UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................to .................
Commission File Number: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
12900 Preston Road, Suite 700, Dallas, Texas 75230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-8242
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer ____ Accelerated filer X Non-accelerated filer ____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,889,151 shares of Common Stock, $1 Par Value as of January 9, 2008
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
ITEM 1. Consolidated Financial Statements (1)
Consolidated Statements of Financial Condition
June 30, 2007 (Unaudited) and March 31, 2007.............3
Consolidated Statements of Operations (Unaudited)
For the three months ended June 30, 2007
and June 30, 2006........................................4
Consolidated Statements of Changes in Net Assets
For the three months ended June 30, 2007 (Unaudited)
and year ended March 31, 2007............................5
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended June 30, 2007 and
June 30, 2006............................................6
Portfolio of Investments
June 30, 2007............................................7
Notes to Consolidated Financial Statements.......................12
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................19
ITEM 3. Quantitative and Qualitative Disclosure About
Market Risk.........................................21
ITEM 4. Controls and Procedures.................................22
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors...............................................23
ITEM 6. Exhibits and Reports on Form 8-K........................23
Signatures ...................................................................24
(1) As described in Note 2, the financial statements for fiscal years 2007 and
2008 have been restated.
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
Assets June 30, 2007 March 31, 2007
------------- -------------
as restated as restated
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: June 30, 2007 - $28,758,246
March 31, 2007 - $28,632,356) $ 537,279,981 $ 526,993,983
Companies 5% to 25% owned
(Cost: June 30, 2007 - $18,948,896
March 31, 2007 - $18,798,896) 81,892,002 76,398,002
Companies less than 5% owned
(Cost: June 30, 2007 - $31,982,402
March 31, 2007 - $24,211,045) 87,178,742 77,763,048
------------- -------------
Total investments
(Cost: June 30, 2007 - $79,689,544
March 31, 2007 - $71,642,297) 706,350,725 681,155,033
Cash and cash equivalents 31,264,000 38,844,203
Receivables 152,972 337,892
Other assets 9,227,147 9,170,185
------------- -------------
Totals $ 746,994,844 $ 729,507,313
============= =============
Liabilities and Shareholders' Equity
Other liabilities $ 1,320,521 $ 1,457,847
Deferred income taxes 2,330,377 2,317,777
------------- -------------
Total liabilities 3,650,898 3,775,624
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,326,516 shares
at June 30, 2007 and 4,323,416 shares
at March 31, 2007 4,326,516 4,323,416
Additional capital 116,645,836 116,373,960
Undistributed net investment income 5,518,081 5,655,020
Undistributed net realized loss
on investments (2,774,367) (3,100,142)
Unrealized appreciation of investments 626,661,182 609,512,737
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $191.13 per share at June 30, 2007 on the
3,889,151 sharesoutstanding and $186.75 per
share at March 31, 2007 on the 3,886,051
shares outstanding 743,343,946 725,731,689
------------- -------------
Totals $ 746,994,844 $ 729,507,313
============= =============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30
----------------------------
2007 2006
------------ ------------
as restated as restated
Investment income:
Interest $ 564,687 $ 205,852
Dividends 363,427 782,566
Management and directors' fees 225,200 198,450
------------ ------------
1,153,314 1,186,868
------------ ------------
Operating expenses:
Salaries 274,136 343,465
Net pension benefit (36,237) (29,187)
Other operating expenses 264,964 221,228
------------ ------------
502,863 535,506
------------ ------------
Income before interest expense and income taxes 650,451 651,362
Interest expense -- 146,982
------------ ------------
Income before income taxes 650,451 504,380
Income tax expense 9,760 12,824
------------ ------------
Net investment income $ 640,691 $ 491,556
============ ============
Proceeds from disposition of investments $ 325,775 $ 397,016
Cost of investments sold -- --
------------ ------------
Net realized gain on investments 325,775 397,016
Net increase (decrease) in unrealized appreciation
of investments 17,148,445 (5,217,480)
------------ ------------
Net realized and unrealized gain (loss) on investments $ 17,474,220 $ (4,820,464)
============ ============
Increase (decrease) in net assets from operations $ 18,114,911 $ (4,328,908)
============ ============
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Net Assets
Three Months Ended Year Ended
June 30, 2007 March 31, 2007
------------- -------------
as restated as restated
(Unaudited)
Operations:
Net investment income $ 640,691 $ 4,233,340
Net realized gain on investments 325,775 14,966,296
Net increase in unrealized appreciation
of investments 17,148,445 147,681,609
------------- -------------
Increase in net assets from operations 18,114,911 166,881,245
Distributions from:
Undistributed net investment income (777,630) (2,323,150)
Capital share transactions:
Exercise of employee stock options 231,390 1,794,850
Adjustment to initially apply FASB No. 158,
net of tax -- 1,173,751
Stock option expense 43,586 169,003
------------- -------------
Increase in net assets 17,612,257 167,695,699
Net assets, beginning of period 725,731,689 558,035,990
------------- -------------
Net assets, end of period $ 743,343,946 $ 725,731,689
============= =============
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30
-------
2007 2006
------------- -------------
as restated as restated
Cash flows from operating activities
Increase (decrease) in net assets from operations $ 18,114,911 $ (4,328,908)
Adjustments to reconcile increase in net
assets from operations to net cash
provided by operating activities:
Proceeds from disposition of investments 325,775 397,016
Purchases of securities (8,051,747) --
Maturities of securities 4,500 402,445
Depreciation and amortization 4,409 3,865
Net pension benefit (36,237) (29,187)
Realized gain on investments (325,775) (397,016)
Net (increase) decrease in unrealized appreciation
of investments (17,148,445) 5,217,480
Stock option expense 43,586 4,120
(Increase) decrease in receivables 184,920 (15,871)
Increase in other assets (6,729) (19,943)
Decrease in other liabilities (119,163) (106,582)
Decrease in accrued pension cost (36,568) (34,467)
Increase in deferred income taxes 12,600 10,200
------------- -------------
Net cash provided by (used in) operating activities (7,033,963) 1,103,152
------------- -------------
Cash flows from financing activities
Increase in notes payable to bank -- 150,000,000
Distributions from undistributed net
investment income (777,630) (772,050)
Proceeds from exercise of employee stock options 231,390 1,097,500
------------- -------------
Net cash provided by (used in) financing activities (546,240) 150,325,450
------------- -------------
Net increase (decrease) in cash and cash
equivalents (7,580,203) 151,428,602
Cash and cash equivalents at beginning
of period 38,844,203 11,503,866
------------- -------------
Cash and cash equivalents at end of period $ 31,264,000 $ 162,932,468
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ 123,763
Income taxes $ -- $ 20,000
(See Notes to Consolidated Financial Statements)
6
Portfolio of Investments - June 30, 2007
----------------------------------------
Company Investment (a) Cost Value (b)
- ------------------------------------------------------------------------------------------------------------------------------------
+AT&T INC. ++20,770 shares common stock (acquired 3-9-99) $ 12 $ 861,955
San Antonio, Texas
Global leader in local, long
distance, Internet and
transaction-based voice
and data services.
