.
Stock-Based Compensation. The Company accounts for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based compensation cost is
reflected in net asset value, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and amends the related existing disclosure requirements. Since the
Company accounts for its stock-based compensation under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, SFAS 148
does not have an impact on the Company's operating results or financial position
for the years ended March 31, 2003, 2002 and 2001.
The following table illustrates the effect on net asset value and net asset
value per share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
stock-based compensation.
Years Ended March 31
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
Net asset value, as reported $ 206,466,975 $ 250,491,042 $ 226,608,613
Deduct: Total fair value computed
stock-based compensation 179,440 59,216 59,216
------------- ------------- -------------
Pro forma net asset value $ 206,287,535 $ 250,431,826 $ 226,549,397
============= ============= =============
Net asset value per share:
Basic - as reported $ 53.92 $ 65.42 $ 59.40
============= ============= =============
Basic - pro forma $ 53.87 $ 65.40 $ 59.38
============= ============= =============
Diluted - as reported $ 53.79 $ 65.20 $ 59.14
============= ============= =============
Diluted- pro forma $ 53.74 $ 65.19 $ 59.12
============= ============= =============
The diluted net asset value per share calculation assumes all vested
outstanding options for which the market price exceeds the exercise price have
been exercised.
Effective April 1, 2003, the Company adopted the fair value method of
recording compensation expense related to all stock options granted after March
31, 2003, in accordance with SFAS Nos. 123 and 148. Accordingly, the fair value
of stock options as determined on the date of grant using the Black-Scholes
option-pricing model will be expensed over the vesting period of the related
stock options.
2. Valuation of Investments
The consolidated financial statements as of March 31, 2003 and 2002 include
securities valued at $261,680,466 (91.2% of the value of the consolidated
investment portfolio) and $317,137,082 (91.3% of the value of the consolidated
investment portfolio), respectively, whose values have been determined by the
Board of Directors in the absence of readily ascertainable market values.
Because of the inherent uncertainty of valuation, these values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
3. Income taxes
For the tax years ended December 31, 2002, 2001 and 2000, CSC and CSVC
qualified to be taxed as regulated investment companies ("RICs") under
applicable provisions of the Internal Revenue Code. As RICs, CSC and CSVC must
distribute at least 90% of their taxable net investment income (investment
company taxable income) and may either distribute or retain their taxable net
realized gain on investments (capital gains). Both CSC and CSVC intend to meet
the applicable qualifications to be taxed as RICs in future years; however,
either company's ability to meet certain portfolio diversification requirements
of RICs in future years may not be controllable by such company.
No material provision was made for Federal income taxes on the investment
company taxable income of CSC and CSVC for the 2003, 2002 and 2001 fiscal years.
Such income was distributed to shareholders in the form of cash dividends for
which CSC and CSVC receive a tax deduction. With respect to net investment
income, the income tax expense for each of the three years ended March 31, 2003
includes a deferred tax provision related to the net pension benefit.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $67,790,000 and
$92,107,000 have been provided on net unrealized appreciation of investments of
$195,598,595 and $265,287,211 at March 31, 2003 and 2002, respectively. Such
appreciation is not included in taxable income until realized. Deferred income
taxes on net unrealized appreciation of investments have been provided at the
then currently effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 2003 and 2002.
4. Notes Payable
The note payable to bank at March 31, 2003 and 2002 was from an unsecured
revolving line of credit of $25,000,000 and $15,000,000, respectively, of which
$15,500,000 and $6,500,000, respectively, had been drawn. The revolving line of
credit bears interest at the bank's base rate less .50% or LIBOR plus 1.25% and
matures on July 31, 2004.
The notes payable to portfolio company were demand promissory notes to
Skylawn Corporation with interest payable at the greater of prime minus 2.25% or
the Applicable Federal Rate established by the Internal Revenue Service.
Interest expense on these portfolio company notes was $75,531 in 2003 and
$216,280 in 2002.
5. Subordinated Debenture
The subordinated debenture of $5,000,000 outstanding at March 31, 2002 was
payable to others and guaranteed by the Small Business Administration ("SBA"),
bore interest at 8.0% and was repaid June 3, 2002.
6. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase 28,000,
28,000 and 42,000 shares of common stock at $35.625 per share (the market price
at the time of grant) were outstanding and exercisable at March 31, 2003, 2002
and 2001, respectively, and expire July 2003. During the three years ended March
31, -0- options were exercised in 2003, 14,000 were exercised in 2002 and -0-
were exercised in 2001. The 1984 Incentive Stock Option Plan expired in 1994.
On July 19, 1999, shareholders approved the 1999 Stock Option Plan
("Plan"), which provides for the granting of stock options to employees and
officers of the Company and authorizes the issuance of common stock upon the
exercise of such options for up to 140,000 shares of common stock. All options
are granted at or above market price and generally expire ten years from the
date of grant and are generally exercisable on or after the first anniversary of
the date of grant in five to ten annual installments.
