View:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
SCHEDULE 13D
(RULE 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
(Amendment No. )(1)
Capital Southwest Corporation
-----------------------------
(Name of Issuer)
Common Stock, $1 Par Value
--------------------------
(Title of Class of Securities)
140501107
---------
(CUSIP Number)
STEVEN WOLOSKY, ESQ.
OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
(212) 451-2300
--------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
August 16, 2007
---------------
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition that is the subject of this Schedule 13D, and is filing
this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the
following box |X|.
NOTE. Schedules filed in paper format shall include a signed original and
five copies of the schedule, including all exhibits. SEE Rule 13d-7 for other
parties to whom copies are to be sent.
(Continued on following pages)
(Page 1 of 14 Pages)
- ------------
(1) The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which would
alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, SEE the
NOTES).
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 2 of 14 Pages
- ---------------------- ----------------------
================================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
NED SHERWOOD
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
(b) /X/
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) / /
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
U.S.A.
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY 49,938
OWNED BY -----------------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON WITH 184,554
-----------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
73,938
-----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
184,554
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
258,492
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* / /
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
6.6%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 3 of 14 Pages
- ---------------------- ----------------------
================================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
ZS CROSSOVER II GP, L.L.C.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
(b) /X/
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) / /
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY -0-
OWNED BY -----------------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON WITH 174,332
-----------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
-0-
-----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
174,332
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
174,332
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* / /
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
4.5%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 4 of 14 Pages
- ---------------------- ----------------------
================================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
ZS CROSSOVER II L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
(b) /X/
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) / /
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY -0-
OWNED BY -----------------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON WITH 106,342
-----------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
-0-
-----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
106,342
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
106,342
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* / /
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
2.8%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 5 of 14 Pages
- ---------------------- ----------------------
================================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
ZS SPECIAL I L.P.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
(b) /X/
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) / /
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY -0-
OWNED BY -----------------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON WITH 67,990
-----------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
-0-
-----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
67,990
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
67,990
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* / /
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
1.3%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 6 of 14 Pages
- ---------------------- ----------------------
================================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
MRMP TRUST
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
(b) /X/
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) / /
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
SOUTH DAKOTA
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY 49,938
OWNED BY -----------------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON WITH -0-
-----------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
49,938
-----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
-0-
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
49,938
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* / /
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
LESS THAN 1%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 7 of 14 Pages
- ---------------------- ----------------------
================================================================================
1 NAME OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
THE NED AND EMILY SHERWOOD FOUNDATION
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
(b) /X/
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
OO
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEM 2(d) OR 2(e) / /
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
DELAWARE
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY -0-
OWNED BY -----------------------------------------------------------------
EACH 8 SHARED VOTING POWER
REPORTING
PERSON WITH 10,222
-----------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
-0-
-----------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
10,222
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
10,222
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES* / /
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
LESS THAN 1%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO
================================================================================
*SEE INSTRUCTIONS BEFORE FILLING OUT!
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 8 of 14 Pages
- ---------------------- ----------------------
The following constitutes the Schedule 13D filed by the undersigned
(the "Schedule 13D").
Item 1. SECURITY AND ISSUER.
This statement relates to shares of the Common Stock, $1 Par Value
(the "Shares"), of Capital Southwest Corporation (the "Issuer"). The address of
the principal executive offices of the Issuer is 12900 Preston Road, Suite 700,
Dallas, Texas 75230.
Item 2. IDENTITY AND BACKGROUND.
(a) This statement is being filed by Ned Sherwood, ZS Crossover II GP,
L.L.C. ("Crossover GP"), a Delaware limited liability company, ZS Crossover II
L.P. ("Crossover II"), a Delaware limited partnership, ZS Special I L.P.
("Special I"), a Delaware limited partnership, MRMP Trust ("MRMP"), a South
Dakota trust and The Ned And Emily Sherwood Foundation (the "Foundation"), a
charitable foundation organized in the State of Delaware. Each of the foregoing
is referred to as a "Reporting Person" and collectively as the "Reporting
Persons."
The Reporting Persons have entered into a Joint Filing Agreement,
dated August 16, 2007, a copy of which is attached as an exhibit hereto and
incorporated herein by reference, pursuant to which the Reporting Persons have
agreed to file this statement jointly in accordance with the provisions of Rule
13d-1(k)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Reporting Persons expressly disclaim that they have agreed to act as
a group other than as described in this Schedule 13D. Pursuant to Rule 13d-4 of
the Exchange Act, the Reporting Persons expressly declare that the filing of
this statement shall not be construed as an admission that any such person is,
for the purposes of Section 13(d) and/or Section 13(g) of the Exchange Act or
otherwise, the beneficial owner of any securities covered by this statement held
by any other person.