+ALAMO GROUP INC. 2,830,300 shares common stock 2,190,937 48,115,000
Sequin, Texas (acquired 4-1-73 thru 5-25-07)
Tractor-mounted mowing and
mobile excavation equipment
for governmental, industrial
and agricultural markets;
street-sweeping equipment
for municipalities.
ALL COMPONENTS, INC. 8.25% subordinated note due 2012 (acquired 6-27-07) 6,000,000 6,000,000
Addison, Texas 150,000 shares Series A convertible preferred stock,
Electronics contract manu- convertible into 600,000 shares of common stock
facturing; distribution at $0.25 per share (acquired 9-16-94) 150,000 1,000,000
and production of memory Warrant to purchase 350,000 shares of common stock
and other components for at $11.00 per share, expiring 2017 (acquired 6-27-07) - -
computer manufacturers, --------- ---------
retailers and value-added 6,150,000 7,000,000
resellers.
+ALLTEL CORPORATION ++8,880 shares common stock (acquired 7-1-98) 88,699 599,844
Little Rock, Arkansas
Owner and operator of the
nation's largest wireless
network.
+ATLANTIC CAPITAL BANCSHARES, INC. 300,000 shares common stock (acquired 4-10-07) 3,000,000 3,000,000
Atlanta, Georgia
Holding company of Atlantic
Capital Bank a full service
commercial bank.
BALCO, INC. 445,000 shares common stock and 60,920 shares
Wichita, Kansas Class B non-voting common stock 624,920 4,500,000
Specialty architectural (acquired 10-25-83 and 5-30-02)
products used in the
construction and remodeling
of commercial and insti-
tutional buildings.
BOXX TECHNOLOGIES, INC. 3,125,354 shares Series B convertible preferred
Austin, Texas stock, convertible into 3,125,354 shares of
Workstations for computer common stock at $0.50 per share
graphics imaging and design. (acquired 8-20-99 thru 8-8-01) 1,500,000 300,000
CMI HOLDING COMPANY, INC. 10% demand note (acquired 6-7-07) 150,000 150,000
Richardson, Texas 10% convertible subordinated notes, convertible
Owns Chase Medical, which into 720,350 shares of common stock at $1.32
develops and sells devices per share, due 2007 (acquired 4-16-04
used in cardiac surgery to thru 12-17-04) 750,000 750,000
relieve congestive heart 2,327,658 shares Series A convertible preferred stock,
failure; develops and convertible into 2,327,658 shares of common stock
supports cardiac imaging at $1.72 per share (acquired 8-21-02 and 6-4-03) 4,000,000 2,000,000
systems. Warrants to purchase 109,012 shares of common stock
at $1.72 per share, expiring 2012 (acquired 4-16-04) - -
--------- ---------
4,900,000 2,900,000
7
Company Investment (a) Cost Value (b)
- ------------------------------------------------------------------------------------------------------------------------------------
+COMCAST CORPORATION ++64,656 shares common stock (acquired 11-18-02) $ 21 $ 1,816,187
Philadelphia, Pennsylvania
Leading provider of cable,
entertainment and communi-
cations products and
services.
DENNIS TOOL COMPANY 20,725 shares 5% convertible preferred stock,
Houston, Texas convertible into 20,725 shares of common stock
Polycrystalline diamond at $48.25 per share (acquired 8-10-98) 999,981 999,981
compacts (PDCs) used in oil 140,137 shares common stock (acquired 3-7-94 and 8-10-98) 2,329,963 2,000,000
field drill bits and in --------- ---------
mining and industrial 3,329,944 2,999,981
applications.
+DISCOVERY HOLDING COMPANY ++70,501 shares Series A common stock (acquired 7-21-05) 20,262 1,618,703
Englewood, Colorado
Provider of creative
content, media management
and network services
worldwide.
+EMBARQ CORPORATION ++4,500 shares common stock (acquired 5-17-06) 46,532 285,165
Overland Park, Kansas
Local exchange carrier that
provides voice and data
services, including
high-speed Internet.
+ENCORE WIRE CORPORATION 4,086,750 shares common stock (acquired 7-16-92 thru 10-7-98) 5,800,000 75,605,000
McKinney, Texas
Electric wire and cable for
residential and commercial
use.
EXTREME INTERNATIONAL, INC. 39,359.18 shares Series C convertible preferred
Sugar Land, Texas stock, convertible into 157,436.72 shares of common
Owns Bill Young Productions, stock at $25.00 per share (acquired 9-30-03) 2,625,000 6,449,000
Texas Video and Post, and 3,750 shares 8% Series A convertible preferred stock,
Extreme Communications, convertible into 15,000 shares of common stock at
which produce radio and $25.00 per share (acquired 9-30-03) 375,000 614,000
television commercials and Warrants to purchase 13,035 shares of common stock
corporate communications at $25.00 per share, expiring 2008 (acquired 8-11-98
videos. thru 9-30-03) - 210,000
--------- ---------
3,000,000 7,273,000
+FMC CORPORATION ++6,430 shares common stock (acquired 6-6-86) 66,726 574,778
Philadelphia, Pennsylvania
Chemicals for agricultural,
industrial and consumer
markets.
+FMC TECHNOLOGIES, INC. ++11,057 shares common stock (acquired 1-2-02) 57,051 875,936
Houston, Texas
Equipment and systems for
the energy, food processing
and air transportation
industries.