At March 31, 2003, there were 85,500 additional shares available for grant
under the Plan. The per share weighted average fair value of stock options
granted during 2002 was $20.76 on the date of grant using the Black Scholes
option-pricing model with the following assumptions: expected dividend yield of
..92%, risk-free interest rate of 5.14%, expected volatility of 20.6%, and
expected life of 7 years.
The following summarizes activity in the stock option plans for the years
ended March 31, 2003, 2002 and 2001:
Number Weighted Average
of shares Exercise Price
--------- --------------
Balance at April 1, 2000 80,000 $55.856
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
------- -------
Balance at March 31, 2001 80,000 55.856
Granted 44,000 65.239
Exercised (14,000) 35.625
Forfeited (27,500) 65.000
Expired -- --
------- -------
Balance at March 31, 2002 82,500 58.336
Granted -- --
Exercised -- --
Forfeited -- --
Expired -- --
------- -------
Balance at March 31, 2003 82,500 $58.336
======= =======
At March 31, 2003, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $35.625 - $84.70 and 4.80
years, respectively.
At March 31, 2003, 2002 and 2001, the number of options exercisable was
44,750, 36,100 and 49,750, respectively and the weighted average exercise price
of those options was $50.61, $45.93, $42.63, respectively.
7. Employee Stock Ownership Plan
The Company and one of its wholly-owned portfolio companies sponsor a
qualified employee stock ownership plan ("ESOP") in which certain employees
participate. Contributions to the plan, which are invested in Company stock, are
made at the discretion of the Board of Directors. A participant's interest in
contributions to the ESOP fully vests after five years of active service. During
the three years ended March 31, the Company made contributions to the ESOP,
which were charged against net investment income, of $44,417 in 2003, $28,322 in
2002 and $42,997 in 2001.
8. Retirement Plans
The Company sponsors a qualified defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned portfolio companies.
The following information about the plan represents amounts and information
related to the Company's participation in the plan and is presented as though
the Company sponsored a single-employer plan. Benefits are based on years of
service and an average of the highest five consecutive years of compensation
during the last ten years of employment. The funding policy of the plan is to
contribute annual amounts that are currently deductible for tax reporting
purposes. No contribution was made to the plan during the three years ended
March 31, 2003.
The following tables set forth the qualified plan's benefit obligations and
fair value of plan assets at March 31, 2003, 2002 and 2001:
Years Ended March 31
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ................... $ 3,284,463 $ 3,255,669 $ 3,260,366
Service cost .................... 41,142 58,428 50,961
Interest cost ................... 202,424 207,940 205,976
Amendments ...................... 346,882 -- --
Actuarial loss .................. 165,560 94,298 59,571
Benefits paid ................... (363,872) (331,872) (321,205)
----------- ----------- -----------
Benefit obligation at end of year $ 3,676,599 $ 3,284,463 $ 3,255,669
=========== =========== ===========
Years Ended March 31
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Change in plan assets
Fair value of plan assets at beginning
of year ........................ $ 9,410,320 $ 8,758,035 $ 9,837,547
Actual return on plan assets ......... (2,164,725) 984,157 (758,307)
Benefits paid ........................ (363,872) (331,872) (321,205)
----------- ----------- -----------
Fair value of plan assets at end of
year ............................ $ 6,881,723 $ 9,410,320 $ 8,758,035
=========== =========== ===========
The following table sets forth the qualified plan's funded status and
amounts recognized in the Company's consolidated statements of financial
condition:
March 31
--------------------------
2003 2002
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................ $(3,346,711) $(2,906,821)
=========== ===========
Projected benefit obligation for service rendered to
date .......................................... $(3,676,599) $(3,284,463)
Plan assets at fair value* ......................... 6,881,723 9,410,320
----------- -----------
Excess of plan assets over the projected benefit
obligation .................................... 3,205,124 6,125,857
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions ........................ 3,023,057 32,117
Unrecognized prior service costs ................... 217,886 (140,319)
Unrecognized net assets being amortized over
19 years ...................................... (147,646) (221,477)
----------- -----------
Prepaid pension cost included in other assets ...... $ 6,298,421 $ 5,796,178
=========== ===========
- -----------
*Primarily equities and bonds including approximately 30,000 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
-----------------------------------
2003 2002 2001
--------- --------- ---------
Service cost - benefits earned during
the year ......................... $ 41,142 $ 58,428 $ 50,961
Interest cost on projected benefit
obligation ....................... 202,424 207,940 205,976
Expected return on assets ............. (641,722) (783,467) (762,897)
Net amortization and deferral ......... (104,087) (114,284) (131,965)
--------- --------- ---------
Net pension benefit from qualified plan $(502,243) $(631,383) $(637,925)
========= ========= =========
The Company also sponsors an unfunded Retirement Restoration Plan, which is
a nonqualified plan that provides for the payment, upon retirement, of the
difference between the maximum annual payment permissible under the qualified
retirement plan pursuant to Federal limitations and the amount which would
otherwise have been payable under the qualified plan.
