UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
SCHEDULE 13D
(Rule
13d-101)
INFORMATION
TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO
§ 240.13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
§ 240.13d-2(a)
(Amendment
No. 4)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)
May 29,
2008
(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 §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check
the following box ¨.
Note: Schedules
filed in paper format shall include a signed original and five copies of the
schedule, including all exhibits. See § 240.13d-7 for
other parties to whom copies are to be sent.
_______________
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
(“Act”) 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
|
1
|
NAME
OF REPORTING PERSON
NED
SHERWOOD
|
||
|
2
|
CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(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 SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE
VOTING POWER
49,938
|
|
|
8
|
SHARED
VOTING POWER
235,882
|
||
|
9
|
SOLE
DISPOSITIVE POWER
63,606
|
||
|
10
|
SHARED
DISPOSITIVE POWER
235,882
|
||
|
11
|
AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
299,488
|
||
|
12
|
CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES
|
¨
|
|
|
13
|
PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
7.70%
|
||
|
14
|
TYPE
OF REPORTING PERSON
IN
|
||
2
CUSIP
NO. 140501107
|
1
|
NAME
OF REPORTING PERSON
ZS
CROSSOVER II GP, L.L.C.
|
||
|
2
|
CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(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 SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE
VOTING POWER
-0-
|
|
|
8
|
SHARED
VOTING POWER
225,660
|
||
|
9
|
SOLE
DISPOSITIVE POWER
-0-
|
||
|
10
|
SHARED
DISPOSITIVE POWER
225,660
|
||
|
11
|
AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
225,660
|
||
|
12
|
CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES
|
¨
|
|
|
13
|
PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
5.80%
|
||
|
14
|
TYPE
OF REPORTING PERSON
PN
|
||
3
CUSIP
NO. 140501107
|
1
|
NAME
OF REPORTING PERSON
ZS
CROSSOVER II LP
|
||
|
2
|
CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(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 SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE
VOTING POWER
-0-
|
|
|
8
|
SHARED
VOTING POWER
116,332
|
||
|
9
|
SOLE
DISPOSITIVE POWER
-0-
|
||
|
10
|
SHARED
DISPOSITIVE POWER
116,332
|
||
|
11
|
AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
116,332
|
||
|
12
|
CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES
|
¨
|
|
|
13
|
PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
2.99%
|
||
|
14
|
TYPE
OF REPORTING PERSON
PN
|
||
4
CUSIP
NO. 140501107
|
1
|
NAME
OF REPORTING PERSON
ZS
SPECIAL I L.P.
|
||
|
2
|
CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(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 SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE
VOTING POWER
-0-
|
|
|
8
|
SHARED
VOTING POWER
109,328
|
||
|
9
|
SOLE
DISPOSITIVE POWER
-0-
|
||
|
10
|
SHARED
DISPOSITIVE POWER
109,328
|
||
|
11
|
AGGREGATE
AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
109,328
|
||
|
12
|
CHECK
BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES
|
¨
|
|
|
13
|
PERCENT
OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
2.81%
|
||
|
14
|
TYPE
OF REPORTING PERSON
PN
|
||
5
CUSIP
NO. 140501107
|
1
|
NAME
OF REPORTING PERSON
MRMP
TRUST
|
||
|
2
|
CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(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 SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE
VOTING POWER
49,938
|
|
|
8
|
SHARED
VOTING POWER
-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)
1.28%
|
||
|
14
|
TYPE
OF REPORTING PERSON
OO
|
||
6
CUSIP
NO. 140501107
|
1
|
NAME
OF REPORTING PERSON
THE
NED AND EMILY SHERWOOD FOUNDATION
|
||
|
2
|
CHECK
THE APPROPRIATE BOX IF A MEMBER OF A GROUP
|
(a) o
(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 SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
|
7
|
SOLE
VOTING POWER
-0-
|
|
|
8
|
SHARED
VOTING POWER
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
|
||
7
CUSIP
NO. 140501107
The following
constitutes Amendment No. 4 to the Schedule 13D filed by the undersigned (the
“Schedule 13D”). This Amendment No. 4 amends the Schedule 13D as
specifically set forth.