+HEELYS, INC. 9,317,310 shares common stock (acquired 5-26-00) 102,490 186,346,000
Carrollton, Texas
Heelys stealth skate shoes,
equipment and apparel sold
through sporting goods
chains, department stores
and footwear retailers.
8
Company Investment (a) Cost Value (b)
- ------------------------------------------------------------------------------------------------------------------------------------
HIC-STAR CORPORATION 10% subordinated note due 2007 (acquired 10-19-04 and
Dallas, Texas 1-13-05) $ 352,646 $ -
Holding company previously 12% subordinated notes due 2008 (acquired 3-25-05 thru
engaged in mortgage banking 2-27-06) 717,523 100,000
operations, which have now Warrants to purchase 463,162 shares of Series A common
been sold. stock at $1.00 per share, expiring 2014 (acquired
3-31-04 thru 1-13-05) - -
--------- ---------
1,070,169 100,000
+HOLOGIC, INC. ++316,410 shares common stock (acquired 8-27-99) 220,000 17,500,637
Bedford, Massachusetts
Medical instruments
including bone densi-
tometers, mammography
devices and digital
radiography systems.
+KIMBERLY-CLARK CORPORATION ++77,180 shares common stock (acquired 12-18-97) 2,358,518 5,162,570
Dallas, Texas
Manufacturer of tissue,
personal care and health
care products.
+LIBERTY GLOBAL, INC. ++42,463 shares Series A common stock (acquired 6-15-05) 106,553 1,742,682
Englewood, Colorado ++42,463 shares Series C common stock (acquired 9-6-05) 100,870 1,667,097
Owns interests in broadband, --------- ---------
distribution and content 207,423 3,409,779
companies.
+LIBERTY MEDIA CORPORATION ++35,250 shares of Liberty Capital Series A common stock
Englewood, Colorado (acquired 5-9-06) 51,829 4,144,343
Holding company owning ++176,252 shares of Liberty Interactive Series A common stock
interests in electronic (acquired 5-9-06) 66,424 3,932,182
retailing, media, communi- --------- ---------
cations and entertainment 118,253 8,076,525
businesses.
LIFEMARK GROUP 1,449,026 shares common stock (acquired 7-16-69) 4,510,400 44,000,000
Hayward, California
Cemeteries, mausoleums and
mortuaries located in
northern California.
MEDIA RECOVERY, INC. 800,000 shares Series A convertible preferred stock,
Graham, Texas convertible into 800,000 shares of common stock at
Computer datacenter and $1.00 per share (acquired 11-4-97) 800,000 7,500,000
office automation supplies 4,000,000 shares common stock (acquired 11-4-97) 4,615,000 37,500,000
and accessories; impact, --------- ---------
tilt monitoring and 5,415,000 45,000,000
temperature sensing devices
to detect mishandled
shipments; dunnage for
protecting shipments.
PALLETONE, INC. 12.3% senior subordinated notes due 2012 (acquired 9-25-06) 1,553,150 2,000,000
Bartow, Florida 150,000 shares common stock (acquired 10-18-01) 150,000 1,000,000
Manufacturer of wooden Warrant to purchase 15,294 shares of common stock at
pallets and pressure-treated $1.00 per share, expiring 2011 (acquired 2-17-06) 45,746 87,000
lumber. --------- ---------
1,748,896 3,087,000
+PALM HARBOR HOMES, INC. 7,855,121 shares common stock (acquired 1-3-85 thru 7-31-95) 10,931,955 70,696,000
Dallas, Texas
Integrated manufacturing,
retailing, financing and
insuring of manufactured
housing and modular homes.
9
Company Investment (a) Cost Value (b)
- ------------------------------------------------------------------------------------------------------------------------------------
+PETSMART, INC. ++300,000 shares common stock (acquired 6-1-95) $ 1,318,771 $ 9,726,000
Phoenix, Arizona
Retail chain of more than
928 stores selling pet
foods, supplies and
services.
THE RECTORSEAL CORPORATION 27,907 shares common stock (acquired 1-5-73 and 3-31-73) 52,600 108,850,000
Houston, Texas
Specialty chemicals for
plumbing, HVAC, electrical,
construction, industrial,
oil field and automotive
applications; smoke contain-
ment systems for building
fires; also owns 20% of The
Whitmore Manufacturing
Company.
+SPRINT NEXTEL CORPORATION ++90,000 shares common stock (acquired 6-20-84) 457,113 1,863,900
Reston, Virginia
Diversified telecom-
munications company.
TCI HOLDINGS, INC. 21 shares 12% Series C cumulative compounding preferred
Denver, Colorado stock (acquired 1-30-90) - 677,250
Cable television systems and
microwave relay systems.
+TEXAS CAPITAL BANCSHARES, INC. ++489,656 shares common stock (acquired 5-1-00) 3,550,006 10,938,915
Dallas, Texas
Regional bank holding
company with banking
operations in six Texas
cities.
VIA HOLDINGS, INC. 9,118 shares Series B preferred stock (acquired 9-19-05) 4,559,000 2
Sparks, Nevada
Designer, manufacturer and
distributor of high-quality
office seating.
WELLOGIX, INC. 4,540,883 shares Series A-1 convertible participating
Houston, Texas preferred stock, convertible into 4,540,883 shares
Developer and supporter of of common stock at $1.1011 per share (acquired
software used by the oil and 8-19-05 thru 6-15-07) 5,000,000 2
gas industry to control
drilling and maintenance
expenses.
THE WHITMORE MANUFACTURING
COMPANY 80 shares common stock (acquired 8-31-79) 1,600,000 26,600,000
Rockwall, Texas
Specialized mining, railroad
and industrial lubricants;
coatings for automobiles and
primary metals; fluid
contamination control
devices.
+WINDSTREAM CORPORATION ++9,181 shares common stock (acquired 7-17-06) 19,656 135,512
Little Rock, Arkansas
Provider of voice, broadband
and entertainment
services.