The following table sets forth the Retirement Restoration Plan's benefit
obligations at March 31, 2003, 2002 and 2001:
Years Ended March 31
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ................... $ 1,778,496 1,758,214 $ 2,026,495
Service cost .................... 5,389 8,573 4,945
Interest cost ................... 104,436 113,779 113,497
Amendments ...................... (347,147) -- --
Actuarial (gain) loss ........... (20,507) 97,210 (176,776)
Benefits paid ................... (167,281) (199,280) (209,947)
----------- ----------- -----------
Benefit obligation at end of year $ 1,353,386 $ 1,778,496 $ 1,758,214
=========== =========== ===========
The following table sets forth the status of the Retirement Restoration
Plan and the amounts recognized in the consolidated statements of financial
condition:
March 31
--------------------------
2003 2002
----------- -----------
Projected benefit obligation ..................... $(1,353,386) $(1,778,496)
Unrecognized net gain from past ex-
perience different from that assumed
and effects of changes in assumptions ....... (54,972) (34,465)
Unrecognized prior service costs ................. (286,262) 65,380
----------- -----------
Accrued pension cost included in other liabilities $(1,694,620) $(1,747,581)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 2003, 2002 and 2001 of $114,320, $126,847 and $151,751, respectively,
are offset against the net pension benefit from the qualified plan.
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.0% and 5.0%, respectively, at March 31, 2003
and 6.5% and 5.0%, respectively, at both March 31, 2002 and March 31, 2001. The
expected long-term rate of return used to project estimated earnings on plan
assets for the qualified plan was 6.0% for the year ended March 31, 2003 and
7.5% for the years ended March 31, 2002 and March 31, 2001. The calculations
also assume retirement at age 65, the normal retirement age.
9. Sources of Income
Income was derived from the following sources:
Investment Income Realized Gain
Years Ended --------------------------------------- (Loss) on
March 31 Investments
- -------- Other Before Income
2003 Interest Dividends Income Taxes
- ---- --------------------------------------- ------------
Companies more than
25% owned ......... $ 5,600 $ 3,073,770 $ 494,900 $ --
Companies 5% to 25%
owned ............. -- -- -- (47,525)
Companies less than
5% owned .......... 180,000 287,220 1,000 2,054,637
Other sources,
including temporary
investments ....... 18,890 -- -- --
------------------------------------------------------
$ 204,490 $ 3,360,990 $ 495,900 $ 2,007,112
======================================================
2002
- ----
Companies more than
25% owned ......... $ 39,200 $ 2,996,591 $ 487,400 $ --
Companies 5% to 25%
owned ............. 99,041 -- -- --
Companies less than
5% owned .......... 133,549 297,042 43,000 (762,114)
Other sources,
including temporary
investments ....... 50,731 -- --
------------------------------------------------------
$ 322,521 $ 3,293,633 $ 530,400 $ (762,114)
======================================================
2001
- ----
Companies more than
25% owned ......... $ 72,800 $ 2,585,386 $ 494,900 $ --
Companies 5% to 25%
owned ............. -- -- -- (3,000,000)
Companies less than
5% owned .......... 217,080 370,447 35,500 (2,125,493)
Other sources,
including temporary
investments ....... 252,361 -- -- --
------------------------------------------------------
$ 542,241 $ 2,955,833 $ 530,400 $(5,125,493)
======================================================
10. Summarized Financial Information of Wholly-Owned Portfolio Companies
The Company has three significant wholly-owned portfolio companies - The
RectorSeal Corporation, The Whitmore Manufacturing Company and Skylawn
Corporation - which are neither investment companies nor business development
companies. Accordingly, the accounts of such portfolio companies are not
included with those of the Company. Summarized combined financial information of
the three portfolio companies is as follows:
(all figures in thousands) March 31
------------------------------
2003 2002
-------- --------
Condensed Balance Sheet Data
Assets
Cash and temporary
investments ...................... $ 14,885 $ 21,884
Receivables ........................ 31,675 28,092
Inventories ........................ 40,854 38,721
Property, plant and equipment ...... 38,035 38,109
Other assets ....................... 24,598 21,072
-------- --------
Totals ........................... $150,047 $147,878
======== ========
Liabilities and Shareholder's Equity
Long-term debt ..................... $ 5,182 $ 10,594
Other liabilities .................. 16,319 16,926
Shareholder's equity ............... 128,546 120,358
-------- --------
Totals ........................... $150,047 $147,878
======== ========
Condensed Statements of Income ........ 2003 2002 2001
-------- -------- --------
Revenues ........................... $100,553 $ 96,417 $ 93,575
Costs and operating expenses ....... 88,861 83,475 80,952
Income before income taxes ......... 13,105 14,722 14,659
Income taxes ....................... 2,858 5,585 4,829
Net income ......................... 10,247 9,137 9,830
11. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$2,408,525 in five portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $74,000 through February, 2008. For the
three years ended March 31, total rental expense charged to investment income
was $60,482 in 2003, $58,984 in 2002 and $58,145 in 2001.