(b) The principal business address of each of Mr. Sherwood, Crossover GP,
Crossover II, Special I, MRMP and the Foundation is 1133 Avenue of the Americas,
New York, New York 10036.
(c) The principal business of Mr. Sherwood is as serving as a management
committee member of Crossover GP and as the Chief Executive Officer of the
general partner of ZS Fund L.P., a private equity firm engaged in making
long-term investments in successful middle-market companies. The principal
business of Crossover GP is serving as the general partner of each of Crossover
II and Special I. The principal business of Crossover II and Special I is
acquiring, holding and disposing of investments in various companies. MRMP is an
investment vehicle owned by the Sherwood family. The Foundation is a charitable
foundation for which Mr. Sherwood serves as a board member.
(d) No Reporting Person has, during the last five years, been convicted
in a criminal proceeding (excluding traffic violations or similar misdemeanors).
(e) No Reporting Person has, during the last five years, been party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or mandating
activities subject to, federal or state securities laws or finding any violation
with respect to such laws.
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 9 of 14 Pages
- ---------------------- ----------------------
(f) Mr. Sherwood is a citizen of the United States of America.
Item 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
The aggregate purchase cost of the 258,492 Shares beneficially owned
by the Reporting Persons is approximately $34,503,085. The 106,342 Shares owned
by Crossover II and the 67,990 Shares owned by Special I were acquired with
their working capital. The 49,938 Shares owned by MRMP were acquired with MRMP's
investment capital. The 10,222 Shares owned by the Foundation where acquired
with the Foundation's investment capital.
Item 4. PURPOSE OF TRANSACTION.
The Reporting Persons purchased the Shares based on the Reporting
Persons' belief that the Shares, when purchased, were undervalued and
represented an attractive investment opportunity. Depending upon overall market
conditions, other investment opportunities available to the Reporting Persons,
and the availability of Shares at prices that would make the purchase of
additional Shares desirable, the Reporting Persons may endeavor to increase
their position in the Issuer through, among other things, the purchase of Shares
on the open market or in private transactions or otherwise, on such terms and at
such times as the Reporting Persons may deem advisable.
On August 16, 2007, Crossover II delivered a letter to the Board of
Directors of the Issuer expressing its belief that the Issuer's Shares trade at
an excessive discount to the market value of its assets and highlighting several
concerns it has about certain aspects of the strategy and direction of the
Issuer. In the letter, Crossover II recommends that the Issuer take steps to
narrow the gap between the Issuer's intrinsic value and its stock price. The
letter is attached hereto as Exhibit 99.2 and is incorporated herein by
reference.
No Reporting Person has any present plan or proposal which would
relate to or result in any of the matters set forth in subparagraphs (a) - (j)
of Item 4 of Schedule 13D except as set forth herein or such as would occur upon
completion of any of the actions discussed above. The Reporting Persons intend
to review their investment in the Issuer on a continuing basis and engage in
discussions with management and the Board of Directors of the Issuer concerning
the business, operations and future plans of the Issuer. Depending on various
factors including, without limitation, the Issuer's financial position and
investment strategy, the price levels of the Shares, conditions in the
securities markets and general economic and industry conditions, the Reporting
Persons may in the future take such actions with respect to their investment in
the Issuer as they deem appropriate including, without limitation, seeking Board
representation, making proposals to the Issuer concerning changes to the
capitalization, ownership structure or operations of the Issuer, purchasing
additional Shares, selling some or all of their Shares, engaging in short
selling of or any hedging or similar transaction with respect to the Shares or
changing their intention with respect to any and all matters referred to in Item
4.
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 10 of 14 Pages
- ---------------------- ----------------------
Item 5. INTEREST IN SECURITIES OF THE ISSUER.
(a) The aggregate percentage of Shares reported owned the Reporting
Persons is based upon 3,889,151 Shares outstanding, which is the total number of
Shares outstanding as of July 31, 2007, as reported in the Issuer's Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on August
3, 2007.
As of the close of business on August 16, 2007, Crossover II and
Special I beneficially owned 106,342 and 67,990 Shares, respectively,
constituting approximately 2.7%, and 1.8% respectively, of the Shares
outstanding. Crossover GP, as the general partner of each of Crossover II and
Special I, may be deemed to beneficially owned the 174,332 Shares owned in the
aggregate by Crossover II and Special I, constituting approximately 4.5% of the
Shares outstanding. As a management committee member of Crossover GP, Mr.