10
Company Investment (a) Cost Value (b)
- ------------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS - BankCap Partners Fund I, L.P. - 6.0% limited
partnership interest (acquired 7-14-06 thru 4-3-07) $ 2,371,476 $ 2,371,476
- Diamond State Ventures, L.P. - 1.9% limited
partnership interest (acquired 10-12-99 thru 8-26-05) 146,000 146,000
- First Capital Group of Texas III, L.P. - 3.3%
limited partnership interest (acquired 12-26-00
thru 8-12-05) 964,604 964,604
- Humac Company - 1,041,000 shares common stock
(acquired 1-31-75 and 12-31-75) - 173,000
- PharmaFab, Inc. - contingent payment agreement
(acquired 2-15-07) 2 2
- STARTech Seed Fund I - 12.1% limited partnership
interest (acquired 4-17-98 thru 1-5-00) 178,066 1
- STARTech Seed Fund II - 3.2% limited partnership
interest (acquired 4-28-00 thru 2-23-05) 950,000 1
- Sterling Group Partners I, L.P. - 1.7% limited
partnership interest (acquired 4-20-01 thru 1-24-05) 1,064,042 2,200,000
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 79,689,544 $706,350,725
============= ============
- ------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined
in Note (a)
Notes to Portfolio of Investments
(a) 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 June 30, 2007, restricted securities represented
approximately 91.0% of the value of the consolidated investment portfolio.
(b) 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.
11
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
-----------
Explanatory Note Regarding Restatements
Capital Southwest Corporation (the "Company") is filing this amendment to
its Form 10-Q for the quarter ended June 30, 2007, to amend and restate its
consolidated financial statements for each of the quarters ended June 30, 2007
and 2006.
After reviewing the accounting treatment for deferred taxes on unrealized
appreciation of investments, the Company has determined its long-standing policy
of recording deferred taxes on unrealized appreciation of investments was not in
conformity with generally accepted accounting principles and its previously
issued financial statements required restatement. Specifically, a Regulated
Investment Company (RIC) is required to record deferred taxes when it is
probable the RIC will not qualify under Subchapter M of the Internal Revenue
Code for a period longer that one year. Historically, management believed it was
probable the Company would not maintain its qualifying status as a RIC in future
years and recorded a deferred tax liability on the unrealized appreciation of
investments. However, upon further analysis, the Company determined it was only
reasonably possible, but not probable, the Company would not maintain its
qualifying status as a RIC. Thus the deferred tax liability consistently
recorded and disclosed should not have been recognized. Additionally, the
Company historically has accrued income taxes payable on its investment gains as
they have been incurred, as it has been the Company's practice to retain its
investment gains. However, RICs are required to accrue federal income taxes on
investment gains that are retained only on the last day of the tax year. The
Company incorrectly recorded the tax impact of its investment gains in periods
other than the last day of its tax year, December 31. Therefore, the income
taxes payable recorded at times other than the tax year end should not have been
recognized. Furthermore, the Company incorrectly classified its' return of
capital contributions cumulatively as "undistributed net realized gains on
investments." RICs are required to classify return of capital contributions as
"additional capital" in the period in which tax basis amounts become permanent;
and reflect undistributed amounts remaining since its' previous tax year end
adjusted for temporary tax basis differences as "undistributed net realized
gains on investments." The restatement will eliminate the accrual for deferred
taxes on unrealized appreciation of investments, and income taxes payable and
related tax carryforwards on realized gains, increasing the net asset value per
share and net assets from operations for the periods restated; and reclassify
return of capital contributions to "additional capital."
The summary of the effects of this change on our consolidated statements of
financial condition as of June 30, 2007 and March 31, 2007, our consolidated
statements of operations and consolidated statements of cashflow for the three
months ended June 30, 2007 and 2006, and our consolidated statements of changes
in net assets for the three months ended June 30, 2007 and year ended March 31,
2007 is included in Note 2, "Restatement of Consolidated Financial Statements,"
located in the notes to our consolidated financial statements.
The following information has been updated to give the effect to the
restatement. In accordance with Rule 12b-15, under the Security Exchange Act of
1934, as amended, the complete text of each amended item is set forth in this
report, even though much of the disclosure in the restated items has not
changed. The disclosure in this quarterly report amendment supersedes and
replaces corresponding disclosures in our quarterly report on Form 10-Q for the
three months ended June 30, 2007 and 2006.
1. Basis of Presentation
Principles of Consolidation. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for investment companies. Under rules and regulations
applicable to investment companies, we are precluded from consolidating any
entity other than another investment company. An exception to this general
principle occurs if the investment company has an investment in an operating
company that provides services to the investment company. Our consolidated
financial statements include our management company.
12
Notes to Consolidated Financial Statements
(continued)
The financial statements included herein have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-Q and Article 6 of
Regulation S-X. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our Form 10-K/A
for the year ended March 31, 2007. Certain information and footnotes normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted, although we believe that the disclosures are adequate for a fair
presentation. The information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results of operations for the interim periods.
2. Restatement of Consolidated Financial Statements
Capital Southwest Corporation (the "Company") has filed an amendment to its
Annual Report on Form 10-K for the year ended March 31, 2007, to amend and
restate its consolidated financial statements and selected per share data and
ratios for each of the fiscals years ended March 31, 2007, 2006 and 2005 and our
selected per share data and ratios for the years ended March 31, 2004 and 2003.
In addition, we are filing this amendment to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007.
After reviewing the accounting treatment for deferred taxes on unrealized
appreciation of investments, the Company has determined its long-standing policy
of recording deferred taxes on unrealized appreciation of investments was not in
conformity with generally accepted accounting principles and its previously
issued financial statements required restatement. The effect of the restatement
on our consolidated statements of financial condition as of June 30, 2007 and
March 31, 2007, our consolidated statements of operations and consolidated
statements of cash flows for the three months ended June 30, 2007 and 2006, our
consolidated statements of changes in net assets for the three months ended June
30, 2007 and year ended March 31, 2007 is as follows and shown in the tables
below:
(A) A Regulated Investment Company (RIC) is required to record
deferred taxes when it is probable the RIC will not qualify under
Subchapter M of the Internal Revenue Code for a period longer that one
year. Historically, management believed it was probable the Company would
not maintain its qualifying status as a RIC in future years and recorded a
deferred tax liability on the unrealized appreciation of investments.
