UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from........................to........................ Commission File Number: 814-61 CAPITAL SOUTHWEST CORPORATION (Exact name of registrant as specified in its charter) Texas 75-1072796 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 12900 Preston Road, Suite 700, Dallas, Texas 75230 (Address of principal executive offices) (Zip Code) (972) 233-8242 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, $1.00 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2003 was $103,394,124, based on the last sale price of such stock as quoted by Nasdaq on such date (officers, directors and 5% shareholders are considered affiliates for purposes of this calculation). The number of shares of common stock outstanding as of May 15, 2004 was 3,857,051. Documents Incorzporated by Reference Part of Form 10-K ------------------------------------ ----------------- (1) Annual Report to Shareholders for the Year Ended Parts I and II; and March 31, 2004 Part IV, Item 14(a)(1) and (2) (2) Proxy Statement for Annual Meeting of Shareholders Part III to be held July 19, 2004TABLE OF CONTENTS Page ---- PART I Item 1. Business....................................................1 Item 2. Properties..................................................1 Item 3. Legal Proceedings...........................................1 Item 4. Submission of Matters to a Vote of Security Holders.........2 Item 4A. Executive Officers..........................................2 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities........2 Item 6. Selected Financial Data.....................................2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................2 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..2 Item 8. Financial Statements and Supplementary Data.................3 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................4 Item 9A. Controls and Procedures.....................................4 PART III Item 10. Directors and Executive Officers of the Registrant..........4 Item 11. Executive Compensation......................................4 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...............4 Item 13. Certain Relationships and Related Transactions..............5 Item 14. Principal Accountant Fees and Services......................5 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............................................5 Signatures ...................................................................6
PART I Item 1. Business We were organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a licensee under the Small Business Investment Act of 1958. At that time, we transferred to our wholly-owned subsidiary, Capital Southwest Venture Corporation ("CSVC"), certain assets and our license as a small business investment company ("SBIC"). CSVC is a closed-end, non-diversified investment company of the management type registered under the Investment Company Act of 1940 (the "1940 Act"). Prior to March 30, 1988, we were registered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to become a business development company subject to the provisions of Sections 55 through 65 of the 1940 Act, as amended by the Small Business Incentive Act of 1980. Because we wholly own CSVC, the portfolios of both entities are referred to collectively as "our", "we" and "us". We are a venture capital investment company whose objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. Our investment interests are focused on expansion financings, management buyouts, recapitalizations, industry consolidations and early-stage financings in a broad range of industry segments. The portfolio is a composite of companies in which we have major interests as well as a number of developing companies and marketable securities of established publicly-owned companies. We make available significant managerial assistance to the companies in which we invest and believe that providing material assistance to such investee companies is critical to their business development activities. The twelve largest investments we own had a combined cost of $42,496,262 and a value of $356,795,966, representing 87.7% of the value of our consolidated investment portfolio at March 31, 2004. For a narrative description of the twelve largest investments, see "Twelve Largest Investments - March 31, 2004" on pages 7 through 9 of our Annual Report to Shareholders for the Year Ended March 31, 2004 (our "2004 Annual Report") which is herein incorporated by reference. Certain of the information presented on the twelve largest investments has been obtained from the respective companies and, in certain cases, from public filings of such companies. The financial information presented on each of the respective companies is from such companies' financial statements, which in some instances are unaudited. We compete for attractive investment opportunities with venture capital partnerships and corporations, venture capital affiliates of industrial and financial companies, SBICs and wealthy individuals. The number of persons employed by us at March 31, 2004 was seven. Our internet website address is www.capitalsouthwest.com. You can review the filings we have made with the U.S. Securities and Exchange Commission, free of charge by linking directly from our website to NASDAQ, a database that links to EDGAR, the Electronic Data Gathering, Analysis, and Retrieval System of the SEC. You should be able to access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The charters adopted by the committees of our board of directors are also available on our website. Item 2. Properties We maintain our offices at 12900 Preston Road, Suite 700, Dallas, Texas, 75230, where we rent approximately 3,700 square feet of office space pursuant to a lease agreement expiring in February 2008. We believe that our offices are adequate to meet our current and expected future needs. Item 3. Legal Proceedings We have no material pending legal proceedings to which we are a party or to which any of our property is subject. 1
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended March 31, 2004. Item 4A. Executive Officers The names and ages of our executive officers as of June 1, 2004, together with certain biographical information, are as follows: William M. Ashbaugh, age 49, has served as Vice President since 2001. He previously served as Managing Director in the corporate finance departments of Hoak Breedlove Wesneski & Co. from 1998 to 2001, Principal Financial Securities from 1997 to 1998 and Southwest Securities from 1995 to 1997. Patrick F. Hamner, age 48, has served as Vice President since 1986 and was an Investment Associate from 1982 to 1986. Susan K. Hodgson, age 42, has served as Secretary-Treasurer since 2001 and was Controller from 1994 to 2001. Gary L. Martin, age 57, has been a director since July 1988 and has served as Vice President since 1984. He previously served as Vice President from 1978 to 1980. Since 1980, Mr. Martin has served as President of The Whitmore Manufacturing Company, a wholly-owned portfolio company. William R. Thomas, age 75, has served as Chairman of the Board of Directors since 1982 and President since 1980. In addition, he has been a director since 1972 and was previously Senior Vice President from 1969 to 1980. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Information set forth under the captions "Shareholder Information - Shareholders, Market Prices and Dividends" on page 33 of our 2004 Annual Report is herein incorporated by reference. Item 6. Selected Financial Data "Selected Consolidated Financial Data" on page 32 of our 2004 Annual Report is herein incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 29 through 31 of our 2004 Annual Report are herein incorporated by reference. Item 7A. 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. The return on our investments is not materially affected by foreign currency fluctuations. Our investment in portfolio securities consists of fixed rate debt securities which totaled $4,729,493 at March 31, 2004, equivalent to 1.16% of the value of our total investments. Since these debt securities usually have relatively high fixed rates of interest, minor changes in market yields of 2
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 would be a corresponding effect on valuations of private companies, which would affect the value and the amount and timing of proceeds eventually realized from these investments. A portion of our investment portfolio also consists of restricted common stock 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 price would result in an identical change in the fair value of our investment in such security. Item 8. Financial Statements and Supplementary Data Pages 10 through 28 of our 2004 Annual Report are herein incorporated by reference. See also Item 15 of this Form 10-K - "Exhibits, Financial Statement Schedules, and Reports on Form 8-K". Selected Quarterly Financial Data (Unaudited) --------------------------------------------- The following presents a summary of the unaudited quarterly consolidated financial information for the years ended March 31, 2004 and 2003. First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- -------- (In thousands, except per share amounts) 2004 - ---- Net investment income $ 437 $ 382 $ 1,459 $ 309 $ 2,587 Net realized gain (loss) on investments (2) 1,935 (92) 6,351 8,192 Net increase in unrealized appreciation of investments 8,756 13,214 12,964 39,755 74,689 Net increase in net assets from operations 9,191 15,531 14,331 46,415 85,468 Net increase in net assets from operations per share 2.40 4.02 3.71 12.03 22.16 2003 - ---- Net investment income $ 475 $ 484 $ 984 $ 356 $ 2,299 Net realized gain (loss) on investments (318) 37 13 1,614 1,346 Net increase (decrease) in unrealized appreciation of investments (14,528) (32,274) 3,478 (2,048) (45,372) Net increase (decrease) in net assets from operations (14,371) (31,753) 4,475 (78) (41,727) Net increase (decrease) in net assets from operations per share (3.75) (8.30) 1.17 (0.02) (10.90) 3
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures As of March 31, 2004, an evaluation was performed under the supervision and with the participation of our management, including the President and Chairman of the Board and Secretary-Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the President and Chairman of the Board and Secretary-Treasurer concluded that our disclosure controls and procedures were effective as of March 31, 2004. There have been no significant changes during the period covered by this report in our internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting. PART III Item 10. Directors and Executive Officers of the Registrant The section of our 2004 Proxy Statement captioned "Nominees for Director" under "Proposal 1. Election of Directors" identifies members of our board of directors and nominees, and is incorporated in this Item 10 by reference. Item 4A of this Form 10-K identifies our executive officers and is incorporated in this Item 10 by reference. The sections of our 2004 Proxy Statement captioned "Meetings and Committees of the Board of Directors - Audit Committee" under "Proposal 1. Election of Directors" and "Report of the Audit Committee" identifies members of our audit committee of our board of directors and our audit committee financial expert, and are incorporated in this Item 10 by reference. The section of our 2004 Proxy Statement captioned "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated in this Item 10 by reference. Code of Ethics We have adopted a code of ethics that applies to all our directors, officers and employees. We have made the Code of Conduct and Ethics available on our website at www.capitalsouthwest.com. Item 11. Executive Compensation The information in the section of our 2004 Proxy Statement captioned "Executive Compensation" is incorporated in this Item 11 by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information in the sections of our 2004 Proxy Statement captioned "Stock Ownership of Certain Beneficial Owners" and "Executive Compensation" are incorporated in this Item 12 by reference. The table below sets forth certain information as of March 31, 2004 regarding the shares of our common stock available for grant or granted under stock option plans that (i) were approved by our stockholders, and (ii) were not approved by our stockholders. 4
Equity Compensation Plan Information Number of Securities Number of Securities Remaining Available For To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity Exercise of Price Of Outstanding Compensation Plans Outstanding Options, Options, (excluding securities reflected Plan Category Warrants And Rights Warrants And Rights in column (a)) - ------------- -------------------- ------------------- -------------- (a) (b) (c) --- --- --- Equity 54,500 $70.004 85,500 compensation plans approved by security holders(1) Equity - - - compensation plans not approved by security holders -------- -------- -------- Total 54,500 $70.004 85,500 - --------- (1) Includes the 1999 Stock Option Plan. For a description of this plan, please refer to Footnote 5 contained in our consolidated financial statements. Item 13. Certain Relationships and Related Transactions There were no relationships or transactions within the meaning of this item during the fiscal year ended March 31, 2004 or proposed for the fiscal year ending March 31, 2005. Item 14. Principal Accountant Fees and Services The information in the sections of our 2004 Proxy Statement captioned "Proposal 2: Ratification of Appointment of Independent Auditors" and "Audit and Other Fees" are incorporated in this Item 14 by reference. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) The following financial statements included in pages 10 through 28 of our 2004 Annual Report are herein incorporated by reference: (A) Portfolio of Investments - March 31, 2004 Consolidated Statements of Financial Condition - March 31, 2004 and 2003 Consolidated Statements of Operations - Years Ended March 31, 2004, 2003 and 2002 Consolidated Statements of Changes in Net Assets - Years Ended March 31, 2004, 2003 and 2002 Consolidated Statements of Cash Flows - Years Ended March 31, 2004, 2003 and 2002 (B) Notes to Consolidated Financial Statements (C) Notes to Portfolio of Investments (D) Selected Per Share Data and Ratios (E) Reports of Independent Registered Public Accounting Firms (F) Portfolio Changes During the Year (a)(2) All schedules are omitted because they are not applicable or not required, or the information is otherwise supplied. (a)(3) See the Exhibit Index. (b) We filed no reports on Form 8-K during the three months ended March 31, 2004. 5