Sherwood may be deemed to beneficially own the Shares owned by Crossover GP.
As of the close of business on August 16, 2007, MRMP beneficially
owned 49,938 Shares, constituting 1.3% of the Shares outstanding. As a trustee
with sole voting and dispository power over the Shares owned by MRMP, Mr.
Sherwood may be deemed to beneficially own the Shares owned by MRMP.
As of the close of business on August 16, 2007, The Foundation may
be deemed to beneficially own 10,222 Shares, constituting less than 1% of the
Shares outstanding. As a director of the Foundation Mr. Sherwood may be deemed
to beneficially own the 10,222 Shares owned by the Foundation.
As of the close of business on August 16, 2007, Mr. Sherwood
beneficially owned an additional 24,000 Shares, constituting less than 1% of the
Shares outstanding, by virtue of a written agreement between Mr. Sherwood and
the Warlen L.P. ("Warlen") that gives Mr. Sherwood approval to control all
purchases and sales of the Shares owned by Warlen.
(b) By virtue of his positions with Crossover II, Special I and the
Foundation, Mr. Sherwood has shared power to vote and dispose of the 184,554
Shares aggregately owned by Crossover II, Special I and the Foundation. Mr.
Sherwood has sole power to vote and dispose of the 49,938 Shares owned by MRMP.
By virtue of his agreement with Warlen, Mr. Sherwood has the sole power to
dispose of the 24,000 Shares that he may be deemed to beneficially own. Mr.
Sherwood does not have voting power over the 24,000 Shares owned by Warlen.
(c) Schedule A annexed hereto lists all transactions in the Securities
by the Reporting Persons during the past sixty days. All of such transactions
were effected in the open market, except as otherwise noted on Schedule A.
(d) No person other than the Reporting Persons is known to have the
right to receive, or the power to direct the receipt of dividends from, or
proceeds from the sale of, the Shares.
(e) Not applicable.
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 11 of 14 Pages
- ---------------------- ----------------------
Item 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO SECURITIES OF THE ISSUER.
Mr. Sherwood has entered into an agreement with Warlen that gives
Mr. Sherwood approval to control all purchases and sales of the Shares owned by
Warlen.
On August 16, 2007, the Reporting Persons entered into a Joint
Filing Agreement (the "Joint Filing Agreement") in which the parties agreed to
the joint filing on behalf of each of them of statements on Schedule 13D with
respect to the securities of the Issuer to the extent required by applicable
law. The Joint Filing Agreement is attached as Exhibit 99.1 hereto and is
incorporated herein by reference.
Other than as described herein, there are no contracts,
arrangements, understandings or relationships among the Reporting Persons, or
between the Reporting Persons and any other person, with respect to the
securities of the Issuer.
Item 7. MATERIAL TO BE FILED AS EXHIBITS.
99.1. Joint Filing Agreement by and among Ned Sherwood, ZS Crossover
II GP, L.L.C., ZS Crossover II L.P., ZS Special I L.P., MRMP
Trust and The Ned And Emily Sherwood Foundation, dated August
16, 2007.
99.2. Letter from Crossover II to the Board of Directors of the
Issuer, dated August 16, 2007.
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 12 of 14 Pages
- ---------------------- ----------------------
SIGNATURES
After reasonable inquiry and to the best of his knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
Dated: August 16, 2007 ZS CROSSOVER II L.P.
By: ZS Crossover II GP, L.L.C.
Its General Partner
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Management Committee Member
ZS SPECIAL I L.P.
By: ZS Crossover II GP, L.L.C.
Its General Partner
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Management Committee Member
ZS CROSSOVER II GP, L.L.C.
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Management Committee Member
MRMP TRUST
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Trustee
THE NED AND EMILY SHERWOOD FOUNDATION
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Director
/s/ Ned Sherwood
---------------------------------------
NED SHERWOOD
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 13 of 14 Pages
- ---------------------- ----------------------
SCHEDULE A
TRANSACTIONS IN THE SHARES BY THE REPORTING PERSONS DURING THE PAST 60 DAYS:
Shares Purchased Price Per Share ($) Date of Purchase
---------------- ------------------- ----------------
ZS SPECIAL I L.P.