However, upon further analysis, the Company determined it was only
reasonably possible, but not probable, the Company would not maintain its
qualifying status as a RIC. Thus the deferred tax liability consistently
recorded and disclosed should not have been recognized.
(B) The Company historically has accrued income taxes payable on its
investment gains as they have been incurred, as it has been the Company's
practice to retain its investment gains. However, RICs are required to
accrue federal income taxes on investment gains that are retained only on
the last day of the tax year. The Company incorrectly recorded the tax
impact of its investment gains in periods other than the last day of its
tax year, December 31. Therefore, the income taxes payable recorded at
times other than the tax year end should not have been recognized.
(C) The Company incorrectly classified its' return of capital
contributions cumulatively as "undistributed net realized gains on
investments." RICs are required to classify return of capital contributions
as "additional capital" in the period in which tax basis amounts become
permanent; and reflect undistributed amounts remaining since its' previous
tax year end adjusted for temporary tax basis differences as "undistributed
net realized gains on investments."
The restatement will eliminate the accrual for deferred taxes on unrealized
appreciation of investments, and income taxes payable and related tax
carryforwards on realized gains, increasing the net asset value per share and
net assets from operations for the periods restated; and reclassify return of
capital contributions to "additional capital."
13
Notes to Consolidated Financial Statements
(continued)
As of June 30, 2007
----------------------------
Previously
Consolidated Statement of Financial Condition Reported (1) As Restated (2)
- -------------------------------------------------------------- ------------ ------------
Total assets 746,994,844 746,994,844
============ ============
Income taxes payable 231,274 -- (B)
Deferred income tax 219,604,301 2,330,377 (A)(B)
------------ ------------
Total liabilities 221,156,096 3,650,898
------------ ------------
Additional Capital 11,493,477 116,645,836 (C)
Undistributed net realized gains (losses) 102,977,794 (2,774,367) (B)(C)
Net unrealized appreciation 408,556,182 626,661,182 (A)
Net assets at market or fair value 525,838,748 743,373,946
------------ ------------
Total liabilities and shareholders equity 746,994,844 746,994,844
============ ============
Consolidated Statement of Financial Condition As of March 31, 2007
- -------------------------------------------------------------- ----------------------------
Previously
Reported (3) As Restated (2)
Total assets ------------ ------------
729,507,313 729,507,313
============ ============
Income taxes payable 231,274 -- (B)
Deferred income tax 213,474,680 2,317,777 (A)(B)
------------ ------------
Total liabilities 215,163,801 3,775,624
------------ ------------
Additional Capital 11,221,601 116,373,960 (C)
Undistributed net realized gains (losses) 102,766,040 (3,100,142) (B)(C)
Net unrealized appreciation 397,410,737 609,512,737 (A)
Net assets at market or fair value 514,343,512 725,731,689
------------ ------------
Total liabilities and shareholders equity 729,507,313 729,507,313
============ ============
Consolidated Statement of Operations Three Months Ended June 30, 2007
- -------------------------------------------------------------- ----------------------------
Previously
Reported (1) As Restated (2)
------------ ------------
Net investment income 640,691 640,691
============ ============
Net realized gain on investments 211,754 325,775 (B)
Net increase in unrealized appreciation of investments 11,145,445 17,148,445 (A)
------------ ------------
Net realized and unrealized gain on investments 11,357,199 17,474,220
------------ ------------
Increase in net assets from operations 11,997,890 18,114,911
============ ============
14
Notes to Consolidated Financial Statements
(continued)
Consolidated Statement of Operations Three Months Ended June 30, 2006
- -------------------------------------------------------------- ----------------------------
Previously
Reported (1) As Restated (2)
------------ ------------
Net investment income 491,556 491,556
============ ============
Net realized gain on investments 258,060 397,016 (B)
Net decrease in unrealized appreciation of investments (3,022,480) (5,217,480) (A)
------------ ------------
Net realized and unrealized loss on investments (2,764,420) (4,820,464)
Decrease in net assets from operations (2,272,864) (4,328,908)
============ ============
Consolidated Statement of Changes in Net Assets Three Months Ended June 30, 2007
- -------------------------------------------------------------- ----------------------------
Previously
Reported (1) As Restated (2)
------------ ------------
Net investment income 640,691 640,691
Net realized gain on investments 211,754 325,775 (B)
Net increase on unrealized appreciation before
distributions 11,145,445 17,148,445 (A)
------------ ------------
Increase in net assets from operations before
distributions 11,997,890 18,114,911
Undistributed net investment income (777,630) (777,630)
Employee stock options exercised 231,390 231,390
Stock option expense -- --
Adjustment to initially apply FASB Statement No. 158, net of tax 43,586 43,586
------------ ------------
Increase in net assets 11,495,236 17,612,257
Net assets, beginning of year 514,343,512 725,731,689
------------ ------------
Net assets, end of year 525,838,748 743,343,946
============ ============
Net asset value, per share $ 135.21 $ 191.13
============ ============
Consolidated Statement of Changes in Net Assets
- -------------------------------------------------------------- Year Ended March 31, 2007
-----------------------------
Previously
Reported (3) As Restated (2)
------------ ------------
Net investment income 4,233,340 4,233,340
Net realized gain on investments 16,334,000 14,966,296 (B)
Net increase on unrealized appreciation before
distributions 96,343,609 147,681,609 (A)
------------ ------------
Increase in net assets from operations before
distributions 116,910,949 166,881,245
Undistributed net investment income (2,323,150) (2,323,150)
Net realized gains deemed
distributed to shareholders -- (11,417,283) (C)
Allocated increase in share value
for deemed distribution -- 11,417,283 (C)
Employee stock options exercised 1,794,850 1,794,850
Stock option expense 1,173,751 1,173,751
Adjustment to initially apply FASB Statement No. 158, net of tax 169,003 169,003
------------ ------------
Increase in net assets 117,725,403 167,695,699
Net assets, beginning of year 396,618,109 558,035,990
------------ ------------
Net assets, end of year 514,343,512 725,731,689
============ ============
Net asset value, per share $ 132.36 $ 186.75
============ ============
15
Notes to Consolidated Financial Statements
(continued)
Three Months Ended June 30, 2007
----------------------------
Consolidated Statement of Cash Flow Previously
- -------------------------------------------------------------- Reported (1) As Restated (2)
------------ ------------
Net cash used by operating activities
(7,033,963) (7,033,963)
------------ ------------
Net cash used in financing activities
(546,240) (546,240)
------------ ------------
Net decrease in cash and cash equivalents (7,580,203) (7,580,203)
------------ ------------
Three Months Ended June 30, 2006
Consolidated Statement of Cash Flow ---------------------------------
- -------------------------------------------------------------- Previously As
Reported (1) Restated (2)
------------ ------------
Net cash provided by operating activities
1,103,152 1,103,152
------------ ------------
Net cash provided by financing activities
150,325,450 150,325,450
------------ ------------
Net increase in cash and cash equivalents 151,428,602 151,428,602
------------ ------------
- ----------
(1) As presented in the Company's original Form 10-Q for the quarter ended June
30, 2007
(2) Adjusted to reflect the restatement described above.