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL SOUTHWEST CORPORATION By: /s/ William R. Thomas ---------------------------- William R. Thomas, President and Chairman of the Board Date: June 11, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ William R. Thomas - ----------------------------- President and Chairman June 11, 2004 William R. Thomas of the Board and Director (chief executive officer) /s/ Gary L. Martin - ----------------------------- Director June 11, 2004 Gary L. Martin /s/ Graeme W. Henderson - ----------------------------- Director June 11, 2004 Graeme W. Henderson /s/ Samuel B. Ligon - ----------------------------- Director June 11, 2004 Samuel B. Ligon /s/ John H. Wilson - ----------------------------- Director June 11, 2004 John H. Wilson /s/ Susan K. Hodgson - ----------------------------- Secretary-Treasurer June 11, 2004 Susan K. Hodgson (chief financial/accounting officer) 6
EXHIBIT INDEX The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with this report.) Exhibit No. Description ----------- ----------- 3.1(a) Articles of Incorporation and Articles of Amendment to Articles of Incorporation, dated June 25, 1969 (filed as Exhibit 1(a) and 1(b) to Amendment No. 3 to Form N-2 for the fiscal year ended March 31, 1979). 3.1(b) Articles of Amendment to Articles of Incorporation, dated July 20, 1987 (filed as an exhibit to Form N-SAR for the six month period ended September 30, 1987). 3.2 By-Laws of the Company, as amended (filed as Exhibit 2 to Amendment No. 11 to Form N-2 for the fiscal year ended March 31, 1987). 4.1 Specimen of Common Stock certificate (filed as Exhibit 4.1 to Form 10-K for the fiscal year ended March 31, 2002). 10.1 The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock Ownership Plan as revised and restated effective April 1, 1998 (filed as Exhibit 10.1 to Form 10-K for the fiscal year ended March 31, 2002). 10.2 Amendment No. I to The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock Ownership Plan as revised and restated effective April 1, 1998 (filed as Exhibit 10.2 to Form 10-K for the fiscal year ended March 31, 2002). 10.3 Amendment No. 2 to The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock Ownership Plan as revised and restated effective April 1, 1998. 10.4 Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989 (filed as Exhibit 10.3 to Form 10-K for the fiscal year ended March 31, 1995). 10.5 Amendments One and Two to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989 (filed as Exhibit 10.4 to Form 10-K for the fiscal year ended March 31, 1998). 10.6 Amendment Three to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 2002). 10.7 Amendment Four to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989. 10.8 Amendment Five to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989. 7
10.9 Amendment Six to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989. 10.10 Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan for certain highly-compensated superseded plan participants effective April 1, 1993 (filed as Exhibit 10.4 to Form 10-K for the fiscal year ended March 31, 1995). 10.11 Amendment One to Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan for certain highly-compensated superceded plan participants effective April 1, 1993 (filed as Exhibit 10.6 to Form 10-K for the fiscal year ended March 31, 1998). 10.12 Capital Southwest Corporation Retirement Income Restoration Plan as amended and restated effective April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 1995). 10.13 Form of Indemnification Agreement which has been established with all directors and executive officers of the Company (filed as Exhibit 10.9 to Form 8-K dated February 10, 1994). 10.14 Capital Southwest Corporation 1999 Stock Option Plan (filed as Exhibit 10.10 to Form 10-K for the fiscal year ended March 31, 2000). 13.1 * Annual Report to Shareholders for the fiscal year ended March 31, 2004. 21.1 List of subsidiaries of the Company (filed as exhibit 21 to Form 10-K for the fiscal year ended March 31, 1998). 23.1 * Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP. 23.2 * Consent of Independent Registered Public Accounting Firm - KPMG LLP. 31.1 * Certification of President and Chairman of the Board required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), filed herewith. 31.2 * Certification of Secretary-Treasurer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed herewith. 32.1 * Certification of President and Chairman of the Board required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith. 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. 8
Exhibit 13.1 Twelve Largest Investments - March 31, 2004 ================================================================================ Palm Harbor Homes, Inc. $86,406,000 - -------------------------------------------------------------------------------- Palm Harbor Homes, Dallas, Texas, is an integrated manufacturer and retailer of manufactured and modular housing produced in 19 plants and sold in 30 states by 149 company-owned retail stores and builder locations and approximately 275 independent dealers, builders and developers. The company provides financing through its subsidiary, CountryPlace Mortgage, and through its jointly-owned mortgage banking company, BSM Financial, and sells insurance through its subsidiary, Standard Casualty. Palm Harbor's high-quality homes are designed to meet the need for attractive, affordable housing. During the year ended March 26, 2004, Palm Harbor reported a net loss of $6,017,000 ($0.26 per share) on net sales of $578,465,000, compared with earnings of $3,221,000 ($0.14 per share) on net sales of $573,130,000 in the previous year. The March 31, 2004 closing Nasdaq bid price of Palm Harbor's common stock was $20.99 per share. At March 31, 2004, the $10,931,955 investment in Palm Harbor by Capital Southwest and its subsidiary was valued at $86,406,000 ($11.00 per share), consisting of 7,855,121 restricted shares of common stock, representing a fully-diluted equity interest of 34.4%. ================================================================================ The RectorSeal Corporation $60,000,000 - -------------------------------------------------------------------------------- The RectorSeal Corporation, Houston, Texas, with two plants in Texas and a plant in New York, manufactures specialty chemical products including pipe thread sealants, firestop sealants, plastic cements and other formulations for plumbing, HVAC, electrical and industrial applications. RectorSeal's subsidiary, Jet-Lube, Inc., with plants in Texas, England and Canada, produces anti-seize compounds, specialty lubricants and other products used in industrial and oil field applications. Another subsidiary produces a line of automotive chemical products sold under the Cargo and Blue Magic trade names. RectorSeal also owns a 20% equity interest in The Whitmore Manufacturing Company (described on page 8). During the year ended March 31, 2004, RectorSeal earned $6,235,000 on revenues of $65,883,000, compared with earnings of $6,799,000 ($5,720,000 after subtracting extraordinary tax credits) on revenues of $63,161,000 in the previous year. RectorSeal's earnings do not reflect its 20% equity in The Whitmore Manufacturing Company. At March 31, 2004, Capital Southwest owned 100% of RectorSeal's common stock having a cost of $52,600 and a value of $60,000,000. ================================================================================ Encore Wire Corporation $59,939,000 - -------------------------------------------------------------------------------- Encore Wire Corporation, McKinney, Texas, manufactures a broad line of copper electrical building wire and cable including non-metallic sheathed, underground feeder and THHN wire and cable for residential, commercial and industrial construction. Encore's products are sold through large-volume distributors and building materials retailers. For the year ended December 31, 2003, Encore reported net income of $14,376,000 ($0.94 per share) on net sales of $384,750,000, compared with net income of $5,964,000 ($0.39 per share) on net sales of $285,207,000 in the previous year. The March 31, 2004 closing Nasdaq bid price of Encore's common stock was $37.23 per share. At March 31, 2004, the $5,800,000 investment in 2,724,500 shares of Encore's restricted common stock by Capital Southwest and its subsidiary was valued at $59,939,000 ($22.00 per share), representing a fully-diluted equity interest of 16.9%. ================================================================================ Skylawn Corporation $40,000,000 - -------------------------------------------------------------------------------- Skylawn Corporation, Hayward, California, owns and operates cemeteries, mausoleums and mortuaries. Skylawn's operations, all of which are in California, include a major cemetery in San Mateo, a mausoleum and an adjacent mortuary in Oakland and cemeteries, mausoleums and mortuaries in Hayward and Sacramento. The company recently acquired a funeral home in San Bruno and will soon begin building a major funeral home on the grounds of its San Mateo County cemetery. Its insurance company and funeral and cemetery trusts enable Skylawn's clients to make pre-need arrangements. For the fiscal year ended March 31, 2004, Skylawn reported unaudited earnings of $2,850,000 on revenues of $25,452,000, compared with restated earnings of $2,928,000 on revenues of $24,871,000 in the previous year. At March 31, 2004, Capital Southwest owned 100% of Skylawn Corporation's common stock, which had a cost of $4,510,400 and was valued at $40,000,000.================================================================================ Alamo Group Inc. $31,034,000 - -------------------------------------------------------------------------------- Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and distributor of heavy-duty, tractor and truck mounted mowing and other vegetation maintenance equipment, street-sweeping equipment and replacement parts. Founded in 1969, Alamo Group operates 15 manufacturing facilities and serves governmental, industrial and agricultural markets in the U.S., Europe, Canada and Australia. For the year ended December 31, 2003, Alamo reported consolidated earnings of $8,038,000 ($0.82 per share) on net sales of $279,078,000, compared with earnings of $6,382,000 ($0.65 per share) on net sales of $259,435,000 in the previous year. The March 31, 2004 closing NYSE market price of Alamo's common stock was $17.39 per share. At March 31, 2004, the $2,065,047 investment in Alamo by Capital Southwest and its subsidiary was valued at $31,034,000 ($11.00 per share), consisting of 2,821,300 restricted shares of common stock, representing a fully-diluted equity interest of 27.2%. ================================================================================ Media Recovery, Inc. $17,000,000 - -------------------------------------------------------------------------------- Media Recovery, Inc., Graham, Texas, distributes computer and office automation supplies and accessories to corporate customers through its direct sales force with 29 offices in 22 states. Its Shockwatch division manufactures impact and tilt monitoring devices used to detect mishandled shipments. Media Recovery's subsidiary, The Damage Prevention Company, Denver, Colorado, manufactures dunnage products used to prevent damage in trucking, rail and export container shipments. During the year ended September 30, 2003, Media Recovery reported net income of $3,454,000 on net sales of $108,751,000, compared with net income of $1,817,000 on net sales of $97,866,000 in the previous year. At March 31, 2004, the $5,415,000 investment in Media Recovery by Capital Southwest and its subsidiary was valued at $17,000,000, consisting of 4,800,000 shares of Series A convertible preferred stock, representing a fully-diluted equity interest of 71.5%. ================================================================================ All Components, Inc. $14,100,000 - -------------------------------------------------------------------------------- All Components, Inc., Farmers Branch, Texas, distributes and produces memory and other electronic components for personal computer manufacturers, retailers, value-added resellers and other corporate customers. Through its Dallas-based sales and distribution center and its contract manufacturing plants in Austin, Texas and Boise, Idaho, the company serves over 2,000 customers throughout the United States. During the year ended August 31, 2003, All Components reported net income of $4,060,000 on net sales of $156,994,000, compared with net income of $1,605,000 on net sales of $135,936,000 in the previous year. At March 31, 2004, the $2,650,000 investment in All Components by Capital Southwest and its subsidiary was valued at $14,100,000 consisting of a 12% subordinated note valued at its cost of $2,500,000 and 150,000 shares of Series A convertible preferred stock valued at $11,600,000, representing a 56.1% fully-diluted equity interest. ================================================================================ The Whitmore Manufacturing Company $12,000,000 - -------------------------------------------------------------------------------- The Whitmore Manufacturing Company, Rockwall, Texas, manufactures specialty lubricants for heavy equipment used in surface mining, railroads and other industries, and produces water-based coatings for the automotive and primary metals industries. Whitmore's subsidiary, Fluid Protection Corporation, manufactures fluid contamination control devices. During the year ended March 31, 2004, Whitmore reported net income of $376,000 on net sales of $13,739,000, compared with net income of $149,000 on net sales of $12,521,000 in the previous year. The company is owned 80% by Capital Southwest and 20% by Capital Southwest's subsidiary, The RectorSeal Corporation (described on page 7). At March 31, 2004, the direct investment in Whitmore by Capital Southwest was valued at $12,000,000 and had a cost of $1,600,000.
