Item 1. Business
Capital Southwest Corporation (the "Company") was organized as a Texas corporation on April 19, 1961. Until September 1969, the Company operated as a licensee under the Small Business Investment Act of 1958. At that time, the Company transferred to its wholly-owned subsidiary, Capital Southwest Venture Corporation ("CSVC"), certain of its assets and its license as a small business investment company ("SBIC"). CSVC is a closed-end, non-diversified investment company of the management type registered under the Investment Company Act of 1940 (the "1940 Act"). Prior to March 30, 1988, the Company was registered as a closed-end, non-diversified investment company under the 1940 Act. On that date, the Company elected to become a business development company subject to the provisions of Sections 55 through 65 of the 1940 Act, as amended by the Small Business Incentive Act of 1980.
The Company is a venture capital investment company whose objective is to achieve capital appreciation through long-term investments in businesses believed to have favorable growth potential. The Company's investments are focused on early-stage financings, expansion financings, management buyouts and recapitalizations in a broad range of industry segments. The portfolio is a composite of companies in which the Company has major interests as well as a number of developing companies and marketable securities of established publicly-owned companies. The Company makes available significant managerial assistance to the companies in which it invests and believes that providing material assistance to such investee companies is critical to its business development activities.
The twelve largest investments of the Company had a combined cost of $42,715,312 and a value of $251,201,091, representing 87.5% of the value of the Company's consolidated investment portfolio at March 31, 2003. For a narrative description of the twelve largest investments, see "Twelve Largest Investments - March 31, 2003" on pages 8 through 10 of the Company's Annual Report to Shareholders for the Year Ended March 31, 2003 (the "2003 Annual Report") which is herein incorporated by reference. Certain of the information presented on the twelve largest investments has been obtained from the respective companies and, in certain cases, from public filings of such companies. The financial information presented on each of the respective companies is from such companies' financial statements, which in some instances are unaudited.
The Company competes for attractive investment opportunities with venture capital partnerships and corporations, venture capital affiliates of industrial and financial companies, SBICs and wealthy individuals.
The number of persons employed by the Company at March 31, 2003 was seven.
The Company's internet website address is www.capitalsouthwest.com. You can review the filings Capital Southwest Corporation has made with U.S. Securities and Exchange Commission ("SEC"), free of charge by linking directly from our website to NASDAQ, a database that links to EDGAR, the Electronic Data Gathering, Analysis, and Retrieval System of the SEC. You should be able to access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Item 2.
Item 2. Properties
The Company maintains its offices at 12900 Preston Road, Suite 700, Dallas, Texas, 75230, where it rents approximately 3,700 square feet of office space pursuant to a lease agreement expiring in February 2008. The Company believes that its offices are adequate to meet its current and expected future needs.
Item 3.
Item 3. Legal Proceedings
The Company has no material pending legal proceedings to which it is a party or to which any of its property is subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended March 31, 2003.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information set forth under the captions "Shareholder Information - Shareholders, Market Prices and Dividends" on page 33 of the 2003 Annual Report is herein incorporated by reference.
Item 6.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 32 of the 2003 Annual Report is herein incorporated by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pages 29 through 31 of the Company's 2003 Annual Report are herein incorporated by reference.
Item 7A.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On Form 8-K dated May 9, 2003, the Company reported the dismissal of KPMG LLP as accountants for the fiscal year ending March 31, 2004 and the appointment of Ernst & Young LLP.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Proposal 1: Election of Directors" in the Company's definitive Proxy Statement for Annual Meeting of Shareholders to be held July 21, 2003, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, on or about June 6, 2003 (the "2003 Proxy Statement") is herein incorporated by reference.
Executive Officers of the Registrant
The officers of the Company, together with the offices in the Company presently held by them, their business experience during the last five years and their ages are as follows:
William M. Ashbaugh, age 48, has served as Vice President of the Company since 2001. He previously served as Managing Director in the corporate finance departments of Hoak Breedlove Wesneski & Co. from 1998 to 2001, Principal Financial Securities from 1997 to 1998 and Southwest Securities from 1995 to 1997.
Patrick F. Hamner, age 47, has served as Vice President of the Company since 1986 and was an investment associate with the Company from 1982 to 1986.
Susan K. Hodgson, age 41, has served as Secretary-Treasurer of the Company since 2001 and was the Controller of the Company from 1994.
Gary L. Martin, age 56, has been a director of the Company since July 1988 and has served as Vice President of the Company since 1984. He previously served as Vice President of the Company from 1978 to 1980. Since 1980, Mr. Martin has served as President of The Whitmore Manufacturing Company, a wholly-owned portfolio company.
William R. Thomas, age 74, has served as Chairman of the Board of Directors of the Company since 1982 and President of the Company since 1980. In addition, he has been a director of the Company since 1972 and was previously Senior Vice President of the Company from 1969 to 1980.
No family relationship exists between any of the above-listed officers, and there are no arrangements or understandings between any of them and any other person pursuant to which they were selected as an officer. All officers are elected to hold office for one year, subject to earlier termination by the Company's board of directors.