(3) As presented in the Company's original Form 10-K for the fiscal year ended
March 31, 2007
(A), (B) and (C) are described in detail above.
3. Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which revised SFAS
123. SFAS 123R also supersedes APB 25 and amends SFAS No. 95, Statement of Cash
Flows. SFAS 123R eliminates the alternative to account for employee stock
options under APB 25 and requires the fair value of all share-based payments to
employees, including the fair value of grants of employee stock options, be
recognized in the income statement, generally over the vesting period.
In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 107, which provides additional implementation
guidance for SFAS 123R. Among other things, SAB 107 provides guidance on
share-based payment valuations, income statement classification and
presentation, capitalization of costs and related income tax accounting.
Effective April 1, 2006, we adopted SFAS 123R using the modified
prospective transition method. We recognize compensation cost over the
straight-line method for all share-based payments granted on or after that date
and for all awards granted to employees prior to April 1, 2006 that remain
unvested on that date. The fair value of stock options are determined on the
date of grant using the Black-Scholes pricing model and are expensed over the
vesting period of the related stock options. Accordingly, for the quarter ended
June 30, 2007, we recognized compensation expense of $43,586.
As of June 30, 2007, the total remaining unrecognized compensation cost
related to non-vested stock options was $1,127,866, which will be amortized over
the weighted-average service period of approximately 7.34 years.
16
Notes to Consolidated Financial Statements
(continued)
4. Employee Stock Option Plan
On July 19, 1999, shareholders approved the 1999 Stock Option ("Plan"),
which provided for the granting of stock options to employees and officers and
authorized the issuance of common stock upon exercise of such options for up to
140,000 shares. All options are granted at or above market price, generally
expire ten years from the date of grant and are generally exercisable on or
after the first anniversary of the date of grant in five to ten annual
installments.
At June 30, 2007, there were 58,500 shares available for grant under the
Plan. The per share weighted-average fair value of the stock options granted on
May 15, 2006 was $31.276 per option using the Black-Scholes pricing model with
the following assumptions: expected dividend yield of .64%, risk-free interest
rate of 5.08%, expected volatility of 21.1%, and expected life of 7 years. The
per share weighted-average fair value of the stock options granted on July 17,
2006 was $33.045 per option using the Black-Scholes pricing model with the
following assumptions: expected dividend yield of .61%, risk-free interest rate
of 5.04%, expected volatility of 21.2%, and expected life of 7 years.
The following summarizes activity in the stock option plan since March 31,
2007:
Number Weighted-Average
of shares Exercise Price
Balance at March 31, 2007 52,500 $86.184
Granted -- --
Exercised (3,100) 74.642
Canceled -- --
--------- --------
Balance at June 30, 2007 49,400 86.908
========= ========
At June 30, 2007, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $65.00 to $98.44 and 7.66
years, respectively. The total intrinsic value of options exercised during the
three months ended June 30, 2007 was $37,529 with the exercise prices ranging
from $65.00 to $93.49 per share. New shares were issued for the $231,390 cash
received from option exercises for the three months ended June 30, 2007.
At June 30, 2007, the number of options exercisable was 8,915 and the
weighted-average exercise price of those options was $76.80.
On July 16, 2007, a stock option to purchase 25,000 shares of common stock
was issued to our new president, Gary L. Martin.
17
Notes to Consolidated Financial Statements
(continued)
5. Summary of Per Share Information
Three Months Ended
June 30
-------
2007 2006
---------- ----------
(as restated) (as restated)
Investment income $ .30 $ .31
Operating expenses (.13) (.14)
Interest expense -- (.04)
Income taxes -- --
---------- ----------
Net investment income .17 .13
Distributions from undistributed
net investment income (.20) (.20)
Net realized gain on investments .08 .10
Net increase (decrease) in unrealized appreciation
of investments 4.41 (1.35)
Exercise of employee stock options* (.09) (.29)
Stock option expense .01 --
---------- ----------
Increase (decrease) in net asset value 4.38 (1.61)
Net asset value:
Beginning of period 186.75 144.56
---------- ----------
End of period $ 191.13 $ 142.95
========== ==========
Shares outstanding at end of period
(000s omitted) 3,889 3,875
* Net decrease is due to the exercise of employee stock options at prices less
than beginning of period net asset value.
6. Subsequent Events
In July 2007, William R. Thomas, retired from role as President and Chief
Executive Officer, but has continued in capacity as Chairman of the Board. Gary
L Martin was named President and Chief Executive Officer.
In August 2007, Susan K. Hodgson resigned from her position as
Secretary-Treasurer and Chief Financial Officer. Tracy L. Morris was hired in
September 2007, as Controller and Chief Financial Officer.
On August 27, 2007, Capital Southwest Corporation and Capital Southwest
Venture Corporation, were named in a lawsuit filed in the United States District
Court of the Northern District of Texas, Dallas Division, against Heelys, Inc
and its Chief Executive Officer, Chief Financial Officer and the directors who
signed its registration statement with the Securities and Exchange Commission in
connection with its December 7, 2006 initial public offering ("IPO"), and its
underwriters for the IPO. The complaint alleges violations of Sections 11 and 15
of the Securities Act of 1933 and the plaintiffs are seeking compensatory
damages in an unspecified amount, as well as reasonable costs and expenses
incurred in the action, including counsel fees and expert fees. We believe that
the plaintiffs' claims are without merit, we deny the allegations in the
complaints, and we intend to vigorously defend the lawsuits.