================================================================================ Texas Capital Bancshares, Inc. $11,110,358 - -------------------------------------------------------------------------------- Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has total assets of approximately $2.2 billion. With banks in Austin, Dallas, Fort Worth, Houston, Plano and San Antonio, Texas Capital Bancshares conducts its business through its wholly-owned subsidiary, Texas Capital Bank, N.A., which targets middle market commercial and wealthy private client customers in Texas. For the year ended December 31, 2003, Texas Capital reported net income of $13,834,000 ($0.60 per share), compared with net income of $7,343,000 ($0.32 per share) in the previous year. The March 31, 2004 closing Nasdaq bid price of Texas Capital's common stock was $16.11 per share. At March 31, 2004, Capital Southwest owned 689,656 unrestricted shares of common stock, having a cost of $5,000,006 and a market value of $11,110,358 ($16.11 per share). ================================================================================ Mail-Well, Inc. $9,371,748 - -------------------------------------------------------------------------------- Mail-Well, Inc., Englewood, Colorado, is one of the largest printers in North America, serving the commercial printing and envelope market segments. It is the world's largest manufacturer of envelopes, the leading printer of envelopes in the U.S. and Canada, and the premier high impact color printer in the U.S. For the year ended December 31, 2003, Mail-Well reported net income of $5,150,000 ($0.11 per share) on net sales of $1.672 billion, compared with a net loss of $202,104,000 ($4.24 per share) on net sales of $1.729 billion in the previous year. The March 31, 2004 closing NYSE market price of Mail-Well's common stock was $4.47 per share. At March 31, 2004, the $2,986,870 investment in Mail-Well by Capital Southwest was valued at $9,371,748 ($4.47 per share), consisting of 2,096,588 unrestricted shares of common stock, representing a fully-diluted equity interest of 3.8%. ================================================================================ PETsMART, Inc. $8,115,000 - -------------------------------------------------------------------------------- PETsMART, Inc., Phoenix, Arizona, is the largest specialty retailer of services and solutions for the lifetime needs of pets. The company operates more than 600 pet superstores in the United States and Canada and is a leading direct marketer of pet products through its e-commerce site and its pet and equine catalog business. For the year ended February 1, 2004, PETsMART, Inc. reported net income of $139,549,000 ($0.95 per share) on net sales of $2.996 billion, compared with net income of $88,855,000 ($0.63 per share) on net sales of $2.695 billion in the previous year. The March 31, 2004 closing Nasdaq market price of PETsMART's common stock was $27.05 per share. At March 31, 2004, Capital Southwest and its subsidiary owned 300,000 unrestricted shares of common stock, having a cost of $1,318,771 and a market value of $8,115,000 ($27.05 per share). ================================================================================ Liberty Media Corporation $7,719,860 - -------------------------------------------------------------------------------- Liberty Media Corporation, Englewood, Colorado, acquired by AT&T as part of Tele-Communications, Inc. in 1999 and now an independent company, produces, acquires and distributes entertainment, sports and informational programming services and electronic retailing services, which are delivered via cable television and other technologies to viewers in the United States and overseas. For the year ended December 31, 2003, Liberty Media reported a net loss of $1.222 billion ($0.44 per share) on net sales of $4.028 billion, compared with a net loss of $5.330 billion ($2.06 per share) on net sales of $2.084 billion in the previous year. The March 31, 2004 closing NYSE market price of Series A common stock was $10.95 per share. At March 31, 2004, Capital Southwest owned 705,010 unrestricted shares of Series A common stock, having a cost of $165,613 and a market value of $7,719,860 ($10.95 per share).
Portfolio of Investments - March 31, 2004 Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ +AT&T CORP. <1% ++26,649 shares common New York, New York stock (acquired 3-9-99) $ 12 $ 521,521 Major provider of voice and data communications services including business and consumer long distance and Internet. - ------------------------------------------------------------------------------------------------------------------------------------ +AT&T WIRELESS SERVICES, INC. <1% ++42,878 shares common Redmond, Washington stock (acquired 7-9-01) 10 583,570 Provider of wireless voice and data services and products in the cellular and PCS markets. - ------------------------------------------------------------------------------------------------------------------------------------ +ALAMO GROUP INC. 27.2% 2,821,300 shares common stock Seguin, Texas (acquired 4-1-73 thru 10-4-99) 2,065,047 31,034,000 Tractor-mounted mowing and vegetation maintenance equipment for governmental, industrial and agricultural markets; street-sweeping equipment for municipalities. - ------------------------------------------------------------------------------------------------------------------------------------ ALL COMPONENTS, INC. 56.1% 12% subordinated notedue 2008 Farmers Branch, Texas (acquired 10-28-03 and 1-06-04) 2,500,000 2,500,000 Distribution and production of memory 150,000 shares Series A convertible and other components for personal computer preferred stock, convertible manufacturers, retailers and value-added into 600,000 shares of common resellers; electronics contract manufacturing. stock at $0.25 per share (acquired 9-16-94) 150,000 11,600,000 ----------- ------------ 2,650,000 14,100,000 - ------------------------------------------------------------------------------------------------------------------------------------ +ALLTEL CORPORATION <1% ++8,880 shares common stock Little Rock, Arkansas (acquired 7-1-98) 108,355 443,023 Wireline and wireless communications and information services. - ------------------------------------------------------------------------------------------------------------------------------------ AMPRO MORTGAGE CORPORATION 34.8% 5,000 shares Series A Dallas, Texas cumulative preferred stock Originator and banker of (acquired 2-28-03) 5,000,000 2,500,000 residential mortgage loans. 1,500 shares Series B cumulative preferred stock (acquired 3-31-04) 1,500,000 1,500,000 29,167 shares Series A common stock (acquired 2-28-03) 29,167 -- Warrant to purchase 375,000 shares of common stock at $1.00 per share, expiring 2014 (acquired 3-31-04) -- -- ----------- ------------ 6,529,167 4,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ BALCO, INC. 88.5% 445,000 shares common stock Wichita, Kansas and 60,920 shares Class B Specialty architectural products used non-voting common stock in the construction and remodeling of (acquired 10-25-83 and 5-30-02) 624,920 5,000,000 commercial and institutional buildings. - ------------------------------------------------------------------------------------------------------------------------------------ +Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ BOXX TECHNOLOGIES, INC. 15.4% 3,125,354 shares Series B Austin, Texas convertible preferred stock, Workstations for computer graphics convertible into 3,125,354 imaging and design. shares of common stock at $0.50 per share (acquired 8-20-99 thru 8-8-01) $ 1,500,000 $ 2 Warrants to purchase 80,000 shares of Series B preferred stock at $0.50 per share, expiring 2005 (acquired 8-24-00) -- -- ----------- ------------ 1,500,000 2 - ------------------------------------------------------------------------------------------------------------------------------------ CMI HOLDING COMPANY, INC. 16.2% 2,327,658 shares Series A Richardson, Texas preferred stock (acquired Owns Chase Medical, which develops 8-21-02 and 6-04-03) 4,000,000 4,000,000 and sells devices used in cardiac surgery including proprietary devices for surgical intervention to relieve congestive heart failure. - ------------------------------------------------------------------------------------------------------------------------------------ +COMCAST CORPORATION <1% ++43,104 shares common stock Philadelphia, Pennsylvania (acquired 11-18-02) 21 1,239,240 Development, management and operation of broadband cable networks, electronic retailing and programming. - ------------------------------------------------------------------------------------------------------------------------------------ +CONCERT INDUSTRIES LTD. 6.7% 2,833,485 shares common stock Vancouver, British Columbia (acquired 5-31-00 thru 6-1-01) 9,131,224 2 Manufacture and sale of latex, thermal and multi-bonded air-laid nonwoven fabrics having superabsorbent properties. - ------------------------------------------------------------------------------------------------------------------------------------ DENNIS TOOL COMPANY 67.4% 20,725 shares 5% convertible Houston, Texas preferred stock, convertible Polycrystalline diamond compacts (PDCs) into 20,725 shares of common used in oil field drill bits and in mining stock at $48.25 per share and industrial applications. (acquired 8-10-98) 999,981 999,981 140,137 shares common stock (acquired 3-7-94 and 8-10-98) 2,329,963 1,500,000 ----------- ------------ 3,329,944 2,499,981 - ------------------------------------------------------------------------------------------------------------------------------------ +ENCORE WIRE CORPORATION 16.9% 2,724,500 shares common stock McKinney, Texas (acquired 7-16-92 thru Electric wire and cable for residential 10-7-98) 5,800,000 59,939,000 and commercial use. - ------------------------------------------------------------------------------------------------------------------------------------ EXOPACK HOLDING CORP. 1.4% 5,925 shares common stock Spartanburg, South Carolina (acquired 7-27-01 thru 9-29-03) 623,790 805,800 Paper and plastic flexible packaging for products such as pet food, building materials, chemicals and other commodities. - ------------------------------------------------------------------------------------------------------------------------------------ EXTREME INTERNATIONAL, INC. 52.8% 12% subordinated notes due Sugar Land, Texas 2008, $2,229,493 principal Owns Bill Young Productions, Texas amount (acquired 9-30-03) 1,551,750 2,229,493 Video and Post, and Extreme Communications, 3,935,918 shares Series C which produce radio and television convertible preferred stock, commercials and corporate communications videos. convertible into 15,743,672 shares of common stock at $0.25 per share (acquired 9-30-03) 2,625,000 3,935,918 375,000 shares 8% Series A convertible preferred stock, convertible into 1,500,000 shares of common stock at $0.25 per share (acquired 9-30-03) 375,000 -- Warrants to purchase 1,303,500 shares of common stock at $0.25 per share, expiring 2008 (acquired 8-11-98 thru 9-30-03) -- -- ----------- ------------ 4,551,750 6,165,411 - ------------------------------------------------------------------------------------------------------------------------------------ +Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ +FMC CORPORATION <1% ++6,430 shares common stock Chicago, Illinois (acquired 6-6-86) $ 66,726 $ 275,332 Chemicals for agricultural, industrial and consumer markets. - ------------------------------------------------------------------------------------------------------------------------------------ +FMC TECHNOLOGIES, INC. <1% ++11,057 shares common stock Chicago, Illinois (acquired 1-2-02) 57,051 298,871 Equipment and systems for the energy, food processing and air transportation industries. - ------------------------------------------------------------------------------------------------------------------------------------ HEELING, INC. 43.0% 1,745,455 shares Series A Carrollton, Texas preferred stock (acquired Heelys stealth skate shoes sold through 5-26-00) 480,000 480,000 specialty skate, lifestyle and sporting 436,364 shares Series B goods stores, footwear chains, department convertible preferred stock, stores and over the Internet at Heelys.com. convertible into 436,364 shares of common stock at $0.275 per share (acquired 5-26-00) 120,000 1,600,000 ----------- ------------ 600,000 2,080,000 - ------------------------------------------------------------------------------------------------------------------------------------ +HOLOGIC, INC. <1% ++158,205 