Item 3 is
hereby amended and restated to read as follows:
|
|
Item
3.
|
Source and Amount of
Funds or Other
Consideration.
|
The
aggregate purchase cost of the 299,488 Shares beneficially owned by the
Reporting Persons is approximately $39,359,054. The 116,332 Shares
owned by Crossover II and the 109,328 Shares owned by Special I were acquired
with their working capital. The 49,938 Shares beneficially owned by
MRMP were acquired with MRMP’s investment capital. The 10,222 Shares
beneficially owned by the Foundation where acquired with the Foundation’s
investment capital.
Item 4 is
hereby amended to add the following:
On May
29, 2008 the Reporting Persons delivered a letter to Gary Martin and the members
of the Issuer’s Board of Directors expressing their dissatisfaction with the
continued substantial market undervaluation of the Issuer due to the Issuer’s
poor investment performance history and cavalier valuation
procedures. In the letter the Reporting Persons demanded that CSWC
take steps to sell its approximately $54 million of unrestricted public
securities and to register and distribute its holdings in ALG, HLYS, PHHM and
WIRE. The letter is attached hereto as Exhibit 99.1 and is
incorporated herein by reference.
Item 5 is
hereby amended and restated to read as follows:
|
|
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 May 1, 2008, as reported in the Issuer’s Annual Report on Form
10-K filed with the Securities and Exchange Commission on May 23,
2008.
As of the
date hereof, Crossover II and Special I beneficially owned 116,332 and 109,328
Shares, respectively, constituting approximately 2.99%, and 2.81% 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
225,660 Shares owned in the aggregate by Crossover II and Special I,
constituting approximately 5.80% 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
date hereof, MRMP beneficially owned 49,938 Shares, constituting 1.28% 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.
8
CUSIP
NO. 140501107
As of the
date hereof, 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 date hereof, Mr.
Sherwood beneficially owned an additional 13,668 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 235,882 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 13,668 Shares that he may be deemed to beneficially own. Mr.
Sherwood does not have voting power over the 13,668 Shares owned by
Warlen.
(c) Schedule
A annexed hereto lists all transactions in the Securities by the Reporting
Persons in the past 60 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.
Item 7 is
hereby amended to add the following exhibit:
|
|
Item
7.
|
Material to be Filed
as Exhibits.
|
|
|
99.1.
|
Letter
from ZS Crossover II LP to Gary Martin and the Board of Directors of the
Issuer, dated May 29, 2008.
|
9
CUSIP
NO. 140501107
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: May
30, 2008
|
ZS
CROSSOVER II LP
|
|
|
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
|
||
10
CUSIP
NO. 140501107
SCHEDULE
A
Transactions
in the Shares by the Reporting Persons in the Past 60 Days
|
Shares
Purchased / (Sold)
|
Price
Per Share ($)
|
Date
of Purchase / Sale
|
ZS SPECIAL I
L.P.
|
773
|
117.5059
|
04/03/08
|
|
|
1,000
|
114.9885
|
04/09/08
|
|
|
100
|
114.3000
|
05/12/08
|
|
|
1,105
|
119.6242
|
05/14/08
|
|
|
11
|
121.7273
|
05/15/08
|
|
|
1,454
|
118.6220
|
05/16/08
|
|
|
358
|
118.4064
|
05/19/08
|
|
|
1,628
|
118.6673
|
05/20/08
|
|
|
322
|
119.5715
|
05/21/08
|
|
|
1,233
|
120.6023
|
05/22/08
|
|
|
300
|
120.6433
|
05/22/08
|
|
|
2,342
|
120.5617
|
05/23/08
|
|
|
13,789
|
119.7783
|
05/27/08
|
|
|
2,558
|
118.0357
|
05/28/08
|
ZS CROSSOVER II
LP
|
259
|
117.7414
|
04/04/08
|
|
|
961
|
119.3505
|
04/25/08
|
|
|
960
|
119.1142
|
04/30/08
|
|
|
1,000
|
121.4720
|
05/06/08
|
|
|
(1,000)
|
119.2845
|
05/06/08
|
|
|
3,501
|
115.9086
|
05/07/08
|
|
|
900
|
115.5654
|
05/08/08
|
|
|
2,403
|
114.9949
|
05/09/08
|
11
Exhibit 99.1
ZS
Crossover II L.P.
1133
Avenue of the Americas
New York,
New York 10036
|
Ned
L. Sherwood
|
(212)
398-6200
|
|
Fax
(212) 398-1808
|
May 29,
2008
Mr. Gary
Martin and
Board of
Directors of Capital Southwest Corporation
12900
Preston Road, Suite 700
Dallas,
Texas 75230
Dear Mr.