Item 11.
Item 11. Executive Compensation
The information set forth under the caption "Compensation of Directors and Executive Officers" in the 2003 Proxy Statement is herein incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the captions "Stock Ownership of Certain Beneficial Owners" and "Proposal 1: Election of Directors" in the 2003 Proxy Statement is herein incorporated by reference.
The table below sets forth certain information as of March 31, 2003 regarding the shares of our common stock available for grant or granted under stock option plans that (i) were approved by our stockholders, and (ii) were not approved by our stockholders.
(1) Includes the 1984 Incentive Stock Option Plan and the 1999 Stock Option Plan. For a description of these plans, please refer to Footnote 6 contained in our consolidated financial statements.
Item 13.
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this item during the fiscal year ended March 31, 2003 or proposed for the fiscal year ending March 31, 2004.
Item 14.
Item 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our President and Chairman of the Board and Secretary-Treasurer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c) as of a date within 90 days before the filing date of this annual report. Based on that evaluation, the President and Chairman of the Board and Secretary-Treasurer have concluded that the Company's current disclosure controls and procedures are effective and timely, providing all material information relating to the Company required to be disclosed in reports filed or submitted under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken.
Item 15.
Item 15. Principal Accountant Fees and Services
The information set forth under the caption "Audit and Other Fees" and "Proposal 2: Ratification of Appointment of Independent Auditors" in the 2003 Proxy Statement is herein incorporated by reference.
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements included in pages 11 through 28 of the Company's 2003 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 2003 Consolidated Statements of Financial Condition - March 31, 2003 and 2002 Consolidated Statements of Operations - Years Ended March 31, 2003, 2002 and 2001 Consolidated Statements of Changes in Net Assets - Years Ended March 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows - Years Ended March 31, 2003, 2002 and 2001
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Independent Auditors' Report
(F) Portfolio Changes During the Year
(a)(2) All schedules are omitted because they are not applicable or not required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index on page 9.
(b) The Company filed no reports on Form 8-K during the three months ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
By: /s/ William R. Thomas ----------------------------- William R. Thomas, President and Chairman of the Board
Date: June 13, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ----
/s/ William R. Thomas - ------------------------ President and Chairman June 13, 2003 William R. Thomas of the Board and Director (chief executive officer)
/s/ Gary L. Martin - ------------------------ Director June 13, 2003 Gary L. Martin
/s/ Graeme W. Henderson - ------------------------ Director June 13, 2003 Graeme W. Henderson
/s/ James M. Nolan - ------------------------ Director June 13, 2003 James M. Nolan
/s/ John H. Wilson - ------------------------ Director June 13, 2003 John H. Wilson
/s/ Susan K. Hodgson - ------------------------ Secretary-Treasurer June 13, 2003 Susan K. Hodgson (chief financial/accounting officer)
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, William R. Thomas, President and Chairman of the Board of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Capital Southwest Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could aversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003 By: /s/ William R. Thomas ------------- ----------------------------- William R. Thomas, President and Chairman of the Board
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Susan K. Hodgson, Secretary-Treasurer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Capital Southwest Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could aversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003 By: /s/ Susan K. Hodgson ------------- ------------------------------------- Susan K. Hodgson, Secretary-Treasurer
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.
10.9* Amendment Six to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989.
10.10 Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan for certain highly-compensated superseded plan participants effective April 1, 1993 (filed as Exhibit 10.4 to Form 10-K for the fiscal year ended March 31, 1995).
10.11 Amendment One to Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan for certain highly-compensated superceded plan participants effective April 1, 1993 (filed as Exhibit 10.6 to Form 10-K for the fiscal year ended March 31, 1998).
10.12 Capital Southwest Corporation Retirement Income Restoration Plan as amended and restated effective April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for the fiscal year ended March 31, 1995).
10.13 Form of Indemnification Agreement which has been established with all directors and executive officers of the Company (filed as Exhibit 10.9 to Form 8-K dated February 10, 1994).
10.14 Capital Southwest Corporation 1984 Incentive Stock Option Plan as amended and restated as of April 20, 1987 (filed as Exhibit 10.10 to Form 10-K for the fiscal year ended March 31, 1990).
10.15 Capital Southwest Corporation 1999 Stock Option Plan (filed as Exhibit 10.10 to Form 10-K for the fiscal year ended March 31, 2000).
13.1* Annual Report to Shareholders for the fiscal year ended March 31, 2003.
16.1 Letter Regarding Change of Certifying Accountant (incorporated by reference to Exhibit 16 to Form 8-K filed on May 9, 2003).
21.1 List of subsidiaries of the Company (filed as exhibit 21 to Form 10-K for the fiscal year ended March 31, 1998).
23.1* Independent Auditors' Consent.
99.1* Certificate Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the President and Chairman of the Board of the Corporation.
99.2* Certificate Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Secretary-Treasurer of the Corporation.