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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, 2004
TABLE 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