Martin and the Board of Directors:
We are
disappointed that the Capital Southwest Corporation (“CSWC”, or “the Company”)
Board of Directors (“the Board”) and management team chose to fight to exclude
our non-binding proposal from the Company’s proxy statement. We were
surprised that a company that ostensibly prides itself on supporting shareholder
rights would continually attempt to silence the voice of its largest independent
shareholder. However, given CSWC’s poor investment record over the
past 10 years and what appears to be its more than 40-year record of
inaccurately recording its net asset value, we can understand why the Company
would spend shareholder dollars in an attempt to avoid a shareholder vote on a
non-binding proposal. Your efforts to block our shareholder proposal
only serve to reinforce our belief that you are keenly aware that many other
independent shareholders share our views. We remind the members of
the Board that the shareholders are the true owners of the Company, and that the
Board has a fiduciary duty to act in their best interests.
As CSWC’s
largest independent shareholder, our interests are aligned with all
shareholders. Thanks largely to our efforts, the Company has recently
taken the following steps benefiting all shareholders that have resulted in the
correction of previously incorrect accounting treatments, a material increase in
reported net asset value, and the elimination of obfuscations of net asset
value:
Mr. Gary
Martin and Board of Directors
May 29,
2008
Page
2
|
·
|
On
November 20, 2007, CSWC announced that it would restate past SEC filings
to adjust for the elimination of the Company’s deferred tax
liability. According to the Company’s press release, CSWC
“determined its long-standing policy of recording deferred taxes on
unrealized appreciation of investments was not in conformity with AICPA
Audit and Accounting Guide for Investment Company
standards.” This action resulted in an approximate $170
million, or $43.66 per share, increase in reported net asset value for the
period ended September 30, 2007. We had previously requested
that the Company take these very steps to correct this accounting policy
in a letter to the Company in August 2007.
|
|
·
|
As
of March 31, 2008, CSWC reported that it had obtained some form of third
party assurances – though not, in our opinion, true third party appraisals
– on the valuations of its four major private
companies. Interestingly, we note that CSWC increased the value
of these companies by 27.5% between December 31, 2007 and March 31, 2008
in order to obtain these third party assurances. In other
words, the aggregate value of these companies was increased by $62.7
million, or $16.12 per share, in a three-month period. Included
in these revisions is the value of Lifemark Group, which was adjusted
upward by an astounding 61.4% in the quarter! Thus, it seems
clear that CSWC did not make it a priority to accurately value these
Company assets until our letters were published and CSWC felt compelled to
do so.
|
|
·
|
As
of March 31, 2008, CSWC also reduced the valuation discounts on its four
largest public company holdings (ALG, HLYS, PHHM and WIRE) to an
approximate 25% discount from their aggregate public market
value. While this 25% discount is somewhat less than the 35%
discount applied as of December 31, 2007, we question the methodology
utilized in this valuation process. We do not believe that
these four public holdings were valued in accordance with FAS 157 (which
does not become mandatory until April 1, 2008, one day after the end of
CSWC’s 2008 fiscal year). We had requested that the Company
reevaluate the discounts that are applied to these companies in our
previous letters and we welcome the reduced discounts; however, we believe
that once CSWC fully adopts FAS 157, these discounts will have to be
reduced substantially more in order for CSWC to be compliant with
accounting regulations.
|
Mr. Gary
Martin and Board of Directors
May 29,
2008
Page
3
While we
endorse these actions as positive steps, we note that the Company acted only
after we privately and publicly suggested that taking such actions would be in
the best interest of shareholders. Additionally, these actions have
done little to date to reduce the substantial discount to net asset value per
share at which CSWC’s stock trades. Recently, the stock of CSWC has
traded at approximately $119 per share while the Company’s net asset value per
share (adjusted for market prices as of May 28, 2008 of its public holdings and
excluding discounts for non-registration) is approximately $175 per share,
implying a market price discount to net asset value of 32%. The Board
and management must realize that while this substantial discount exists, their
work is not done, and that further decisive action needs to be taken to ensure
shareholder value is maximized.