Selected Per Share Data and Ratios
Years Ended March
-----------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------
Per Share Data
Investment income .............................................. $ 1.06 $ 1.08 $ 1.06 $ .86 $ 1.00
Operating expenses ............................................. (.30) (.27) (.26) (.27) (.40)
Interest expense ............................................... (.12) (.24) (.30) (.12) (.11)
Income taxes ................................................... (.04) (.04) (.05) (.03) (.03)
-----------------------------------------------------------------
Net investment income .......................................... .60 .53 .45 .44 .46
Distributions from undistributed net investment income ......... (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments ........................ .35 (.14) (.85) 1.58 .26
Net increase (decrease) in unrealized appreciation of
investments after deferred taxes ........................... (11.85) 6.31 (1.69) (6.49) (10.81)
Exercise of employee stock options* ............................ -- (.08) -- -- (.30)
-----------------------------------------------------------------
Increase (decrease) in net asset value ......................... (11.50) 6.02 (2.69) (5.07) (10.99)
Net asset value
Beginning of year ............................................ 65.42 59.40 62.09 67.16 78.15
-----------------------------------------------------------------
End of year .................................................. $ 53.92 $ 65.42 $ 59.40 $ 62.09 $ 67.16
=================================================================
Increase (decrease) in deferred taxes on unrealized
appreciation ............................................... $ (6.35) $ 3.26 $ (1.01) $ (3.49) $ (6.04)
Deferred taxes on unrealized appreciation:
Beginning of year ............................................ 24.05 20.79 21.80 25.29 31.33
-----------------------------------------------------------------
End of year .................................................. $ 17.70 $ 24.05 $ 20.79 $ 21.80 $ 25.29
=================================================================
Ratios and Supplemental Data
Ratio of operating expenses to average net assets .............. .52% .42% .42% .42% .55%
Ratio of operating expenses to average net assets plus average
deferred taxes on unrealized appreciation .................. .39% .31% .31% .31% .39%
Ratio of net investment income to average net assets ........... 1.04% .85% .74% .67% .63%
Portfolio turnover rate ........................................ 1.53% 1.05% 2.56% 4.26% .19%
Shares outstanding at end of period (000s omitted) ............. 3,829 3,829 3,815 3,815 3,815
- ---------
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
Independent Auditors' Report
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statements of financial
condition of Capital Southwest Corporation and subsidiaries as of March 31, 2003
and 2002, including the portfolio of investments as of March 31, 2003, and the
related consolidated statements of operations, changes in net assets, and cash
flows for each of the years in the three-year period ended March 31, 2003 and
the selected per share data and ratios for each of the years in the five-year
period ended March 31, 2003. These financial statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and per share data and
ratios based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and per share data and ratios are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included the physical
examination of securities owned as of March 31, 2003 and 2002, held by the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements and selected per share
data and ratios referred to above present fairly, in all material respects, the
financial position of Capital Southwest Corporation and subsidiaries as of March
31, 2003 and 2002, the results of their operations, the changes in their net
assets and their cash flows for each of the years in the three-year period ended
March 31, 2003, and the selected per share data and ratios for each of the years
in the five-year period ended March 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
April 25, 2003
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The composite measure of the Company's financial performance in the
Consolidated Statements of Operations is captioned "Increase (decrease) in net
assets from operations" and consists of three elements. The first is "Net
investment income", which is the difference between the Company's income from
interest, dividends and fees and its combined operating and interest expenses,
net of applicable income taxes. The second element is "Net realized gain (loss)
on investments", which is the difference between the proceeds received from
disposition of portfolio securities and their stated cost, net of applicable
income tax expense. The third element is the "Net increase (decrease) in
unrealized appreciation of investments", which is the net change in the market
or fair value of the Company's investment portfolio, compared with stated cost,
net of an increase or decrease in deferred income taxes which would become
payable if the unrealized appreciation were realized through the sale or other
disposition of the investment portfolio. It should be noted that the "Net
realized gain (loss) on investments" and "Net increase (decrease) in unrealized
appreciation of investments" are directly related in that when an appreciated
portfolio security is sold to realize a gain, a corresponding decrease in net
unrealized appreciation occurs by transferring the gain associated with the
transaction from being "unrealized" to being "realized." Conversely, when a loss
is realized on a depreciated portfolio security, an increase in net unrealized
appreciation occurs.