18
Notes to Consolidated Financial Statements
(continued)
In September and October 2007 four similar suits were also filed in the
United States District Court of the Northern District of Texas making
substantially similar allegations under Sections 11, 12 and 15 of the Securities
Act of 1933, and seeking substantially similar damages. These lawsuits have been
transferred to a single judge, and we expect that all the cases will be
consolidated into a single action, with a consolidated complaint filed shortly
thereafter. We believe that the plaintiffs' claims are without merit, we deny
the allegations in the complaints, and we intend to vigorously defend the
lawsuits.
On November 15, 2007, the Company received a Staff Determination Letter
from NASDAQ, stating that we were delinquent in our SEC filings for the quarter
ended September 30, 2007 and in violation of NASDAQ rules. The letter instructed
us to file for an appeal for the determination or trading of the Company's stock
would be suspended. On November 20, 2007, the Company requested a written
hearing with NASDAQ. The hearing date was set for January 10, 2008.
7. Recent Accounting Pronouncements
The State of Texas recently passed House Bill 3 (HB3), which revises the
existing franchise tax system to create a new tax on virtually all Texas
businesses. Starting in the fiscal year 2007, HB3 changes the franchise tax
base, lowers the tax rate and extends coverage to active businesses receiving
state law liability protection. We have been subject to an immaterial amount of
Texas franchise taxes and expect the future effect of HB3 to also be immaterial.
In September 2006, the FASB issued Statement of Financial Accounting
Standard No. 157, "Fair Value Measurements" (SFAS 157). The standard defines
fair value, outlines a framework for measuring fair value, and details the
required disclosures about fair value measurements. The standard is effective
for years beginning after November 15, 2007, therefore we will adopt SFAS 157
effective April 1, 2008. We are evaluating the impact of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value and establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective
for us beginning April 1, 2008. The impact, if any, from the adoption of SFAS
159 has not been determined.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at June 30, 2007 was $743,343,946 equivalent to $191.13 per
share. Assuming reinvestment of all dividends and tax credits on retained
long-term capital gains, the June 30, 2007 net asset value reflects an increase
of 37.3% during the past twelve months.
June 30, June 30,
2007 2006
---- ----
Net assets $743,343,946 $554,036,652
Shares outstanding 3,889,151 3,875,751
Net assets per share $191.13 $142.95
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations
The composite measure of our financial performance in the Consolidated
Statements of Operations is captioned "Increase (decrease) in net assets from
operations" and consists of three elements. The first is "Net investment
income", which is the difference between our income from interest, dividends and
fees and our combined operating and interest expenses, net of applicable income
taxes. The second element is "Net realized gain on investments", which is the
difference between the proceeds received from disposition of portfolio
securities and their stated cost. The third element is the "Net increase
(decrease) in unrealized appreciation of investments", which is the net change
in the market or fair value of our investment portfolio, compared with stated
cost. It should be noted that the "Net realized gain on investments" and "Net
increase (decrease) in unrealized appreciation of investments" are directly
related in that when an appreciated portfolio security is sold to realize a
gain, a corresponding decrease in net unrealized appreciation occurs by
transferring the gain associated with the transaction from being "unrealized" to
being "realized". Conversely, when a loss is realized on a depreciated portfolio
security, an increase in net unrealized appreciation occurs.
Net Investment Income
Interest income of $564,687 in the three months ended June 30, 2007
increased from $205,852 in the year-ago period due to an increase in excess cash
and interest rates. During the three months ended June 30, 2007 and 2006, we
recorded dividend income from the following sources:
Three Months Ended
June 30
-------
2007 2006
---- ----
Alamo Group Inc. $169,278 $169,278
Dennis Tool Company 25,000 37,499
Encore Wire Corporation 81,735 -
Kimberly-Clark Corporation 40,905 37,818
Lifemark Group - 150,000
PalletOne, Inc. - 44,921
The RectorSeal Corporation - 240,000
TCI Holdings, Inc 20,318 20,318
The Whitmore Manufacturing Company - 60,000
Other 26,191 22,732
---------- ----------
$363,427 $782,566
Net Increase (Decrease) in Unrealized Appreciation of Investments
Set forth in the following table are the significant increases and
decreases in unrealized appreciation by portfolio company:
Three Months Ended
June 30
2007 2006
---- ----
Encore Wire Corporation $ 6,130,000 $8,174,000
Heelys, Inc. (9,318,000) -
Palm Harbor Homes, Inc. - (7,855,000)
The RectorSeal Corporation 10,850,000 -
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
During the three months ended June 30, 2007, the value of our investment in
Encore Wire Corporation was increased $6,130,000 due to an increase in the
company's stock price. The value of our investment in The RectorSeal Corporation
was increased $10,850,000 due to increased sales and earnings at the company.
Offsetting the gains at RectorSeal and Encore Wire during the three months
ended June 30, 2007, was a $9,318,000 decline in the value of Heelys, which has
experienced a market price decline in each of the past two quarters.
Portfolio Investments
During the quarter ended June 30, 2007, we made an investment of $3,000,000
in a new portfolio company and additional investments of $5,051,747 in existing
portfolio companies.
We have agreed, subject to certain conditions, to invest up to $4,115,423
in two portfolio companies.
Financial Liquidity and Capital Resources
At June 30, 2007, we had cash and cash equivalents of approximately $31.3
million. Pursuant to Small Business Administration (SBA) regulations, cash and
cash equivalents of $3.2 million held by Capital Southwest Venture Corporation
(CSVC) may not be transferred or advanced to us without the consent of the SBA.
Under current SBA regulations and subject to SBA's approval of its credit
application, CSVC would be entitled to borrow up to $16.4 million. We also have
an unsecured $25.0 million revolving line of credit from a commercial bank, of
which $25.0 million was available at June 30, 2007. With the exception of a
capital gain distribution made in the form of a distribution of the stock of a
portfolio company in the fiscal year ended March 31, 1996, we have elected to
retain all gains realized during the past 39 years. Retention of future gains is
viewed as an important source of funds to sustain our investment activity.