shares common stock Bedford, Massachusetts (acquired 8-27-99) 220,000 3,203,651 Medical instruments including bone densitometers, mammography devices and digital radiography systems. - ------------------------------------------------------------------------------------------------------------------------------------ +KIMBERLY-CLARK CORPORATION <1% ++77,180 shares common stock Dallas, Texas (acquired 12-18-97) 2,396,926 4,870,058 Manufacturer of tissue, personal care and health care products. - ------------------------------------------------------------------------------------------------------------------------------------ +LIBERTY MEDIA CORPORATION <1% ++705,010 shares Series A Englewood, Colorado common stock (acquired Global media and entertainment company 3-9-99 thru 12-12-02) 165,613 7,719,860 owning interests in video programming and communications businesses. - ------------------------------------------------------------------------------------------------------------------------------------ +MAIL-WELL, INC. 3.8% ++2,096,588 shares common stock Englewood, Colorado (acquired 2-18-94 thru 11-10-98) 2,986,870 9,371,748 Envelopes and commercial printing. - ------------------------------------------------------------------------------------------------------------------------------------ MEDIA RECOVERY, INC. 71.5% 4,800,000 shares Series A Graham, Texas convertible preferred stock, Computer and office automation supplies convertible into 4,800,000 and accessories; impact and tilt monitoring shares of common stock at devices to detect mishandled shipments; $1.00 per share dunnage for protecting shipments. (acquired 11-4-97) 5,415,000 17,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ ORGANIZED LIVING, INC. 4.6% 3,333,335 shares Series D Lenexa, Kansas convertible preferred stock, Specialty retailer of products designed convertible into 3,333,335 shares to provide home and office storage of common stock at $1.80 per and organization solutions. share (acquired 1-7-00 and 10-30-00) 6,000,000 1 - ------------------------------------------------------------------------------------------------------------------------------------ +Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ PALLET ONE, INC. 8.8% 1,633,500 shares Series A Bartow, Florida preferred stock (acquired Wood pallet manufacturer with 12 10-18-01) $ 1,350,000 $ 750,000 manufacturing facilities. 150,000 shares common stock (acquired 10-18-01) 150,000 -- ----------- ------------ 1,500,000 750,000 - ------------------------------------------------------------------------------------------------------------------------------------ +PALM HARBOR HOMES, INC. 34.4% 7,855,121 shares common stock Dallas, Texas (acquired 1-3-85 thru 7-31-95) 10,931,955 86,406,000 Integrated manufacturing, retailing, financing and insuring of manufactured housing and modular homes. - ------------------------------------------------------------------------------------------------------------------------------------ +PETSMART, INC. <1% ++300,000 shares common stock Phoenix, Arizona (acquired 6-1-95) 1,318,771 8,115,000 Retail chain of more than 600 stores selling pet foods, supplies and services. - ------------------------------------------------------------------------------------------------------------------------------------ PHARMAFAB, INC. 28.6% 35,000 shares Series A Grand Prairie, Texas convertible preferred stock, Value-added contract manufacturer of convertible into 129,506 shares branded and generic pharmaceutical drugs. common stock at $27.0259 per share (acquired 8-1-03) 3,500,000 3,500,000 20,000 shares Series B convertible preferred stock, convertible into 74,004 shares common stock at $27.0259 per share (acquired 8-1-03) 2,000,000 2,000,000 ----------- ------------ 5,500,000 5,500,000 - ------------------------------------------------------------------------------------------------------------------------------------ THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock Houston, Texas (acquired 1-5-73 and 3-31-73) 52,600 60,000,000 Specialty chemical products for plumbing, HVAC, electrical, construction, industrial, oil field and automotive applications; owns 20% of Whitmore Manufacturing Company. - ------------------------------------------------------------------------------------------------------------------------------------ SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock Hayward, California (acquired 7-16-69) 4,510,400 40,000,000 Cemeteries, mausoleums and mortuaries located in northern California. - ------------------------------------------------------------------------------------------------------------------------------------ +SPRINT CORPORATION - FON Group <1% ++72,000 shares common stock Westwood, Kansas (acquired 6-20-84) 449,654 1,326,960 Diversified telecommunications company. - ------------------------------------------------------------------------------------------------------------------------------------ +SPRINT CORPORATION - PCS Group <1% ++36,000 shares common stock Overland Park, Kansas (acquired 11-23-98) 53,991 331,200 Domestic wireless telephony services. - ------------------------------------------------------------------------------------------------------------------------------------ +Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c) - ------------------------------------------------------------------------------------------------------------------------------------ TCI HOLDINGS, INC. - 21 shares 12% Series C Denver, Colorado cumulative compounding Cable television systems and microwave preferred stock (acquired relay systems. 1-30-90) $ -- $ 677,250 - ------------------------------------------------------------------------------------------------------------------------------------ +TEXAS CAPITAL BANCSHARES, INC. 2.4% ++689,656 shares common stock Dallas, Texas (acquired 5-1-00) 5,000,006 11,110,358 Regional bank holding company with banking operations in six Texas cities. - ------------------------------------------------------------------------------------------------------------------------------------ TEXAS PETROCHEMICAL HOLDINGS, INC. 5.0% 30,000 shares common stock Houston, Texas (acquired 6-27-96) 3,000,000 1 Butadiene for synthetic rubber, MTBE for gasoline octane enhancement and butylenes for varied applications. - ------------------------------------------------------------------------------------------------------------------------------------ TEXAS SHREDDER, INC. 53.3% 750 shares Series B convertible San Antonio, Texas preferred stock, convertible Design and manufacture of heavy-duty into 750,000 shares of common shredder systems for recycling steel and stock at $0.10 per share other materials from junk automobiles. (acquired 3-6-91) 75,000 3,525,000 - ------------------------------------------------------------------------------------------------------------------------------------ VOCALDATA, INC. 1.0% 650,001 shares Series A Richardson, Texas convertible preferred stock, Hardware and software for customer premises convertible into 703,899 shares telephony equipment based on Voice Over of common stock at $0.808 per Internet Protocol. share (acquired 11-4-99 and 12-3-99) 568,750 1 100,143 shares Series B convertible preferred stock, convertible into 123,184 shares of common stock at $1.43 per share (acquired 10-26-00) 176,153 1 827,083 shares common stock (acquired 10-24-03) 744,902 -- ----------- ------------ 1,489,805 2 - ------------------------------------------------------------------------------------------------------------------------------------ THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock Rockwall, Texas (acquired 8-31-79) 1,600,000 12,000,000 Specialized mining, industrial and railroad lubricants; automotive transit coatings. - ------------------------------------------------------------------------------------------------------------------------------------ MISCELLANEOUS - Diamond State Ventures, L.P. - 1.9% limited partnership interest (acquired 10-12-99 thru 12-4-03) 196,875 196,875 - First Capital Group of Texas III, L.P. - 3.3% limited partnership interest (acquired 12-26-00 thru 8-28-03) 640,000 640,000 100.0% Humac Company - 1,041,000 shares common stock (acquired 1-31-75 and 12-31-75) -- 156,000 - STARTech Seed Fund I - 12.6% limited partnership interest (acquired 4-17-98 thru 1-5-00) 178,066 1 - STARTech Seed Fund II - 3.2% limited partnership interest (acquired 4-28-00 thru 3-21-04) 900,000 1 - Sterling Group Partners I, L.P. - 1.7% limited partnership interest (acquired 4-20-01 thru 11-21-03) 1,063,100 1,063,100 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $97,282,649 $406,948,819 =========== ============ - ------------------------------------------------------------------------------------------------------------------------------------ +Publicly-owned company ++Unrestricted securities as defined in Note (b)
Notes to Portfolio of Investments (a) The percentages in the "Equity" column express the potential equity interests held by Capital Southwest Corporation and Capital Southwest Venture Corporation (together, the "Company") in each issuer. Each percentage represents the amount of the issuer's common stock the Company owns or can acquire as a percentage of the issuer's total outstanding common shares, plus shares reserved for all warrants, convertible securities and employee stock options. The symbol "<1%" indicates that the Company holds a potential equity interest of less than one percent. (b) Unrestricted securities (indicated by ++) are freely marketable securities having readily available market quotations. All other securities are restricted securities which are subject to one or more restrictions on resale and are not freely marketable. At March 31, 2004, restricted securities represented approximately 87.9% of the value of the consolidated investment portfolio. (c) Under the valuation policy of the Company, unrestricted securities are valued at the closing sale price for listed securities and at the lower of the closing bid price or the last sale price for Nasdaq securities on the valuation date. Restricted securities, including securities of publicly-owned companies which are subject to restrictions on resale, are valued at fair value as determined by the Board of Directors. Fair value is considered to be the amount which the Company may reasonably expect to receive for portfolio securities if such securities were sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities. Among the factors considered by the Board of Directors in determining the fair value of restricted securities are the financial condition and operating results of the issuer, the long-term potential of the business of the issuer, the market for and recent sales prices of the issuer's securities, the values of similar securities issued by companies in similar businesses, the proportion of the issuer's securities owned by the Company, the nature and duration of resale restrictions and the nature of any rights enabling the Company to require the issuer to register restricted securities under applicable securities laws. In determining the fair value of restricted securities, the Board of Directors considers the inherent value of such securities without regard to the restrictive feature and adjusts for any diminution in value resulting from restrictions on resale. (d) Agreements between certain issuers and the Company provide that the issuers will bear substantially all costs in connection with the disposition of common stocks, including those costs involved in registration under the Securities Act of 1933 but excluding underwriting discounts and commissions. These agreements cover common stocks owned at March 31, 2004 and common stocks which may be acquired thereafter through exercise of warrants and conversion of debentures and preferred stocks. They apply to restricted securities of all issuers in the investment portfolio of the Company except securities of the following issuers, which are not obligated to bear registration costs: Humac Company, Skylawn Corporation and The Whitmore Manufacturing Company. (e) The descriptions of the companies and ownership percentages shown in the portfolio of investments were obtained from published reports and other sources believed to be reliable, are supplemental and are not covered by the report of independent auditors. Acquisition dates indicated are the dates specific securities were acquired. Certain securities were received in exchange for or upon conversion or exercise of other securities previously acquired.