-----------------
3,038 $120.3470 08/09/07
704 $128.4984 08/07/07
1,000 $135.3265 07/31/07
2,200 $136.4975 07/26/07
2,500 $141.0009 07/25/07
4,900 $145.3096 07/24/07
1,000 $150.3210 07/23/07
4,189 $150.0500 07/20/07
1,030 $153.1782 07/19/07
1,300 $150.4248 07/18/07
3,500 $150.9457 07/17/07
1,500 $153.2359 07/16/07
100 $154.3200 07/12/07
1,600 $151.2666 07/11/07
1,500 $152.8386 07/09/07
200 $154.5498 07/05/07
500 $154.5700 07/05/07
2,090 $155.2450 06/29/07
300 $160.5900 06/27/07
1,413 $155.1348 06/26/07
2,295 $153.0079 06/25/07
Shares Purchased Price Per Share ($) Date of Purchase
---------------- ------------------- ----------------
ZS CROSSOVER II L.P.
--------------------
1,000 $135.3265 07/31/07
100 $163.2900 06/19/07
ZS CROSSOVER II GP, L.L.C.
--------------------------
None
MRMP TRUST
----------
None
THE NED AND EMILY SHERWOOD FOUNDATION
-------------------------------------
None
NED SHERWOOD
------------
None
- ---------------------- ----------------------
CUSIP No. 140501107 13D Page 14 of 14 Pages
- ---------------------- ----------------------
EXHIBIT INDEX
Exhibit Exhibit Number
- ------- --------------
1. Joint Filing Agreement by and among Ned Sherwood, 99.1
ZS Crossover II GP, L.L.C., ZS Crossover II L.P.,
ZS Special I L.P., MRMP Trust and The Ned And
Emily Sherwood Foundation , dated August 16, 2007.
2. Letter from Crossover II to the Board of 99.2
Directors of the Issuer, dated August 16, 2007.
Exhibit 99.1
JOINT FILING AGREEMENT
In accordance with Rule 13d-1(k)(1)(iii) under the Securities
Exchange Act of 1934, as amended, the persons named below agree to the joint
filing on behalf of each of them of a Statement on Schedule 13D dated August 16,
2007 (including amendments thereto) with respect to the Common Stock of Capital
Southwest Corporation. This Joint Filing Agreement shall be filed as an Exhibit
to such Statement.
Dated: August 16, 2007 ZS CROSSOVER II L.P.
By: ZS Crossover II GP, L.L.C.
Its General Partner
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Management Committee Member
ZS SPECIAL I L.P.
By: ZS Crossover II GP, L.L.C.
Its General Partner
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Management Committee Member
ZS CROSSOVER II GP, L.L.C.
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Management Committee Member
MRMP TRUST
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Trustee
THE NED AND EMILY SHERWOOD FOUNDATION
By: /s/ Ned Sherwood
----------------------------------------------
Name: Ned Sherwood
Title: Director
/s/ Ned Sherwood
---------------------------------------
NED SHERWOOD
Exhibit 99.2
ZS CROSSOVER II L.P.
1133 Avenue of the Americas
27th Floor
New York, NY 10036
(212) 398-6200; (212) 398-1808 (fax)
August 16, 2007
Board of Directors
Capital Southwest Corporation
12900 Preston Road, Suite 700
Dallas, Texas 75230
We appreciate the time management took to speak with us earlier this week.
Based on our discussions with Capital Southwest Corporation ("CSWC" or the
"Company") management and our in-depth review of publicly available information,
it is our belief that the Company's stock price continues to trade at an
excessive discount to the market value of its assets, which we estimate to range
between $175 and $200 per share. This market value is 58% to 81% greater than
yesterday's closing price of CSWC of $110.66 per share. We believe that the
Company is trading at a significant discount to its intrinsic value because of,
among other things, certain policies and practices that the Company has
historically adopted and has indicated it will continue to apply for the
foreseeable future.
We also have serious issues with certain judgments of CSWC's Board of
Directors (the "Board"). Unlike most Business Development Companies ("BDCs"),
CSWC has generally chosen to retain its realized gains rather than distribute
the proceeds to its shareholders. CSWC has also chosen not to exercise its
registration rights on its four most significant holdings in public companies so
such shares can be freely traded as market conditions warrant. Based on CSWC's
Quarterly Report on Form 10-Q for the period ended June 30, 2007 (the "Form
10-Q"), these two policies resulted in a reduction of the Company's stated net
asset value ("NAV") by nearly $100 per share. In other words, as of June 30,
2007, CSWC's NAV would have been $233.95 per share as opposed to the $135.61 per
share that was reported.
It is clear to us that the Board and senior management have adopted
policies or utilized accounting presentation practices which result in a
significant understatement of CSWC's NAV, and that these policies and practices
should be changed immediately.
