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 $45,316,675 and a value of $309,839,711, representing 89.2% of the value of the Company's consolidated investment portfolio at March 31, 2002. For a narrative description of the twelve largest investments, see "Twelve Largest Investments - March 31, 2002" on pages 7 through 9 of the Company's Annual Report to Shareholders for the Year Ended March 31, 2002 (the "2002 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, 2002 was seven.
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 2003. 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, 2002.
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 32 of the 2002 Annual Report is herein incorporated by reference.
Item 6.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 31 of the 2002 Annual Report is herein incorporated by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pages 28 through 30 of the Company's 2002 Annual Report are herein incorporated by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to financial market risks, including changes in marketable equity security prices. The Company does not use derivative financial instruments to mitigate any of these risks. The return on the Company's investments is not materially affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate debt securities which totaled $2,880,000 at March 31, 2002, equivalent to 0.83% of the value of the Company's total investments. Since these debt securities usually have relatively high fixed rates of interest, minor changes in market yields of publicly-traded debt securities have little or no effect on the values of debt securities in the Company's portfolio and no effect on interest income. The Company's 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 the Company's investment portfolio consists of debt and equity securities of private companies. The Company anticipates 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 the Company's investment portfolio also consists of restricted common stocks and warrants to purchase common stocks of publicly-owned companies. The fair values of these restricted securities are influenced by the nature of applicable resale restrictions, the underlying earnings and financial condition of the issuer, and the market valuations of comparable publicly-owned companies. A portion of the Company's investment portfolio also consists of unrestricted, freely marketable common stocks of publicly-owned companies. These freely marketable investments are directly exposed to equity price risks, in that a change in an issuer's public market equity price would result in an identical change in the fair value of the Company's investment in such security.
Item 8.
Item 8. Financial Statements and Supplementary Data
Pages 10 through 27 of the Company's 2002 Annual Report are herein incorporated by reference. See also Item 14 of this Form 10-K - "Exhibits, Financial Statement Schedules, and Reports on Form 8-K".
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for Annual Meeting of Shareholders to be held July 15, 2002, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, on or about June 7, 2002 (the "2002 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 47, 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 46, 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 40, has served as Secretary-Treasurer of the Company since 2001 and was the Controller of the Company from 1994.
Gary L. Martin, age 55, 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 73, 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 2002 Proxy Statement is herein incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Stock Ownership of Certain Beneficial Owners" and "Election of Directors" in the 2002 Proxy Statement is herein incorporated by reference.
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, 2002 or proposed for the fiscal year ending March 31, 2003.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements included in pages 10 through 27 of the Company's 2002 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 2002 Consolidated Statements of Financial Condition - March 31, 2002 and 2001 Consolidated Statements of Operations - Years Ended March 31, 2002, 2001 and 2000 Consolidated Statements of Changes in Net Assets - Years Ended March 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows - Years Ended March 31, 2002, 2001 and 2000
(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 6.
(b) The Company filed no reports on Form 8-K during the three months ended March 31, 2002.
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 14, 2002
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 14, 2002 (William R. Thomas) of the Board and Director
/s/ Gary L. Martin - --------------------------- Director June 14, 2002 (Gary L. Martin)
/s/ Graeme W. Henderson - --------------------------- Director June 14, 2002 (Graeme W. Henderson)
/s/ James M. Nolan - --------------------------- Director June 14, 2002 (James M. Nolan)
/s/ John H. Wilson - --------------------------- Director June 14, 2002 (John H. Wilson)
/s/ Susan K. Hodgson - --------------------------- Secretary-Treasurer June 14, 2002 (Susan K. Hodgson) (Financial and Accounting Officer)
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.
4.2 Subordinated debenture of CSVC guaranteed by the Small Business Administration (filed as Exhibit 4.3 to Form 10-K for the fiscal year ended March 31, 1993).
10.1* The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock Ownership Plan as revised and restated effective April 1, 1998.
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.
10.3 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).
10.4 Amendments One and Two to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989.
10.5* Amendment Three to Retirement Plan for Employees of Capital Southwest Corporation and Its Affiliates as amended and restated effective April 1, 1989.
10.6 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).
10.7 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.
10.8 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).
10.9 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).
10.10 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).
10.11 Capital Southwest Corporation 1999 Stock Option Plan.
Exhibit No. Description - ----------- -----------
13* Annual Report to Shareholders for the fiscal year ended March 31, 2002.
21. List of subsidiaries of the Company.
23* Independent Auditors' Consent.