Portfolio Changes During the Year New Investments and Additions to Previous Investments Amount ----------- All Components, Inc. ............................ $ 2,500,000 AmPro Mortgage Corporation ...................... 1,500,000 CMI Holding Company, Inc. ....................... 1,000,000 CashWorks, Inc. ................................. 954,945 Diamond State Ventures, L.P. .................... 12,500 Exopack Holding Corp. ........................... 99,960 First Capital Group of Texas III, L.P............ 240,000 PharmaFab, Inc. ................................. 5,500,000 Sterling Group Partners I, L.P. ................. 484,000 StarTech Seed Fund II ........................... 150,000 Miscellaneous ................................... 17,435 ----------- $12,458,840 =========== Dispositions Amount Cost Received ----------- ----------- CashWorks, Inc. ................................. $ 3,000,100 $12,780,483 Concert Industries Ltd........................... 188,900 -- PTS Holdings, Inc. .............................. -- 51,245 PETsMART, Inc. .................................. 676,753 3,654,339 Miscellaneous ................................... 17,435 -- ----------- ----------- $ 3,883,188 $16,486,067 =========== =========== Repayments Received.............................. $ 2,754,845 ===========
Capital Southwest Corporation and Subsidiaries Consolidated Statements of Financial Condition March 31 --------------------------- Assets 2004 2003 ------------ ------------ Investments at market or fair value (Notes 1 and 2) Companies more than 25% owned (Cost: 2004 - $23,114,865, 2003 - $23,114,865) ................. $237,095,981 $202,893,981 Companies 5% to 25% owned (Cost: 2004 - $30,431,224, 2003 - $30,120,124) ................. 70,189,005 18,566,004 Companies less than 5% owned (Cost: 2004 - $43,736,560, 2003 - $38,226,853) ................. 99,663,833 65,600,452 ------------ ------------ Total investments (Cost: 2004 - $97,282,649, 2003 - $91,461,842) ................. 406,948,819 287,060,437 Cash and cash equivalents ................ 10,150,796 4,650,388 Receivables .............................. 76,477 297,664 Other assets (Note 7) .................... 6,802,767 6,481,383 ------------ ------------ Totals ................................ $423,978,859 $298,489,872 ============ ============ March 31 ------------------------------ Liabilities and Shareholders' Equity 2004 2003 ------------- ------------- Note payable to bank (Note 4) ................... $ 15,500,000 $ 15,500,000 Notes payable to portfolio company (Note 4) ..... 5,000,000 7,500,000 Accrued interest and other liabilities (Note 7) . 1,815,996 1,868,991 Income taxes payable ............................ 2,726,850 -- Deferred income taxes (Note 3) .................. 108,312,663 67,153,906 ------------- ------------- Total liabilities ........... 133,355,509 92,022,897 ------------- ------------- Shareholders' equity (Notes 3 and 5) Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,294,416 shares at March 31, 2004 and 4,266,416 shares at March 31, 2003 ................. 4,294,416 4,266,416 Additional capital ........................... 7,904,997 6,935,497 Undistributed net investment income ..................................... 3,578,088 3,299,659 Undistributed net realized gain on investments ................................ 79,381,980 71,190,108 Unrealized appreciation of investments - net of deferred income taxes ............... 202,497,171 127,808,597 Treasury stock - at cost (437,365 shares) ........................... (7,033,302) (7,033,302) ------------- ------------- Net assets at market or fair value, equivalent to $75.35 per share on the 3,857,051 shares outstanding at March 31, 2004, and $53.92 per share on the 3,829,051 shares outstanding at March 31, 2003 .............. 290,623,350 206,466,975 ------------- ------------- Totals ....................................... $ 423,978,859 $ 298,489,872 ============= ============= See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries Consolidated Statements of Operations Years Ended March 31 -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Investment income (Note 9): Interest ........................................................................ $ 213,987 $ 204,490 $ 322,521 Dividends ....................................................................... 3,860,937 3,360,990 3,293,633 Management and directors' fees .................................................. 632,864 495,900 530,400 ------------ ------------ ------------ 4,707,788 4,061,380 4,146,554 ------------ ------------ ------------ Operating expenses: Salaries ........................................................................ 997,079 911,671 894,612 Net pension benefit (Note 7) .................................................... (272,912) (387,923) (504,536) Other operating expenses (Notes 6 and 8) ........................................ 775,847 626,106 633,254 ------------ ------------ ------------ 1,500,014 1,149,854 1,023,330 ------------ ------------ ------------ Income before interest expense and income taxes .................................... 3,207,774 2,911,526 3,123,224 Interest expense ................................................................... 531,068 476,761 929,372 ------------ ------------ ------------ Income before income taxes ......................................................... 2,676,706 2,434,765 2,193,852 Income tax expense (Note 3) ........................................................ 89,646 135,513 151,956 ------------ ------------ ------------ Net investment income .............................................................. $ 2,587,060 $ 2,299,252 $ 2,041,896 ============ ============ ============ Proceeds from disposition of investments ........................................... $ 16,486,067 $ 4,563,763 $ 5,923,165 Cost of investments sold (Note 1) .................................................. 3,883,188 2,556,651 6,685,279 ------------ ------------ ------------ Realized gain (loss) on investments before income taxes (Note 9) ................... 12,602,879 2,007,112 (762,114) Income tax expense (benefit) ....................................................... 4,411,007 661,384 (224,180) ------------ ------------ ------------ Net realized gain (loss) on investments ............................................ 8,191,872 1,345,728 (537,934) ------------ ------------ ------------ Increase (decrease) in unrealized appreciation of investments before income taxes .. 114,067,574 (69,688,616) 36,971,348 Increase (decrease) in deferred income taxes on appreciation of investments (Note 3) (39,379,000) (24,317,000) 12,797,000 ------------ ------------ ------------ Net increase (decrease) in unrealized appreciation of investments .................. 74,688,574 (45,371,616) 24,174,348 ------------ ------------ ------------ Net realized and unrealized gain (loss) on investments ............................. $ 82,880,446 $(44,025,888) $ 23,636,414 ============ ============ ============ Increase (decrease) in net assets from operations .................................. $ 85,467,506 $(41,726,636) $ 25,678,310 ============ ============ ============ See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries Consolidated Statements of Changes in Net Assets Years Ended March 31 ----------------------------------------------- 2004 2003 2002 ------------- ------------- ------------- Operations Net investment income ........................................... $ 2,587,060 $ 2,299,252 $ 2,041,896 Net realized gain (loss) on investments ......................... 8,191,872 1,345,728 (537,934) Net increase (decrease) in unrealized appreciation of investments 74,688,574 (45,371,616) 24,174,348 ------------- ------------- ------------- Increase (decrease) in net assets from operations ............... 85,467,506 (41,726,636) 25,678,310 Distributions from: Undistributed net investment income ............................. (2,308,631) (2,297,431) (2,294,631) Capital share transactions Exercise of employee stock options .............................. 997,500 -- 498,750 ------------- ------------- ------------- Increase (decrease) in net assets ............................... 84,156,375 (44,024,067) 23,882,429 Net assets, beginning of year ..................................... 206,466,975 250,491,042 226,608,613 ------------- ------------- ------------- Net assets, end of year ........................................... $ 290,623,350 $ 206,466,975 $ 250,491,042 ============= ============= ============= See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiaries Consolidated Statements of Cash Flows Years Ended March 31 -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Cash flows from operating activities Increase (decrease) in net assets from operations ........................ $ 85,467,506 $(41,726,636) $ 25,678,310 Adjustments to reconcile increase (decrease) in net assets from operations to net cash provided by (used in) operating activities: Proceeds from disposition of investments ............................ 16,486,067 4,563,763 5,923,165 Purchases of securities ............................................. (12,458,840) (11,904,639) (3,545,458) Maturities of securities ............................................ 2,754,845 80,000 2,267,970 Depreciation and amortization ....................................... 19,089 21,668 26,258 Net pension benefit ................................................. (272,912) (387,923) (504,536) Net realized and unrealized loss (gain) on investments .............. (82,880,446) 44,025,888 (23,636,414) Decrease (increase) in receivables .................................. 221,187 1,455,633 (1,488,920) Decrease (increase) in other assets ................................. 5,023 (29,447) (17,922) Increase (decrease) in accrued interest and other liabilities ....... 41,701 (96,188) (44,479) Decrease in accrued pension cost .................................... (167,281) (167,280) (199,280) Deferred income taxes ............................................... 95,600 135,800 176,600 ------------ ------------ ------------ Net cash provided by (used in) operating activities ...................... 9,311,539 (4,029,361) 4,635,294 ------------ ------------ ------------ Cash flows from financing activities Increase in note payable to bank ......................................... -- 9,000,000 1,500,000 Increase (decrease) in notes payable to portfolio company ................ (2,500,000) 5,000,000 (3,500,000) Decrease in subordinated debenture ....................................... -- (5,000,000) -- Distributions from undistributed net investment income ................... (2,308,631) (2,297,431) (2,294,631) Proceeds from exercise of employee stock options ......................... 997,500 -- 498,750 ------------ ------------ ------------ Net cash provided by (used in) financing activities ...................... (3,811,131) 6,702,569 (3,795,881) ------------ ------------ ------------ Net increase in cash and cash equivalents ................................ 5,500,408 2,673,208 839,413 Cash and cash equivalents at beginning of year ........................... 4,650,388 1,977,180 1,137,767 ------------ ------------ ------------ Cash and cash equivalents at end of year ................................. $ 10,150,796 $ 4,650,388 $ 1,977,180 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ................................. $ 531,194 $ 606,722 $ 922,011 Income taxes ............................. $ -- $ -- $ 287 See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Capital Southwest Corporation ("CSC") is a business development company subject to regulation under the Investment Company Act of 1940. Capital Southwest Venture Corporation ("CSVC"), a wholly-owned subsidiary of CSC, is a Federal licensee under the Small Business Investment Act of 1958. Capital Southwest Management Corporation ("CSMC"), a wholly-owned subsidiary of CSC, is the management company for CSC and CSVC. The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements of CSC, CSVC and CSMC (together, the "Company"): Principles of Consolidation. The consolidated financial statements have been prepared on the value method of accounting in accordance with accounting principles generally accepted in the United States of America for investment companies. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents. All temporary cash investments having a maturity of three months or less when purchased are considered to be cash equivalents. Investments. Investments are stated at market or fair value determined by the Board of Directors as described in the Notes to Portfolio of Investments and Note 2 below. The average cost method is used in determining cost of investments sold. Investments are recorded on a trade date basis. Dividends are recognized on the ex-dividend date and interest income is accrued daily. Segment Information. The Company operates and manages its business in a singular segment. As an investment company, the Company invests in portfolio companies in various industries and geographic areas as presented in the portfolio of investments. Indemnification. The Company enters into agreements that contain customary indemnification provisions. The maximum exposure under these indemnification agreements is unknown, but the Company has had no previous claims or losses and expects the risk of losses to be remote. Related Parties. Several of the Company's directors, officers and employees serve on the boards of various portfolio companies. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation. Effective April 1, 2003, the Company adopted the fair value method of recording compensation expense related to all stock options granted after March 31, 2003, in accordance with FASB Statement No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123". Accordingly, the fair value of stock options as determined on the date of grant using the Black-Scholes option-pricing model will be expensed over the vesting period of the related stock options. No stock options were granted during the fiscal year ended March 31, 2004. Prior to April 1, 2003, the Company accounted for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". No stock-based compensation cost is reflected in net asset value, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net asset value and net asset value per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based compensation.
Years Ended March 31 ------------------------------------------ 2004 2003 2002 ------------ ------------ ------------ Net asset value, as reported $290,623,350 $206,466,975 $250,491,042 Deduct: Total fair value computed stock-based compensation 179,440 179,440 59,216 ------------ ------------ ------------ Pro forma net asset value $290,443,910 $206,287,535 $250,431,826 ============ ============ ============ Net asset value per share: Basic - as reported $75.35 $53.92 $65.42 ====== ====== ====== Basic - pro forma $75.30 $53.87 $65.40 ====== ====== ====== Diluted - as reported $75.32 $53.79 $65.20 ====== ====== ====== Diluted- pro forma $75.27 $53.74 $65.19 ====== ====== ====== The diluted net asset value per share calculation assumes all vested outstanding options for which the market price exceeds the exercise price have been exercised. 2. Valuation of Investments The consolidated financial statements as of March 31, 2004 and 2003 include securities valued at $357,538,427 (87.9% of the value of the consolidated investment portfolio) and $261,680,466 (91.2% of the value of the consolidated investment portfolio), respectively, whose values have been determined by the Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, these values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. 3. Income Taxes For the tax years ended December 31, 2003, 2002 and 2001, CSC and CSVC qualified to be taxed as regulated investment companies ("RICs") under applicable provisions of the Internal Revenue Code. As RICs, CSC and CSVC must distribute at least 90% of their taxable net investment income (investment company taxable income) and may either distribute or retain their taxable net realized gain on investments (capital gains). Both CSC and CSVC intend to meet the applicable qualifications to be taxed as RICs in future years; however, either company's ability to meet certain portfolio diversification requirements of RICs in future years may not be controllable by such company. For the year ended December 31, 2003, CSC and CSVC had net investment income for book and tax purposes of $2,308,631 and $693,569, respectively, all of which has been distributed. During 2003, CSC and CSVC had a net capital gain for book purposes of $2,638,095 and $2,676,859, respectively, and a net capital gain for tax purposes of $2,579,248 and $2,669,314, respectively, which were offset by a capital loss carryforward of $4,792,370 and $2,758,084, respectively. As of December 31, 2003, CSC and CSVC had capital loss carryforwards of $2,213,122 (expires 2009-2010) and $88,770 (expires 2009), respectively, which may be used to offset future taxable capital gains. The aggregate cost of investments for federal income tax purposes as of March 31, 2004 was $100,752,741. Such investments had unrealized appreciation of $335,974,385 and unrealized depreciation of $26,308,215 for book purposes, or net unrealized appreciation of $309,666,170. They had unrealized appreciation of $333,617,078 and unrealized depreciation of $27,420,999 for tax purposes, or net unrealized appreciation of $306,196,079 at March 31, 2004. The difference between book basis and tax basis unrealized appreciation is attributable primarily to interest income that was accrued for tax purposes, but not for book purposes. CSC and CSVC may not qualify or elect to be taxed as RICs in future years. Therefore, consolidated deferred Federal income taxes of $107,169,000 and $67,790,000 have been provided on net unrealized appreciation of investments of $309,666,170 and $195,598,595 at March 31, 2004 and 2003, respectively. Such appreciation is not included in taxable income until realized. Deferred income taxes on net unrealized appreciation of investments have been provided at the then currently effective maximum Federal corporate tax rate on capital gains of 35% at March 31, 2004 and 2003. 4. Notes Payable The note payable to bank at March 31, 2004 and 2003 was from an unsecured revolving line of credit of $25,000,000 of which $15,500,000 had been drawn at both March 31, 2004 and 2003. The revolving line of credit bears interest at the bank's base rate less .50% or LIBOR plus 1.25% and matures on July 31, 2004.