Net Investment Income
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential return from equity participation and provides minimal
current yield in the form of interest or dividends. The Company also earns
interest income from the short-term investment of cash funds, and the annual
amount of such income varies based upon the average level of funds invested
during the year and fluctuations in short-term interest rates. During the three
years ended March 31, the Company had interest income from temporary cash
investments of $17,346 in 2003, $48,877 in 2002 and $249,000 in 2001. The
Company also receives management fees from its wholly-owned portfolio companies
which aggregated $458,400 in each of the years ended March 31, 2003, March 31,
2002 and March 31, 2001. During the three years ended March 31, 2003, the
Company recorded dividend income from the following sources:
Years Ended March 31
------------------------------------
2003 2002 2001
---------- ---------- ----------
AT&T Corp. ......................... $ 19,987 $ 19,987 $ 68,621
Alamo Group Inc. ................... 677,112 677,112 677,112
Dennis Tool Company ................ 49,999 49,999 49,999
Kimberly-Clark Corporation ......... 95,703 87,985 84,126
The RectorSeal Corporation ......... 960,000 960,000 960,000
Skylawn Corporation ................ 1,146,659 1,069,480 658,275
TCI Holdings, Inc. ................. 81,270 81,270 81,270
Texas Shredder, Inc. ............... 33,667 44,506 40,460
The Whitmore Manufacturing Company . 240,000 240,000 240,000
Other .............................. 56,593 63,294 95,970
---------- ---------- ----------
$3,360,990 $3,293,633 $2,955,833
========== ========== ==========
Total operating expenses, excluding interest expense, increased by $126,524
or 12.4% and by $43,684 or 4.5% during the years ended March 31, 2003 and 2002,
respectively. Due to the nature of its business, the majority of the Company's
operating expenses are related to employee and director compensation, office
expenses, legal and accounting fees and the net pension benefit. Interest
expense decreased by $452,611 during the year ended March 31, 2003 due to a
decrease in interest rates and the payoff of the subordinated debenture on June
3, 2002. For the year ended March 31, 2002, interest expense decreased by
$214,965 due to a decrease in interest rates.
Net Realized Gain (Loss) on Investments
Net realized gain on investments was $1,345,728 (after income tax expense
of $661,384) during the year ended March 31, 2003, compared with a loss of
$537,934 (after income tax benefit of $224,180) during 2002 and a loss of
$3,230,987 (after income tax benefit of $1,894,506) during 2001. Management does
not attempt to maintain a comparable level of realized gains from year to year,
but instead attempts to maximize total investment portfolio appreciation. This
strategy often dictates the long-term holding of portfolio securities in pursuit
of increased values and increased unrealized appreciation, but may at opportune
times dictate realizing gains or losses through the disposition of certain
portfolio investments.
Net Increase (Decrease) in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded an increase
(decrease) in unrealized appreciation of investments before income taxes of
$(69,688,616), $36,971,348 and $(10,310,835) in 2003, 2002 and 2001,
respectively. As explained in the first paragraph of this discussion and
analysis, the realization of gains or losses results in a corresponding decrease
or increase in unrealized appreciation of investments. Set forth in the
following table are the significant increases and decreases in unrealized
appreciation (before the related change in deferred income taxes and excluding
the effect of gains or losses realized during the year) by portfolio company for
securities held at the end of each year.
Years Ended March 31
2003 2002 2001
------------ ------------ ------------
AT&T Corp. ................. $ (426,165) $ (746,162) $ (4,681,896)
Alamo Group Inc. ........... (8,464,000) 2,821,000 2,821,000
All Components, Inc. ....... -- (50,000) 3,450,000
Balco, Inc. ................ 2,000,000 1,482,240 --
CDC Technologies, Inc./Drew
Scientific Group PLC .. -- (38,098) (2,592,541)
Concert Industries Ltd. .... (5,479,000) (3,740,000) 294,351
Encore Wire Corporation .... (10,898,000) 10,898,000 --
Liberty Media Corporation .. (1,868,329) (921,280) (10,605,732)
Mail-Well, Inc. ............ (2,557,926) (524,000) (6,290,000)
Media Recovery, Inc. ....... -- (8,000,000) 10,000,000
Organized Living, Inc. ..... (2,999,999) (3,000,000) --
Palm Harbor Homes, Inc. .... (39,275,000) 31,420,000 (7,855,000)
PETsMART, Inc. ............. (436,051) 5,298,343 654,220
The RectorSeal Corporation . 5,000,000 2,500,000 5,500,000
Skylawn Corporation ........ -- -- 3,000,000
Sprint Corporation-FON Group (254,880) (482,400) (2,952,720)
As shown in the above table for the year ended March 31, 2003, we sustained
a major $39,275,000 decrease in the value of our investment in Palm Harbor
Homes, Inc. This 35.7% decrease in value reflects Palm Harbor's vulnerability to
the unfavorable condition of the manufactured housing industry as the
availability of floor plan financing for retailers has declined and lenders have
withdrawn from manufactured housing mortgage financing for retail purchasers.