The rationale for this belief is as follows:
o CSWC owns significant equity positions in four publicly traded companies
(Alamo Group Inc., Encore Wire Corporation, Palm Harbor Homes, Inc., and Heelys,
Inc.). Although CSWC has held these stakes for many years, it has chosen not to
exercise its registration rights with respect to these securities and,
therefore, it values these stakes at significant discounts (generally 30% or
more) to their end-of-quarter market prices. Further, as a result of its
affiliate's status, the failure to register the shares does not permit CSWC to
sell a significant portion of its position when market conditions warrant.
o CSWC has historically adopted a policy of electing to "retain all gains
realized with one exception during the past 39 years" (quote from the Form
10-Q), and its stated intention is to continue to do so in the future. This
policy is the most damaging with regard to value obfuscation because it the
justification for the accrual of the deferred tax liability which totaled $219.6
million, or $56.47 per share, as of June 30, 2007.
CSWC is structured as a BDC and, therefore, all income and tax liabilities
are the responsibility of the shareholders, and not of the Company. Nonetheless,
CSWC, by choosing to retain all gains, has obligated the Company to pay on
behalf of its shareholders a 35% tax to the IRS. If gains were distributed to
the shareholders rather than retained, CSWC would owe no tax, and the
shareholders would owe long-term capital gains taxes at either a 15% rate (for
individuals) or 0% (for tax-exempt entities). In either case, the 35% rate is
well in excess of what actually is owed. This practice is unwarranted and
totally inconsistent with good business practice.
The Company has indicated that this policy permits it the flexibility to
make new investments without having to raise new equity in the capital markets;
however, the Form 10-Q showed that CSWC had approximately $94.6 million of cash
and unrestricted marketable securities plus $41.4 million of available credit
lines or a total of $136.0 million of liquidity. The Company could also increase
its credit lines very significantly if it so decided.
During the past five years, CSWC has made new venture capital investments
at the rate of approximately $8.5 million per year. Therefore, the maintenance
of a policy that requires the booking of a $219.4 million deferred tax liability
when the Company has enough liquidity to make 16 years of investments at its
recent pace is unwarranted and totally inconsistent with good business practice.
By just changing CSWC's distribution policy, this liability would no longer have
to be accrued and CSWC's NAV would increase by $56.47 per share from $135.21 to
$191.68 per share (as of June 30, 2007). This figure does not include the
discount attributable to CSWC's failure to register its shares in its four major
public company holdings.
We also believe that CSWC has created value historically by being a
successful growth capital investor in private companies. Your policy of
retaining virtually all of your securities holdings even after the companies
have matured (i.e., earnings have leveled off and/or the company has gone
public) has significantly impaired shareholders' returns.
For example, in the case of Alamo, its compound annual return since its
1993 IPO has been approximately 5.4% versus the S&P 500's compound return of
10.2% over the same period. Similarly, since Palm Harbor's IPO in 1995, its
stock price has increased by approximately 6.9% per year versus the S&P 500's
compound annual return of 9.7% over the same period. Heely's went public in
December 2006 at a price of $21.00, and it closed yesterday at $8.76. Given that
CSWC does not have a track record of creating value in its publicly traded
securities, the Company should have sold such securities as soon as was possible
and/or distributed them to its shareholders who could then have made their own
investment decisions.
2
In summary, it is clear that the Board and senior management are not
working to narrow the gap between CSWC's intrinsic value and its stock price
but, instead, have adopted policies and practices which result in the
significant and continued understatement of CSWC's intrinsic value. These
practices are clearly not in the best interest of CSWC's stockholders.
We would expect the Board and the Company's new CEO to immediately change
these policies and practices, including:
- the method of valuing its portfolio securities;
- the policy of retaining realized gains; and
- the holding on to investments after they are public and have matured.
Given our discussions with management and our review of publicly available
information, however, we have little faith that the Board and the Company's new
CEO are prepared to make the necessary changes. Absent such changes, we believe
that a complete liquidation of the Company is the best way to realize the
Company's full value for stockholders.
Accordingly, we believe that management should make the necessary changes
we recommend or that the Board should adopt a formal plan of complete
liquidation for CSWC under which all of its assets would be sold and the
proceeds distributed to stockholders. We would be happy to meet with the Board
and management to discuss our views on maximizing shareholder value for CSWC's
stockholders; however, we can no longer tolerate inaction. We therefore must
reserve all rights to take any and all actions we deem appropriate if the Board
and new CEO are unwilling to do what is necessary and proper for its
stockholders. We look forward to a positive response and hope further actions on
our part will be unnecessary.
Sincerely,
/s/ Ned L. Sherwood
-----------------------------------
Ned L. Sherwood
3