The notes payable to portfolio company were demand promissory notes to Skylawn Corporation with interest payable at the greater of prime minus 2.0% or the Applicable Federal Rate established by the Internal Revenue Service. Interest expense on these portfolio company notes was $151,089 in 2004, $75,531 in 2003 and $216,280 in 2002. 5. Employee Stock Option Plan Under the 1984 Incentive Stock Option Plan, options to purchase -0-, 28,000 and 28,000 shares of common stock at $35.625 per share (the market price at the time of grant) were outstanding and exercisable at March 31, 2004, 2003 and 2002, respectively. During the three years ended March 31, 28,000 options were exercised in 2004, -0- were exercised in 2003 and 14,000 were exercised in 2002. The 1984 Incentive Stock Option Plan expired in 1994. On July 19, 1999, shareholders approved the 1999 Stock Option Plan ("Plan"), which provides for the granting of stock options to employees and officers of the Company and authorizes the issuance of common stock upon the exercise of such options for up to 140,000 shares of common stock. All options are granted at or above market price and generally expire ten years from the date of grant and are generally exercisable on or after the first anniversary of the date of grant in five to ten annual installments. At March 31, 2004, there were 85,500 additional shares available for grant under the Plan. The per share weighted average fair value of stock options granted during 2002 was $20.76 on the date of grant using the Black Scholes option-pricing model with the following assumptions: expected dividend yield of ..92%, risk-free interest rate of 5.14%, expected volatility of 20.6%, and expected life of 7 years. The following summarizes activity in the stock option plans for the years ended March 31, 2004, 2003 and 2002: Number Weighted Average of shares Exercise Price --------- -------------- Balance at April 1, 2001 80,000 $55.856 Granted 44,000 65.239 Exercised (14,000) 35.625 Forfeited (27,500) 65.000 Expired -- -- ------- ------- Balance at March 31, 2002 82,500 58.336 Granted -- -- Exercised -- -- Forfeited -- -- Expired -- -- ------- ------- Balance at March 31, 2003 82,500 58.336 Granted -- -- Exercised (28,000) 35.625 Forfeited -- -- Expired -- -- ------- ------- Balance at March 31, 2004 54,500 $70.004 ======= ======= At March 31, 2004, the range of exercise prices and weighted average remaining contractual life of outstanding options was $65.00 - $84.70 and 6.12 years, respectively. At March 31, 2004, 2003 and 2002, the number of options exercisable was 24,200, 44,750 and 36,100, respectively and the weighted average exercise price of those options was $73.24, $50.61, $45.93, respectively. 6. Employee Stock Ownership Plan The Company and one of its wholly-owned portfolio companies sponsor a qualified employee stock ownership plan ("ESOP") in which certain employees participate. Contributions to the plan, which are invested in Company stock, are made at the discretion of the Board of Directors. A participant's interest in contributions to the ESOP fully vests after five years of active service. During the three years ended March 31, 2004, the Company made contributions to the ESOP, which were charged against net investment income, of $88,937 in 2004, $44,417 in 2003 and $28,322 in 2002.
7. Retirement Plans The Company sponsors a qualified defined benefit pension plan which covers its employees and employees of certain of its wholly-owned portfolio companies. The following information about the plan represents amounts and information related to the Company's participation in the plan and is presented as though the Company sponsored a single-employer plan. Benefits are based on years of service and an average of the highest five consecutive years of compensation during the last ten years of employment. The funding policy of the plan is to contribute annual amounts that are currently deductible for tax reporting purposes. No contribution was made to the plan during the three years ended March 31, 2004. The following tables set forth the qualified plan's benefit obligations and fair value of plan assets at March 31, 2004, 2003 and 2002: Years Ended March 31 -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Change in benefit obligation Benefit obligation at beginning of year ........................ $ 3,676,599 $ 3,284,463 $ 3,255,669 Service cost ......................... 81,309 41,142 58,428 Interest cost ........................ 215,511 202,424 207,940 Amendments ........................... -- 346,882 -- Actuarial loss ....................... 189,566 165,560 94,298 Benefits paid ........................ (363,872) (363,872) (331,872) ------------ ------------ ------------ Benefit obligation at end of year .... $ 3,799,113 $ 3,676,599 $ 3,284,463 ============ ============ ============ Change in plan assets Fair value of plan assets at beginning of year ........................ $ 6,881,723 $ 9,410,320 $ 8,758,035 Actual return on plan assets ......... 3,512,912 (2,164,725) 984,157 Benefits paid ........................ (363,872) (363,872) (331,872) ------------ ------------ ------------ Fair value of plan assets at end of year ............................ $ 10,030,763 $ 6,881,723 $ 9,410,320 ============ ============ ============ The following table sets forth the qualified plan's funded status and amounts recognized in the Company's consolidated statements of financial condition: March 31 ---------------------------- 2004 2003 ------------ ------------ Actuarial present value of benefit obligations: Accumulated benefit obligation ................ $ (3,403,639) $ (3,346,711) ============ ============ Projected benefit obligation for service rendered to date .......................................... $ (3,799,113) $ (3,676,599) Plan assets at fair value* ......................... 10,030,763 6,881,723 ------------ ------------ Excess of plan assets over the projected benefit obligation .................................... 6,231,650 3,205,124 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions ........................ 275,731 3,023,057 Unrecognized prior service costs ................... 210,351 217,886 Unrecognized net assets being amortized over 20 years ...................................... (73,815) (147,646) ------------ ------------ Prepaid pension cost included in other assets ...... $ 6,643,917 $ 6,298,421 ============ ============ - ----------------- *Primarily equities and bonds including approximately 28,000 shares of common stock of the Company.
Components of net pension benefit related to the qualified plan include the following: Years Ended March 31 -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Service cost - benefits earned during the year ......................... $ 81,309 $ 41,142 $ 58,428 Interest cost on projected benefit obligation ....................... 215,511 202,424 207,940 Expected return on assets ............. (576,020) (641,722) (783,467) Net amortization and deferral ......... (66,296) (104,087) (114,284) ------------ ------------ ------------ Net pension benefit from qualified plan $ (345,496) $ (502,243) $ (631,383) ============ ============ ============ The Company also sponsors an unfunded Retirement Restoration Plan, which is a nonqualified plan that provides for the payment, upon retirement, of the difference between the maximum annual payment permissible under the qualified retirement plan pursuant to Federal limitations and the amount which would otherwise have been payable under the qualified plan. The following table sets forth the Retirement Restoration Plan's benefit obligations at March 31, 2004, 2003 and 2002: Years Ended March 31 ----------------------------------------- 2004 2003 2002 ----------- ----------- ----------- Change in benefit obligation Benefit obligation at beginning of year ................... $ 1,353,386 $ 1,778,496 $ 1,758,214 Service cost .................... 5,464 5,389 8,573 Interest cost ................... 82,683 104,436 113,779 Amendments ...................... -- (347,147) -- Actuarial (gain) loss ........... 139,839 (20,507) 97,210 Benefits paid ................... (167,281) (167,281) (199,280) ----------- ----------- ----------- Benefit obligation at end of year $ 1,414,091 $ 1,353,386 $ 1,778,496 =========== =========== =========== The following table sets forth the status of the Retirement Restoration Plan and the amounts recognized in the consolidated statements of financial condition: March 31 -------------------------- 2004 2003 ----------- ----------- Projected benefit obligation ..................... $(1,414,091) $(1,353,386) Unrecognized net gain from past ex- perience different from that assumed and effects of changes in assumptions ....... 84,867 (54,972) Unrecognized prior service costs ................. (270,699) (286,262) ----------- ----------- Accrued pension cost included in other liabilities $(1,599,923) $(1,694,620) =========== =========== The Retirement Restoration Plan expenses recognized during the years ended March 31, 2004, 2003 and 2002 of $72,584, $114,320 and $126,847, respectively, are offset against the net pension benefit from the qualified plan. The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 5.75% and 5.0%, respectively, at March 31, 2004, 6.0% and 5.0%, respectively, at March 31, 2003 and 6.5% and 5.0%, respectively, at March 31, 2002. The expected long-term rate of return used to project estimated earnings on plan assets for the qualified plan was 6.0% for the years ended March 31, 2004 and March 31, 2003 and 7.5% for the year ended March 31, 2002. The calculations also assume retirement at age 65, the normal retirement age.
8. Commitments The Company has agreed, subject to certain conditions, to invest up to $2,700,025 in six portfolio companies. The Company leases office space under an operating lease which requires base annual rentals of approximately $75,000 through February, 2008. For the three years ended March 31, total rental expense charged to investment income was $74,122 in 2004, $60,482 in 2003 and $58,984 in 2002. 9. Sources of Income Income was derived from the following sources: Investment Income Realized Gain Years Ended --------------------------------------- (Loss) on March 31 Investments - -------- Other Before Income 2004 Interest Dividends Income Taxes - ---- --------------------------------------- ------------- Companies more than 25% owned ......... $ -- $ 3,577,800 $ 629,000 $ -- Companies 5% to 25% owned ............. -- -- 3,864 (188,900) Companies less than 5% owned .......... 203,304 283,137 -- 12,791,779 Other sources, including temporary investments ....... 10,683 -- -- -- ---------------------------------------- ------------ $ 213,987 $ 3,860,937 $ 632,864 $ 12,602,879 ======================================== ============ 2003 - ---- Companies more than 25% owned ......... $ 5,600 $ 3,073,770 $494,900 $ -- Companies 5% to 25% owned ............. -- -- -- (47,525) Companies less than 5% owned .......... 180,000 287,220 1,000 2,054,637 Other sources, including temporary investments ....... 18,890 -- -- -- ---------------------------------------- ------------ $ 204,490 $ 3,360,990 $ 495,900 $ 2,007,112 ======================================== ============ 2002 - ---- Companies more than 25% owned ......... $ 39,200 $ 2,996,591 $ 487,400 $ -- Companies 5% to 25 owned ............. 99,041 -- -- -- Companies less than 5% owned .......... 133,549 297,042 43,000 (762,114) Other sources, including temporary investments ....... 50,731 -- -- -- ---------------------------------------- ------------ $ 322,521 $ 3,293,633 $ 530,400 $ (762,114) ======================================== ============
Selected Per Share Data and Ratios Years Ended March ----------------------------------------------------------------- Per Share Data 2004 2003 2002 2001 2000 --------- --------- --------- --------- --------- Investment income .............................................. $ 1.22 $ 1.06 $ 1.08 $ 1.06 $ .86 Operating expenses ............................................. (.39) (.30) (.27) (.26) (.27) Interest expense ............................................... (.14) (.12) (.24) (.30) (.12) Income taxes ................................................... (.02) (.04) (.04) (.05) (.03) --------- --------- --------- --------- --------- Net investment income .......................................... .67 .60 .53 .45 .44 Distributions from undistributed net investment income ......... (.60) (.60) (.60) (.60) (.60) Net realized gain (loss) on investments ........................ 2.13 .35 (.14) (.85) 1.58 Net increase (decrease) in unrealized appreciation of investments after deferred taxes ........................... 19.37 (11.85) 6.31 (1.69) (6.49) Exercise of employee stock options* ............................ (.14) -- (.08) -- -- --------- --------- --------- --------- --------- Increase (decrease) in net asset value ......................... 21.43 (11.50) 6.02 (2.69) (5.07) Net asset value Beginning of year ............................................ 53.92 65.42 59.40 62.09 67.16 --------- --------- --------- --------- --------- End of year .................................................. $ 75.35 $ 53.92 $ 65.42 $ 59.40 $ 62.09 ========= ========= ========= ========= ========= Increase (decrease) in deferred taxes on unrealized appreciation ............................................... $ 10.09 $ (6.35) $ 3.26 $ (1.01) $ (3.49) Deferred taxes on unrealized appreciation: Beginning of year ............................................ 17.70 24.05 20.79 21.80 25.29 --------- --------- --------- --------- --------- End of year .................................................. $ 27.79 $ 17.70 $ 24.05 $ 20.79 $ 21.80 ========= ========= ========= ========= ========= Ratios and Supplemental Data Ratio of operating expenses to average net assets .............. .63% .52% .42% .42% .42% Ratio of operating expenses to average net assets plus average deferred taxes on unrealized appreciation .................. .47% .39% .31% .31% .31% Ratio of net investment income to average net assets ........... 1.09% 1.04% .85% .74% .67% Portfolio turnover rate ........................................ 3.74% 1.53% 1.05% 2.56% 4.26% Net asset value total return ................................... 41.16% (16.75%) 11.18% (3.25%) (5.12%) Shares outstanding at end of period (000s omitted) ............. 3,857 3,829 3,829 3,815 3,815 - ---------------- * Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.
Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Capital Southwest Corporation: We have audited the accompanying consolidated statement of financial condition of Capital Southwest Corporation and subsidiaries, including the portfolio of investments on pages 10-14, as of March 31, 2004, and the related consolidated statements of operations, changes in net assets, and cash flows, and the selected per share data and ratios on page 26 for the year then ended. These financial statements and per share data and ratios are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and per share data and ratios based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included verification by examination of securities held by the custodian as of March 31, 2004 and confirmation of securities not held by the custodian by correspondence with others. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements and the selected per share data and ratios referred to above present fairly, in all material respects, the consolidated financial position of Capital Southwest Corporation and subsidiaries at March 31, 2004, the consolidated results of its operations, changes in its net assets, and its cash flows, and the selected per share data and ratios for the year then ended, in conformity with U.S. generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas May 12, 2004
Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Capital Southwest Corporation: We have audited the accompanying consolidated statement of financial condition of Capital Southwest Corporation and subsidiaries as of March 31, 2003, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the years in the two-year period ended March 31, 2003, and the selected per share data and ratios for each of the years in the four-year period ended March 31, 2003. These consolidated financial statements and per share data and ratios are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and per share data and ratios based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the consolidated financial statements and selected per share data and ratios referred to above present fairly, in all material respects, the financial position of Capital Southwest Corporation and subsidiaries as of March 31, 2003, the results of their operations, the changes in their net assets and their cash flows for each of the years in the two-year period ended March 31, 2003, and the selected per share data and ratios for each of the years in the four-year period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Dallas, Texas April 25, 2003
Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The composite measure of the Company's financial performance in the Consolidated Statements of Operations is captioned "Increase (decrease) in net assets from operations" and consists of three elements. The first is "Net investment income", which is the difference between the Company's income from interest, dividends and fees and its combined operating and interest expenses, net of applicable income taxes. The second element is "Net realized gain (loss) on investments", which is the difference between the proceeds received from disposition of portfolio securities and their stated cost, net of applicable income tax expense. The third element is the "Net increase (decrease) in unrealized appreciation of investments", which is the net change in the market or fair value of the Company's investment portfolio, compared with stated cost, net of an increase or decrease in deferred income taxes which would become payable if the unrealized appreciation were realized through the sale or other disposition of the investment portfolio. It should be noted that the "Net realized gain (loss) on investments" and "Net increase (decrease) in unrealized appreciation of investments" are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being "unrealized" to being "realized." Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs. Net Investment Income The Company's principal objective is to achieve capital appreciation. Therefore, a significant portion of the investment portfolio is structured to maximize the potential return from equity participation and provides minimal current yield in the form of interest or dividends. The Company also earns interest income from the short-term investment of cash funds, and the annual amount of such income varies based upon the average level of funds invested during the year and fluctuations in short-term interest rates. During the three years ended March 31, the Company had interest income from temporary cash investments of $10,247 in 2004, $17,346 in 2003 and $48,877 in 2002. The Company also receives management fees from its wholly-owned portfolio companies which aggregated $597,000 in 2004 and $458,400 in 2003 and 2002. During the three years ended March 31, 2004, the Company recorded dividend income from the following sources: Years Ended March 31 ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- AT&T Corp. ......................... $ 23,984 $ 19,987 $ 19,987 Alamo Group Inc. ................... 677,112 677,112 677,112 Balco, Inc. ........................ 252,960 -- -- Dennis Tool Company ................ 49,999 49,999 49,999 Kimberly-Clark Corporation ......... 109,596 95,703 87,985 The RectorSeal Corporation ......... 1,407,729 960,000 960,000 Skylawn Corporation ................ 950,000 1,146,659 1,069,480 TCI Holdings, Inc. ................. 81,270 81,270 81,270 Texas Shredder, Inc. ............... 7,500 33,667 44,506 The Whitmore Manufacturing Company . 240,000 240,000 240,000 Other .............................. 60,787 56,593 63,294 ---------- ---------- ---------- $3,860,937 $3,360,990 $3,293,633 ========== ========== ========== Total operating expenses, excluding interest expense, increased by $350,160 or 30.5% and by $126,524 or 12.4% during the years ended March 31, 2004 and 2003, respectively. Due to the nature of its business, the majority of the Company's operating expenses are related to employee and director compensation, office expenses, legal and accounting fees and the net pension benefit. Interest expense decreased by $452,611 during the year ended March 31, 2003 due to a decrease in interest rates and the payoff of the subordinated debenture on June 3, 2002. For the year ended March 31, 2002, interest expense decreased by $214,965 due to a decrease in interest rates. Net Realized Gain (Loss) on Investments Net realized gain on investments was $8,191,872 (after income tax expense of $4,411,007) during the year ended March 31, 2004, compared with a gain of $1,345,728 (after income tax expense of $661,384) during 2003 and a loss of $537,934 (after income tax benefit of $224,180) during 2002. Management does not attempt to maintain a comparable level of realized gains from year to year, but instead attempts to maximize total investment portfolio appreciation. This strategy often dictates the long-term holding of portfolio securities in pursuit of increased values and increased unrealized appreciation, but may at opportune times dictate realizing gains or losses through the disposition of certain portfolio investments.
Net Increase (Decrease) in Unrealized Appreciation of Investments For the three years ended March 31, the Company recorded an increase (decrease) in unrealized appreciation of investments before income taxes of $114,067,574, $(69,688,616) and $36,971,348 in 2004, 2003 and 2002, respectively. As explained in the first paragraph of this discussion and analysis, the realization of gains or losses results in a corresponding decrease or increase in unrealized appreciation of investments. Set forth in the following table are the significant increases and decreases in unrealized appreciation (before the related change in deferred income taxes and excluding the effect of gains or losses realized during the year) by portfolio company for securities held at the end of each year. Years Ended March 31 -------------------------------------------- 2004 2003 2002 ------------ ------------ ------------ Alamo Group Inc. .............. $ 8,464,000 $ (8,464,000) $ 2,821,000 All Components, Inc. .......... 2,900,000 -- (50,000) AmPro Mortgage Corporation .... (2,529,167) -- -- Concert Industries Ltd. ....... (442,998) (5,479,000) (3,740,000) Encore Wire Corporation ....... 46,316,000 (10,898,000) 10,898,000 Extreme International, Inc. .. 4,613,661 551,750 -- Mail-Well, Inc. ............... 5,115,674 (2,557,926) (524,000) Media Recovery, Inc. .......... 7,000,000 -- (8,000,000) Organized Living, Inc. ........ -- (2,999,999) (3,000,000) Palm Harbor Homes, Inc. ....... 15,710,000 (39,275,000) 31,420,000 PETsMART, Inc. ................ 4,335,000 (436,051) 5,298,343 The RectorSeal Corporation .... 5,000,000 5,000,000 2,500,000 Texas Capital Bancshares, Inc. 6,110,352 -- -- As shown in the above table for the year ended March 31, 2004, we sustained a major $46,316,000 increase in the value of our investment in Encore Wire Corporation. This was due to the significant increase in Encore's sales and earnings which stemmed partly from higher copper prices. In the prior period, we experienced a $10,898,000 decline in the value of our investment as overcapacity in the electric wire and cable industry led to intense price competition and lower profit margins. During the year ended March 31, 2004, the value of our investment in Palm Harbor Homes, Inc. increased by $15,710,000 due to anticipated improvement of the manufactured housing industry resulting from substantially reduced inventories of foreclosed homes and reappearance of sources of chattel mortgage financing. In the prior period, the value of our investment decreased by $39,275,000 due to the unfavorable outlook for the manufactured housing industry. A description of the investments listed above and other material components of the investment portfolio is included elsewhere in this report under the caption "Portfolio of Investments - March 31, 2004." Deferred Taxes on Unrealized Appreciation of Investments The Company provides for deferred Federal income taxes on net unrealized appreciation of investments. Such taxes would become payable at such time as unrealized appreciation is realized through the sale or other disposition of those components of the investment portfolio which would result in taxable transactions. At March 31, 2004 consolidated deferred Federal income taxes of $107,169,000 were provided on net unrealized appreciation of investments of $309,666,170 compared with deferred taxes of $67,790,000 on net unrealized appreciation of $195,598,595 at March 31, 2003. Deferred income taxes at March 31, 2004 and 2003 were provided at the then currently effective maximum Federal corporate tax rate on capital gains of 35%. Portfolio Investments During the year ended March 31, 2004, the Company invested $12,458,840 in various portfolio securities listed elsewhere in this report under the caption "Portfolio Changes During the Year," which also lists dispositions of portfolio securities. During the 2003 and 2002 fiscal years, the Company invested a total of $11,904,639 and $3,545,458, respectively.
Financial Liquidity and Capital Resources At March 31, 2004, the Company had cash and cash equivalents of approximately $10.2 million. Pursuant to Small Business Administration ("SBA") regulations, cash and cash equivalents of $0.2 million held by CSVC may not be transferred or advanced to CSC without the consent of the SBA. Under current SBA regulations and subject to SBA's approval of its credit application, CSVC would be entitled to borrow up to $64.5 million. The Company also has an unsecured $25,000,000 revolving line of credit from a commercial bank, of which $9,500,000 was available at March 31, 2004. With the exception of a capital gain distribution made in the form of a distribution of the stock of a portfolio company in the fiscal year ended March 31, 1996, the Company has elected to retain all gains realized during the past 36 years. Retention of future gains is viewed as an important source of funds to sustain the Company's investment activity. Approximately $49.4 million of the Company's investment portfolio is represented by unrestricted publicly-traded securities, which have an ascertainable market value and represent a source of liquidity. Funds to be used by the Company for operating or investment purposes may be transferred in the form of dividends, management fees or loans from Skylawn Corporation, The RectorSeal Corporation and The Whitmore Manufacturing Company, wholly-owned portfolio companies of the Company, to the extent of their available cash reserves and borrowing capacities. At March 31, 2004, the Company owed $5,000,000 to Skylawn Corporation. Management believes that the Company's cash and cash equivalents and cash available from other sources described above are adequate to meet its expected requirements. Consistent with the long-term strategy of the Company, the disposition of investments from time to time may also be an important source of funds for future investment activities. Contractual Obligations As shown below, the Company had the following contractual obligations as of March 31, 2004. For further information see Note 4 and Note 8 of the Consolidated Financial Statements. Payments Due By Period ($ in Thousands) --------------------------------------- Less than More Than Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years - ----------------------------------------------------------------------------------------- Long-Term Debt Obligations $20,500 $20,500 -- -- -- Capital Lease Obligations -- -- -- -- -- Operating Lease Obligations -- -- $75 $75 -- Purchase Obligations -- -- -- -- -- Other Long-Term Liabilities Reflected on the Company's Balance Sheet under GAAP -- -- -- -- -- ------------------------------------------------------- Total $20,500 $20,500 $75 $75 -- ------------------------------------------------------- Critical Accounting Policies Valuation of Investments In accordance with the Investment Company Act of 1940, investments in unrestricted securities (freely marketable securities having readily available market quotations) are valued at market and investments in restricted securities (securities subject to one or more resale restrictions) are valued at fair value determined in good faith by the Company's Board of Directors. Under the valuation policy of the Company, unrestricted securities are valued at the closing sale price for listed securities and at the lower of the closing bid price or the last sale price for Nasdaq securities on the valuation date. Restricted securities, including securities of publicly-owned companies which are subject to restrictions on resale, are valued at fair value, which is considered to be the amount the Company may reasonably expect to receive if such securities were sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities. Among the factors considered by the Board of Directors in determining the fair value of restricted securities are the financial condition and operating results of the issuer, the long-term potential of the business of the issuer, the market for and recent sales prices of the issuer's securities, the values of similar securities issued by companies in similar businesses, the proportion of the issuer's securities owned by the Company, the nature and duration of resale restrictions and the nature of any rights enabling the Company to require the issuer to register restricted securities under applicable securities laws. In determining the fair value of restricted securities the Board of Directors considers the inherent value of such securities without regard to the restrictive feature and adjusts for any diminution in value resulting from restrictions on resale.