The hostile industry climate has created intense price competition and reduced
sales volume. We also experienced a significant decline in the value of our
investment in Encore Wire Corporation, which was reduced during the year by
$10,898,000, equivalent to 44.4%, as overcapacity in the electric wire and cable
industry led to intense price competition and lower profit margins. Another
large decline was in the value of our investment in Alamo Group Inc., which
decreased by $8,464,000 - a 27.3% decline during the year - due to the weakness
of mower sales to governmental agencies and the unfavorable condition of the
agricultural equipment market. Another large decline was in the value of our
investment in Concert Industries Ltd., which decreased by $5,479,000 - a 92.5%
decline during the year - as the company experienced continuing losses
attributable to production problems in its new Canadian manufacturing facility
and to increased competition in the air-laid nonwoven fabrics market.
A description of the investments listed above and other material components
of the investment portfolio is included elsewhere in this report under the
caption "Portfolio of Investments - March 31, 2003."
Deferred Taxes on Unrealized Appreciation of Investments
The Company provides for deferred Federal income taxes on net unrealized
appreciation of investments. Such taxes would become payable at such time as
unrealized appreciation is realized through the sale or other disposition of
those components of the investment portfolio which would result in taxable
transactions. At March 31, 2003 consolidated deferred Federal income taxes of
$67,790,000 were provided on net unrealized appreciation of investments of
$195,598,595 compared with deferred taxes of $92,107,000 on net unrealized
appreciation of $265,287,211 at March 31, 2002. Deferred income taxes at March
31, 2003 and 2002 were provided at the then currently effective maximum Federal
corporate tax rate on capital gains of 35%.
Portfolio Investments
During the year ended March 31, 2003, the Company invested $11,904,639 in
various portfolio securities listed elsewhere in this report under the caption
"Portfolio Changes During the Year," which also lists dispositions of portfolio
securities. During the 2002 and 2001 fiscal years, the Company invested a total
of $3,545,458 and $15,922,079, respectively.
Financial Liquidity and Capital Resources
At March 31, 2003, the Company had cash and cash equivalents of
approximately $4.7 million. Pursuant to Small Business Administration ("SBA")
regulations, cash and cash equivalents of $0.5 million held by CSVC may not be
transferred or advanced to CSC without the consent of the SBA. Under current SBA
regulations and subject to SBA's approval of its credit application, CSVC would
be entitled to borrow up to $63.8 million. The Company also has an unsecured
$25,000,000 revolving line of credit from a commercial bank, of which $9,500,000
was available at March 31, 2003. With the exception of a capital gain
distribution made in the form of a distribution of the stock of a portfolio
company in the fiscal year ended March 31, 1996, the Company has elected to
retain all gains realized during the past 35 years. Retention of future gains is
viewed as an important source of funds to sustain the Company's investment
activity. Approximately $25.4 million of the Company's investment portfolio is
represented by unrestricted publicly-traded securities, which have an
ascertainable market value and represent a source of liquidity.
Funds to be used by the Company for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Skylawn
Corporation, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies of the Company, to the extent of their
available cash reserves and borrowing capacities. At March 31, 2003, the Company
owed $7,500,000 to Skylawn Corporation.
Management believes that the Company's cash and cash equivalents and cash
available from other sources described above are adequate to meet its expected
requirements. Consistent with the long-term strategy of the Company, the
disposition of investments from time to time may also be an important source of
funds for future investment activities.
Critical Accounting Policies
Valuation of Investments
In accordance with the Investment Company Act of 1940, investments in
unrestricted securities (freely marketable securities having readily available
market quotations) are valued at market and investments in restricted securities
(securities subject to one or more resale restrictions) are valued at fair value
determined in good faith by the Company's Board of Directors. Under the
valuation policy of the Company, unrestricted securities are valued at the
closing sale price for listed securities and at the lower of the closing bid
price or the last sale price for Nasdaq securities on the valuation date.
Restricted securities, including securities of publicly-owned companies which
are subject to restrictions on resale, are valued at fair value, which is
considered to be the amount the Company may reasonably expect to receive if such
securities were sold on the valuation date. Valuations as of any particular
date, however, are not necessarily indicative of amounts which may ultimately be
realized as a result of future sales or other dispositions of securities.