Approximately $63.4 million of our investment portfolio is represented by
unrestricted publicly-traded securities which represent a source of liquidity.
Funds to be used by us for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Lifemark
Group, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies, to the extent of their available cash reserves
and borrowing capacities.
Management believes that our cash and cash equivalents and cash available
from other sources described above are adequate to meet our expected
requirements. Consistent with our long-term strategy, the disposition of
investments from time to time may also be an important source of funds for
future investment activities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in marketable
equity security prices. We do not use derivative financial instruments to
mitigate any of these risks.
Our investment performance is a function of our portfolio companies'
profitability, which may be affected by economic cycles, competitive forces,
foreign currency fluctuations and production costs including labor rates, raw
material prices and certain commodity prices. Most of the companies in our
investment portfolio do not hedge their exposure to raw material and commodity
price fluctuations. However, the portfolio company with the greatest exposure to
foreign currency fluctuations generally
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(continued)
hedges their exposure. All of these factors may have an adverse effect on the
value of our investments and on our net asset value.
Our investment in portfolio securities includes fixed rate debt securities
which totaled $9,000,000 at June 30, 2007, equivalent to 1.3% of the value of
our total investments. Generally these debt securities are below investment
grade and have relatively high fixed rates of interest; therefore, minor changes
in market yields of publicly-traded debt securities have little or no effect on
the values of debt securities in our portfolio and no effect on interest income.
Our investments in debt securities are generally held to maturity and their fair
values are determined on the basis of the terms of the debt security and the
financial condition of the issuer.
A portion of our investment portfolio consists of debt and equity
securities of private companies. We anticipate little or no effect on the values
of these investments from modest changes in public market equity valuations.
Should significant changes in market valuations of comparable publicly-owned
companies occur, there may be a corresponding effect on valuations of private
companies, which would affect the value and the amount and timing of proceeds
eventually realized from these investments. A portion of our investment
portfolio also consists of restricted common stocks of publicly-owned companies.
The fair values of these restricted securities are influenced by the nature of
applicable resale restrictions, the underlying earnings and financial condition
of the issuers of such restricted securities and the market valuations of
comparable publicly-owned companies. A portion of our investment portfolio also
consists of unrestricted, freely marketable common stocks of publicly-owned
companies. These freely marketable investments, which are valued at the public
market price, are directly exposed to equity price risks, in that a change in an
issuer's public market equity price would result in an identical change in the
value of our investment in such security.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our Management, including the President and Controller, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act
of 1934). Based on that evaluation, the President and Controller concluded that
our disclosure controls and procedures were not effective due to a material
weakness in the Company's internal control over financial reporting
("ICFR")disclosed in "Item 9A. Controls and Procedures" of the Company's Annual
Report on Form 10-K/A, for the fiscal year ended March 31, 2007. The following
material weakness is the basis for our conclusion:
o We did not maintain an adequate process to assess and determine the
probability of the Company maintaining its qualifying status as a RIC
subject to subchapter M of the IRC over the next twelve months at any given
quarter.
To address this material weakness, Management will add a formal evaluation
to consider whether it is probable the company will not qualify as a RIC subject
to Subchapter M of the IRC over the next 12 months at any given quarter.
Additionally, the Company will review its investment gains quarterly and
calculate the tax impact on those gains it will retain, however, they will only
record the tax liability at the last day of the tax year. Management will also
determine, based on materiality, any footnote disclosure that may be required
during the interim periods. Furthermore, Management will review and assess
temporary and permanent differences for reclassification to "additional capital"
at each tax year end. When considered necessary by Management, an independent
attorney or accountant with requisite knowledge of investment company taxation
will be consulted in order to provide necessary guidance. Accordingly,
management believes that the financial statements included in this report fairly
represent in all material respects the Company's financial position, results of
operations and cash flows for the periods presented. There were no changes in
the Company's internal control over financial reporting that have materially
affected or are reasonably likely to materially affect our ICFR during the
quarter ended June 30, 2007.
22
PART II. OTHER INFORMATION
- ---------------------------
Item 1A. Risk Factors
There have been no material changes to our risk factors as disclosed in
Item 1A, "Risk Factors", in our Annual Report on Form 10-K/A for the fiscal
year ended March 31, 2007.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1- Certification of President required by Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), filed herewith.
Exhibit 31.2- Certification of Secretary-Treasurer required by
Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed
herewith.
Exhibit 32.1- Certification of President required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350
of Chapter 63 of Title 18 of the United States Code, furnished
herewith.
Exhibit 32.2- Certification of Secretary-Treasurer required by
Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code,
furnished herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
Date: January 9, 2008 By: /s/ Gary L. Martin
---------------------- ----------------------------------
Gary L. Martin, President
(chief executive officer)
Date: January 9, 2008 By: /s/ Tracy L. Morris
---------------------- ----------------------------------
Tracy L. Morris, Controller
(chief financial/accounting)
Exhibit 31.1
CERTIFICATIONS
I, Gary L. Martin, President of Capital Southwest Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Capital Southwest
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: January 9, 2008 By: /s/ Gary L. Martin
--------------- -----------------------------
Gary L. Martin, President
Exhibit 31.2
CERTIFICATIONS
I, Tracy L. Morris, Controller of Capital Southwest Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Capital Southwest
Corporation (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: January 9, 2008 By: /s/ Tracy L. Morris
--------------- -----------------------------
Tracy L. Morris, Controller
Exhibit 32.1
Certification of President and Chief Executive Officer
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
I, Gary L. Martin, President of the Board of Capital Southwest Corporation,
certify that, to my knowledge:
1. the Form 10-QA, filed with the Securities and Exchange Commission on January
9, 2008 ("accompanied report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the accompanied report fairly presents, in all
material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: January 9, 2008 By: /s/ Gary L. Martin
--------------- ------------------------------------
Gary L. Martin, President
Exhibit 32.2
Certification of Controller
Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
I, Tracy L. Morris, Controller of Capital Southwest Corporation, certify
that, to my knowledge:
1. the Form 10-Q/A, filed with the Securities and Exchange Commission on January
9, 2008 ("accompanied report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the accompanied report fairly presents, in all
material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: January 9, 2008 By: /s/ Tracy L. Morris
--------------- -----------------------------
Tracy L. Morris, Controller