Deferred Income Taxes In future years, the Company may not qualify or elect to be taxed as a regulated investment company ("RIC") under applicable provisions of the Internal Revenue Code. Therefore, deferred Federal income taxes have been provided on net unrealized appreciation of investments at the then currently effective corporate tax rate on capital gains. Impact of Inflation The Company does not believe that its business is materially affected by inflation, other than the impact which inflation may have on the securities markets, the valuations of business enterprises and the relationship of such valuations to underlying earnings, all of which will influence the value of the Company's investments. Risks Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a business development company is required to describe the risk factors involved in an investment in the securities of such company due to the nature of the company's investment portfolio. Accordingly the Company states that: The Company's objective is to achieve capital appreciation through investments in businesses believed to have favorable growth potential. Such businesses are often undercapitalized small companies which lack management depth and have not yet attained profitability. The Company's venture investments often include securities which do not yield interest or dividends and are subject to legal or contractual restrictions on resale, which restrictions adversely affect the liquidity and marketability of such securities. Because of the speculative nature of the Company's investments and the lack of any market for the securities initially purchased by the Company, there is a significantly greater risk of loss than is the case with traditional investment securities. The high-risk, long-term nature of the Company's venture investment activities may prevent shareholders of the Company from achieving price appreciation and dividend distributions.
Selected Consolidated Financial Data (all figures in thousands except per share data) 1994 1995 1996 1997 1998 1999 - -------------------------------------------------------------------------------------------------------------- Financial Position (as of March 31) Investments at cost ............. $ 41,993 $ 49,730 $ 58,544 $ 59,908 $ 61,154 $ 73,580 Unrealized appreciation ......... 132,212 153,031 198,386 233,383 340,132 276,698 --------- --------- --------- --------- --------- --------- Investments at market or fair value ................... 174,205 202,761 256,930 293,291 401,286 350,278 Total assets .................... 270,874 213,811 326,972 310,760 522,324 360,786 Notes payable * ................. 15,000 11,000 11,000 5,000 5,000 5,000 Deferred taxes on unrealized appreciation ...... 45,932 53,247 69,121 81,313 118,674 96,473 Net assets ...................... 133,053 147,370 189,048 218,972 296,023 256,232 Shares outstanding .............. 3,715 3,735 3,767 3,767 3,788 3,815 - -------------------------------------------------------------------------------------------------------------- Changes in Net Assets (years ended March 31) Net investment income ........... $ 2,870 $ 2,447 $ 2,855 $ 2,574 $ 2,726 $ 1,762 Net realized gain (loss) on investments .................. (475) 142 11,174 6,806 6,485 995 Net increase (decrease) in unrealized appreciation before distributions ......... 11,160 13,584 38,746 22,804 69,388 (41,233) --------- --------- --------- --------- --------- --------- Increase (decrease) in net assets from operations before distributions ......... 13,555 16,173 52,775 32,184 78,599 (38,476) Cash dividends paid ............. (2,228) (2,241) (2,270) (2,260) (2,268) (2,280) Securities distributed .......... -- -- (9,402) -- -- -- Employee stock options exercised .................... 272 385 575 -- 720 965 --------- --------- --------- --------- --------- --------- Increase (decrease) in net assets 11,599 14,317 41,678 29,924 77,051 (39,791) - -------------------------------------------------------------------------------------------------------------- Per Share Data (as of March 31) Deferred taxes on unrealized appreciation ...... $ 12.36 $ 14.26 $ 18.35 $ 21.59 $ 31.33 $ 25.29 Net assets ...................... 35.81 39.46 50.18 58.13 78.15 67.16 Closing market price ............ 38.125 38.00 60.00 67.875 94.00 73.00 Cash dividends paid ............. .60 .60 .60 .60 .60 .60 Securities distributed .......... -- -- 2.50 -- -- -- * Excludes quarter-end borrowing which is repaid on the first business day after year end.
Selected Consolidated Financial Data (continued) (all figures in thousands except per share data) 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------- Financial Position (as of March 31) Investments at cost ............. $ 85,002 $ 87,602 $ 82,194 $ 91,462 $ 97,283 Unrealized appreciation ......... 238,627 228,316 265,287 195,598 309,666 --------- --------- --------- --------- --------- Investments at market or fair value ................... 323,629 315,918 347,481 287,060 406,949 Total assets .................... 392,586 322,668 357,183 298,490 423,979 Notes payable * ................. 10,000 16,000 14,000 23,000 20,500 Deferred taxes on unrealized appreciation ...... 83,151 79,310 92,107 67,790 107,169 Net assets ...................... 236,876 226,609 250,491 206,467 290,623 Shares outstanding .............. 3,815 3,815 3,829 3,829 3,857 ------------------------------------------------------------------------------------------------ Changes in Net Assets (years ended March 31) Net investment income ........... $ 1,663 $ 1,723 $ 2,042 $ 2,299 $ 2,587 Net realized gain (loss) on investments .................. 6,020 (3,231) (538) 1,346 8,192 Net increase (decrease) in unrealized appreciation before distributions ......... (24,750) (6,470) 24,174 (45,372) 74,689 --------- --------- --------- --------- --------- Increase (decrease) in net assets from operations before distributions ......... (17,067) (7,978) 25,678 (41,727) 85,468 Cash dividends paid ............. (2,289) (2,289) (2,295) (2,297) (2,309) Securities distributed .......... -- -- -- -- -- Employee stock options exercised .................... -- -- 499 -- 997 --------- --------- --------- --------- --------- Increase (decrease) in net assets (19,356) (10,267) 23,882 (44,024) 84,156 - ------------------------------------------------------------------------------------------------- Per Share Data (as of March 31) Deferred taxes on unrealized appreciation ...... $ 21.80 $ 20.79 $ 24.05 $ 17.70 $ 27.79 Net assets ...................... 62.09 59.40 65.42 53.92 75.35 Closing market price ............ 54.75 65.00 68.75 48.15 75.47 Cash dividends paid ............. .60 .60 .60 .60 .60 Securities distributed .......... -- -- -- -- -- * Excludes quarter-end borrowing which is repaid on the first business day after year end.
Shareholder Information Stock Transfer Agent American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038 (telephone 800-937-5449) serves as transfer agent for the Company's common stock. Certificates to be transferred should be mailed directly to the transfer agent, preferably by registered mail. Shareholders The Company had approximately 700 record holders of its common stock at March 31, 2004. This total does not include an estimated 2,300 shareholders with shares held under beneficial ownership in nominee name or within clearinghouse positions of brokerage firms or banks. Market Prices The Company's common stock trades on The Nasdaq Stock Market under the symbol CSWC. The following high and low selling prices for the shares during each quarter of the last two fiscal years were taken from quotations provided to the Company by Nasdaq: Quarter Ended High Low - ------------------------------------------------------------------------ June 30, 2002.................................... $79.24 $66.31 September 30, 2002............................... 70.25 58.00 December 31, 2002................................ 60.24 45.35 March 31, 2003................................... 53.00 43.00 Quarter Ended High Low - ------------------------------------------------------------------------ June 30, 2003.................................... $66.75 $ 47.26 September 30, 2003............................... 60.00 53.31 December 31, 2003............................... 64.75 56.35 March 31, 2004................................... 78.00 61.15 Dividends The payment dates and amounts of cash dividends per share since April 1, 2002 are as follows: Payment Date Cash Dividend - ----------------------------------------------------------------------- May 31, 2002.............................................. $0.20 November 29, 2002......................................... 0.40 May 30, 2003.............................................. 0.20 November 28, 2003......................................... 0.40 May 28, 2004.............................................. 0.20 The amounts and timing of cash dividend payments have generally been dictated by requirements of the Internal Revenue Code regarding the distribution of taxable net investment income (ordinary income) of regulated investment companies. Instead of distributing realized long-term capital gains to shareholders, the Company has ordinarily elected to retain such gains to fund future investments. Automatic Dividend Reinvestment and Optional Cash Contribution Plan As a service to its shareholders, the Company offers an Automatic Dividend Reinvestment and Optional Cash Contribution Plan for shareholders of record who own a minimum of 25 shares. The Company pays all costs of administration of the Plan except brokerage transaction fees. Upon request, shareholders may obtain information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas, Texas 75230. Telephone (972) 233-8242. Questions and answers about the Plan are on the next page. Annual Meeting The Annual Meeting of Shareholders of Capital Southwest Corporation will be held on Monday, July 19, 2004, at 10:00 a.m. in the North Dallas Bank Tower Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-43881) pertaining to Capital Southwest Corporation of our report dated May 12, 2004, with respect to the consolidated financial statements of Capital Southwest Corporation included in the March 31, 2004 Annual Report to Shareholders of Capital Southwest Corporation and incorporated by reference in this Annual Report (Form 10-K) for the year ended March 31, 2004. Ernst & Young LLP June 11, 2004 Dallas, Texas
Exhibit 23.2 Consent of Independent Registered Public Accounting Firm The Board of Directors Capital Southwest Corporation: We consent to the incorporation by reference in the registration statement (No. 33-43881) on Form S-8 of Capital Southwest Corporation of our report dated April 25, 2003, with respect to the consolidated statement of financial condition of Capital Southwest Corporation and subsidiaries as of March 31, 2003, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the years in the two-year period ended March 31, 2003, and the selected per share data and ratios for each of the years in the four-year period ended March 31, 2003, which report appears in the annual report to shareholders for the year ended March 31, 2004, and is incorporated by reference in the March 31, 2004 annual report on Form 10-K of Capital Southwest Corporation. KPMG LLP Dallas, Texas June 11, 2004
Exhibit 31.1 CERTIFICATIONS I, William R. Thomas, President and Chairman of the Board of Capital Southwest Corporation, certify that: 1. I have reviewed this annual report on Form 10-K 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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)) 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) 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 c) 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 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 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: June 11, 2004 By: /s/ William R. Thomas ------------- -------------------------------- William R. Thomas, President and Chairman of the Board
Exhibit 31.2 CERTIFICATIONS I, Susan K. Hodgson, Secretary-Treasurer of Capital Southwest Corporation, certify that: 1. I have reviewed this annual report on Form 10-K 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 consolidated 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)) 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 annual report is being prepared; b) 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 c) 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 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: June 11, 2004 By: /s/ Susan K. Hodgson ------------- ------------------------------------- Susan K. Hodgson, Secretary-Treasurer
Exhibit 32.1 Certification of President and Chairman of the Board Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, William R. Thomas, President and Chairman of the Board of Capital Southwest Corporation, certify that to my knowledge: 1. the Form 10-K, filed with the Securities and Exchange Commission on June 11, 2004 ("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. /s/ William R. Thomas ----------------------------------- William R. Thomas President and Chairman of the Board June 11, 2004
Exhibit 32.2 Certification of Secretary-Treasurer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code I, Susan K. Hodgson, Secretary-Treasurer of Capital Southwest Corporation, certify that to my knowledge: 1. the Form 10-K, filed with the Securities and Exchange Commission on June 11, 2004 ("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. /s/ Susan K. Hodgson --------------------- Susan K. Hodgson Secretary-Treasurer June 11, 2004