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
Deferred Income Taxes
In future years, the Company may not qualify or elect to be taxed as a
regulated investment company ("RIC") under applicable provisions of the Internal
Revenue Code. Therefore, deferred Federal income taxes have been provided on net
unrealized appreciation of investments at the then currently effective corporate
tax rate on capital gains.
Impact of Inflation
The Company does not believe that its business is materially affected by
inflation, other than the impact which inflation may have on the securities
markets, the valuations of business enterprises and the relationship of such
valuations to underlying earnings, all of which will influence the value of the
Company's investments.
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
business development company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. Accordingly the Company states that:
The Company's objective is to achieve capital appreciation through
investments in businesses believed to have favorable growth potential. Such
businesses are often undercapitalized small companies which lack management
depth and have not yet attained profitability. The Company's venture investments
often include securities which do not yield interest or dividends and are
subject to legal or contractual restrictions on resale, which restrictions
adversely affect the liquidity and marketability of such securities.
Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company, there is a
significantly greater risk of loss than is the case with traditional investment
securities. The high-risk, long-term nature of the Company's venture investment
activities may prevent shareholders of the Company from achieving price
appreciation and dividend distributions.
Selected Consolidated Financial Data
(all figures in thousands except per share data)
1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ............. $ 33,953 $ 41,993 $ 49,730 $ 58,544 $ 59,908 $ 61,154
Unrealized appreciation ......... 113,153 132,212 153,031 198,386 233,383 340,132
--------- --------- --------- --------- --------- ---------
Investments at market or
fair value ................... 147,106 174,205 202,761 256,930 293,291 401,286
Total assets .................... 176,422 270,874 213,811 326,972 310,760 522,324
Notes payable * ................. 15,000 15,000 11,000 11,000 5,000 5,000
Deferred taxes on
unrealized appreciation ...... 38,112 45,932 53,247 69,121 81,313 118,674
Net assets ...................... 121,455 133,053 147,370 189,048 218,972 296,023
Shares outstanding .............. 3,681 3,715 3,735 3,767 3,767 3,788
- --------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ........... $ 2,189 $ 2,870 $ 2,447 $ 2,855 $ 2,574 $ 2,726
Net realized gain (loss) on
investments .................. 5,099 (475) 142 11,174 6,806 6,485
Net increase (decrease) in
unrealized appreciation
before distributions ......... 8,524 11,160 13,584 38,746 22,804 69,388
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions ......... 15,812 13,555 16,173 52,775 32,184 78,599
Cash dividends paid ............. (2,202) (2,228) (2,241) (2,270) (2,260) (2,268)
Securities distributed .......... -- -- -- (9,402) -- --
Employee stock options
exercised .................... 322 272 385 575 -- 720
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets 13,932 11,599 14,317 41,678 29,924 77,051
- --------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ...... $ 10.35 $ 12.36 $ 14.26 $ 18.35 $ 21.59 $ 31.33
Net assets ...................... 32.99 35.81 39.46 50.18 58.13 78.15
Closing market price ............ 36.50 38.125 38.00 60.00 67.875 94.00
Cash dividends paid ............. .60 .60 .60 .60 .60 .60
Securities distributed .......... -- -- -- 2.50 -- --
* Excludes quarter-end borrowing which is repaid on the first business day after
year end.
Selected Consolidated Financial Data (continued)
(all figures in thousands except per share data)
1999 2000 2001 2002 2003
- -------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost ............. $ 73,580 $ 85,002 $ 87,602 $ 82,194 $ 91,462
Unrealized appreciation ......... 276,698 238,627 228,316 265,287 195,598
--------- --------- --------- --------- ---------
Investments at market or
fair value ................... 350,278 323,629 315,918 347,481 287,060
Total assets .................... 360,786 392,586 322,668 357,183 298,490
Notes payable * ................. 5,000 10,000 16,000 14,000 23,000
Deferred taxes on
unrealized appreciation ...... 96,473 83,151 79,310 92,107 67,790
Net assets ...................... 256,232 236,876 226,609 250,491 206,467
Shares outstanding .............. 3,815 3,815 3,815 3,829 3,829
- -------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ........... $ 1,762 $ 1,663 $ 1,723 $ 2,042 $ 2,299
Net realized gain (loss) on
investments .................. 995 6,020 (3,231) (538) 1,346
Net increase (decrease) in
unrealized appreciation
before distributions ......... (41,233) (24,750) (6,470) 24,174 (45,372)
--------- --------- --------- --------- ---------
Increase (decrease) in net
assets from operations
before distributions ......... (38,476) (17,067) (7,978) 25,678 (41,727)
Cash dividends paid ............. (2,280) (2,289) (2,289) (2,295) (2,297)
Securities distributed .......... -- -- -- -- --
Employee stock options
exercised .................... 965 -- -- 499 --
--------- --------- --------- --------- ---------
Increase (decrease) in net assets (39,791) (19,356) (10,267) 23,882 (44,024)
- -------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ...... $ 25.29 $ 21.80 $ 20.79 $ 24.05 $ 17.70
Net assets ...................... 67.16 62.09 59.40 65.42 53.92
Closing market price ............ 73.00 54.75 65.00 68.75 48.15
Cash dividends paid ............. .60 .60 .60 .60 .60
Securities distributed .......... -- -- -- -- --
* Excludes quarter-end borrowing which is repaid on the first business day after
year end.