The fact
is the market currently values the Company’s assets at 68 cents on the
dollar. We believe that this discount is directly attributable to the
poor investment performance of CSWC over the past 10 years. We have
asked CSWC management why it insists on retaining the large blocks of the four
major public companies rather than registering and distributing them, as these
securities would likely be valued much closer to dollar-for-dollar in the open
market if distributed. Management has responded with feeble answers,
saying that they, rather than individual shareholders, are better stewards of
these major holdings. We note, however, that since March 31, 1998 the
return CSWC has achieved on its public holdings has been a cumulative loss of
54.3%, or a compound annual rate of return of negative
7.4%. Although HLYS has been a large component of this loss
since its IPO, even excluding HLYS entirely would imply a cumulative loss of
28.4%, or a compound annual rate of return of negative
3.2%.
Based on
these results, we seriously doubt that the Company is a better steward of this
capital than its shareholders would be. As evidenced by the discount
at which the stock trades relative to net asset value, the market seems to agree
with us. We believe that to prevent further erosion of shareholder
value, CSWC should register and distribute the shares of these four public
holdings before year-end on a pro-rata basis to shareholders. In
addition to protecting shareholder value, such a distribution would result in
shareholders being able to take advantage of the current federal capital gains
tax rate of 15% and not be at risk for the increase in this tax rate to 20% or
greater that may be instituted with a new administration in the White House next
year.
Mr. Gary
Martin and Board of Directors
May 29,
2008
Page
4
We
believe the time for decisive action by the Board and management is long overdue
and that other significant independent shareholders agree with
us. Furthermore, as stewards of a Business Development Company, it is
the Board’s and management’s responsibility to accurately present CSWC’s net
asset value on a quarterly and annual basis in order to maximize shareholder
value. We wonder why management and the Board did not take steps to
more accurately account for the true market value of the Company’s holdings
until we publicly called for the changing of certain
policies. Moreover, management and the Board must move more swiftly
to enact the further changes necessary to maximize shareholder
value. Until the Board and management can assure shareholders that
the Company’s assets are accurately accounted for, shareholders of CSWC will
have ample reason to be displeased with the conduct of the Board and
management.
We plan
to closely monitor CSWC’s actions over the coming weeks for evidence that the
Company is taking tangible steps to address our serious concerns. We
suggest the following:
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1.
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The
sale of CSWC’s approximately $54 million of unrestricted public securities
(all except for ALG, HLYS, PHHM and WIRE) and subsequent distribution of
proceeds to shareholders on a pro rata basis;
and
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2.
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The
registration and distribution of the four major public holdings to
shareholders on a pro rata basis.
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We
estimate these two steps would result in a distribution to shareholders of
approximately $82 per share in cash and securities at current market prices,
though the exact amount may vary. After this distribution, CSWC would
still have approximately $8 per share in cash, more than $85 per share of value
in its privately held securities portfolio and no debt. Based on the
Company’s past five-year history of new investments, we believe that following
this distribution CSWC would still have ample cash and debt capacity to
consummate new private company purchases. We also believe that
following this distribution CSWC’s stock price would trade much closer to the
Company’s remaining net asset value of approximately $93 per
share. Thus, by
our calculations, shareholders could own a stock likely valued at close to $93
per share while also having $82 per share in cash and securities in their direct
control, which is a total value of approximately $175 per share, a nearly 50%
premium to the recent CSWC stock price of $119.
Mr. Gary
Martin and Board of Directors
May 29,
2008
Page
5
Clearly,
we are displeased with the Board’s cavalier attitude towards valuation of the
Company’s assets and its refusal to distribute significant cash and marketable
securities to the shareholders. We intend to send this message to the Board and
management by withholding our votes for CSWC’s slate of directors at this year’s
annual meeting if there are no tangible actions taken by that
time. We believe withholding our votes will send a message that
independent shareholders are not satisfied with the status quo, and that we
demand the Board and management work to ensure that shareholder value is
maximized.
Investing
“patient capital” does not equate to operating the Company with lax and
inattentive Board supervision and management. After more than ten
years of poor investment performance and minimal distributions to shareholders,
we believe the current Board and management no longer deserve the benefit of the
doubt. We hope all shareholders will call, email or write to the
Company to voice support for the approximate $82 per share distribution and that
the Board and management will take the necessary actions to maximize shareholder
value.
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Sincerely,
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/s/
Ned L. Sherwood
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Ned
L.
Sherwood
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