Shareholder Information
Stock Transfer Agent
American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038
(telephone 800-937-5449) serves as transfer agent for the Company's common
stock. Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.
Shareholders
The Company had approximately 800 record holders of its common stock at
March 31, 2003. This total does not include an estimated 2,300 shareholders with
shares held under beneficial ownership in nominee name or within clearinghouse
positions of brokerage firms or banks.
Market Prices
The Company's common stock trades on The Nasdaq Stock Market under the
symbol CSWC. The following high and low selling prices for the shares during
each quarter of the last two fiscal years were taken from quotations provided to
the Company by Nasdaq:
Quarter Ended High Low
- -------------------------------------------------------------------------
June 30, 2001.................................... $69.00 $ 59.00
September 30, 2001............................... 68.20 60.25
December 31, 2001................................ 67.19 57.35
March 31, 2002................................... 69.01 63.28
Quarter Ended High Low
- -------------------------------------------------------------------------
June 30, 2002.................................... $79.24 $ 66.31
September 30, 2002............................... 70.25 58.00
December 31, 2002............................... 60.24 45.35
March 31, 2003................................... 53.00 43.00
Dividends
The payment dates and amounts of cash dividends per share since April 1,
2001 are as follows:
Payment Date Cash Dividend
- -----------------------------------------------------------------------
May 31, 2001.............................................. $0.20
November 30, 2001......................................... 0.40
May 31, 2002.............................................. 0.20
November 29, 2002......................................... 0.40
May 30, 2003.............................................. 0.20
The amounts and timing of cash dividend payments have generally been
dictated by requirements of the Internal Revenue Code regarding the distribution
of taxable net investment income (ordinary income) of regulated investment
companies. Instead of distributing realized long-term capital gains to
shareholders, the Company has ordinarily elected to retain such gains to fund
future investments.
Automatic Dividend Reinvestment and Optional Cash Contribution Plan
As a service to its shareholders, the Company offers an Automatic Dividend
Reinvestment and Optional Cash Contribution Plan for shareholders of record who
own a minimum of 25 shares. The Company pays all costs of administration of the
Plan except brokerage transaction fees. Upon request, shareholders may obtain
information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas,
Texas 75230. Telephone (972) 233-8242. Questions and answers about the Plan are
on the next page.
Annual Meeting
The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday, July 21, 2003, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Capital Southwest Corporation:
We consent to the incorporation by reference in the registration statement (No.
33-43881) on Form S-8 of Capital Southwest Corporation of our report dated April
25, 2003, with respect to the consolidated statements of financial condition of
Capital Southwest Corporation and subsidiary as of March 31, 2003 and 2002,
including the portfolio of investments as of March 31, 2003, and the related
consolidated statements of operations, changes in net assets, and cash flows for
each of the years in the three-year period ended March 31, 2003, and the
selected per share data and ratios for each of the years in the five-year period
ended March 31, 2003, which report appears in the annual report to shareholders
for the year ended March 31, 2003, and is incorporated by reference in the March
31, 2003 annual report on Form 10-K of Capital Southwest Corporation.
KPMG LLP
Dallas, Texas
June 12, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Capital Southwest Corporation (the
"Company") on Form 10-K for the year ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
R. Thomas, President and Chairman of the Board of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
1. The 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 Report fairly presents, in all material
respects, the consolidated financial condition and results of operations of the
Company.
Date: June 13, 2003 By: /s/ William R. Thomas
------------- ----------------------------
William R. Thomas, President
and Chairman of the Board
A signed original of this written statement required by Section 906 has been
provided to Capital Southwest Corporation and will be retained by Capital
Southwest Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Capital Southwest Corporation (the
"Company") on Form 10-K for the year ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Susan
K. Hodgson, Secretary-Treasurer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
1. The 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 Report fairly presents, in all material
respects, the consolidated financial condition and results of operations of the
Company.
Date: June 13, 2003 By: /s/ Susan K. Hodgson
------------- -------------------------------------
Susan K. Hodgson, Secretary-Treasurer
A signed original of this written statement required by Section 906 has been
provided to Capital Southwest Corporation and will be retained by Capital
Southwest Corporation and furnished to the Securities and Exchange Commission or
its staff upon request.