To Our Shareholders
Net Asset Value at March 31, 2010 was $486,925,586, equivalent to
$130.14 per share. Assuming reinvestment of all dividends and tax
credits on long-term capital gains, the March 31, 2010 net asset value
was 18.5% greater than the March 31, 2009 net value of $110.98 per
share and 6.7% above the December 31, 2009 net asset value of
$121.99 per share.
The following table identifies significant sources of the changes in
net asset value of each share of Capital Southwest stock during the
past year:
Increases (decreases) in unrealized gains:
Alamo Group, Inc .......................................................................
The RectorSeal Corporation ........................................................
The Whitmore Manufacturing Company .....................................
All Components, Inc ...................................................................
Heelys, Inc .................................................................................
Encore Wire Corporation .............................................................
Media Recovery, Inc. ..................................................................
Palm Harbor Homes, Inc .............................................................
Other increases ..........................................................................
Net realized gains..........................................................................
Net investment income .................................................................
Dividends .....................................................................................
Year End
March 31, 2010
$ 5.30
3.47
3.07
2.48
1.57
0.55
(0.37)
(0.80)
3.61
0.22
0.56
(0.80)
Other changes in net assets ..........................................................
0.30
Increases in net asset value...........................................................
Net asset value beginning of period ...............................................
Net asset value end of period ........................................................
19.16
110.98
$130.14
Moving Parts
During the year ended March 31, 2010, net unrealized appreciation
of investments rose to $377,920,063 ($101.00 per share), an increase
of 23.0% from $307,295,832 ($82.12 per share) at March 31, 2009.
This notable positive change in overall portfolio appreciation of
$70,624,231 ($18.88 per share) was fairly evenly distributed during
the year, as $37,262,293 ($9.96 per share) was reported at Septem-
ber 30, 2009, and the balance, $33,361,938 ($8.92 per share) oc-
curred during the six months ended March 31, 2010. As reflected
elsewhere within this report, net realized gain on investments for the
year ended March 31, 2010 was $825,491, which produced a slight
decrease in net unrealized appreciation of investments during the year
of $538,037 ($0.14 per share).
During the year ended March 31, 2010, investments classified as
Controlled Affiliates increased $23,100,000 in net unrealized apprecia-
tion, which was 32.7% of the total $70,624,231 increase in net unrea-
lized appreciation in investments. The Major Publicly Traded Invest-
ments category experienced a net increase in appreciation of
$24,740,433, which represented 35.0% of the total increase in net
unrealized appreciation of $70,624,231.
March 31, 2010
March 31, 2009
Market
% of Total
Market
% of Total
Value
Investments
Value
Investments
Controlled Affiliates (mainly)
The RectorSeal Corporation
$120,200,000
Lifemark Group
71,000,000
The Whitmore Manufacturing Co.
47,500,000
Media Recovery, Inc
13,400,000
Major Publicly Traded Investments
25.1
14.9
9.9
2.8
$107,200,000
71,000,000
36,000,000
14,800,000
27.0
17.9
9.1
3.7
Encore Wire Corporation
67,431,375
14.1
65,388,000
16.5
Alamo Group, Inc
Heelys, Inc
42,454,500
19,845,870
Palm Harbor Homes, Inc
6,833,955
8.9
4.2
1.4
22,642,400
13,975,965
9,818,901
5.7
3.5
2.5
Venture Capital Assets
68,262,428
14.3
42,023,841
10.6
Marketable Securities
21,014,929
4.4
13,785,916
3.5
Total
$477,943,057
100.0
$396,635,023 100.0
In addition to a complete list of our investments, this report includes
a description of our twelve largest holdings (see pages 6 through 8).
1
These twelve investments had a combined cost of $33,542,228 and a
combined value of $431,648,324, representing 90.3% of the value of
our investment portfolio at March 31, 2010.
Regardless of its classification or current form, every security we
currently hold originated as a venture capital investment in a private
company. Investments in growing, private companies have always
been, and continue to be, the essential source of our present holdings.
Measure of Performance and Value
The following table reflects our Company’s performance compared
to the S&P 500 Index for the past 5 and 10 years:
Investment Returns
Period Ended
March 31, 2010
5 years
10 years
*Capital
Southwest
6.0%
5.4%
**S&P 500
Stock Index
2.0%
(0.7)%
__________
* Compounded annual return for Capital Southwest based on net asset value per share
assuming reinvestment of all dividends and tax credits.
** Compounded annual return for the S&P 500 Stock Index assuming reinvestment of all
dividends.
Investment Activities
A total of $17,234,456 was invested during the twelve months
ended March 31, 2010 including $9,000,000 in new holdings and
$8,234,456 in existing holdings. New venture investments include:
iMemories, Inc. - $4,000,000. The company provides
a convenient means for consumers to maintain and
share their home videos, tapes, reels and photos via a
complete digitizing process. The resulting online for-
mats can be accessed by family and friends with links
to www.imemories.com. The service is sold online and
in selected retail outlets. The investment is in the
form of convertible preferred stock representing a fully
diluted potential ownership of 26.2%.
2
KBI Biopharma, Inc. - $5,000,000. This fully inte-
grated contract biopharmaceutical development and
manufacturing organization serves large pharmaceuti-
cal biotechnology clients. The investment is via Series
B convertible preferred stock representing 14.8% of
the fully diluted ownership.
Additions to existing investments include contracted capital
calls from Ballast Point Ventures II, LP in the amount of
$300,000; BankCap Partners Fund I, LP for $1,747,156; Cina-
tra Clean Technologies, Inc. for $1,737,300; CMI Holding
Company, Inc. for $1,150,000; Discovery Alliance, LLC for
$300,000; and development financing for Palm Harbor Homes,
Inc. of $3,000,000, which was repaid during the period.
Future commitments in these holdings, subject to specific
conditions are $2,325,000 for Ballast Point Ventures II, LP;
$486,163 for BankCap Partners I, LP; $1,270,000 for Capital-
South Partners Fund III, LP; $200,400 for Cinatra Clean Tech-
nologies, Inc.; $600,000 for CMI Holding Company, Inc.;
$150,000 for Discovery Alliance, LLC; and $486,900 for Ster-
ling Group Partners I, LP.
Within the Controlled Affiliates category of our portfolio, The
RectorSeal Corporation made two strategic acquisitions total-
ing $5,200,000 and All Components, Inc. divested its EMS di-
vision for $6,770,000 during the year ended March 31, 2010.
Additionally, in the Major Publicly Traded Investment category,
Alamo Group, Inc. acquired the assets of Bush Hog, LLC for
$23,950,000 during the year ended March 31, 2010.
Our management and directors think like shareholders be-
cause we are. Every $1.00 we directly invest includes approx-
imately $0.24 owned by our management and directors. Ac-
cordingly our investment decisions are very thoughtful and our
monitoring duties are thorough.
Highlights within the Portfolio
Sale of Lifemark Group
In the spring of 1969, we invested $600,000 in a shell cor-
poration named Douglass Industries that was created to ac-
quire Engler Manufacturing Co. Engler was a small, slightly
emerging organization producing mowers to maintain difficult
areas such as highway right-of-ways. As is the case in our
typical investment today, the investment was heavily predi-
cated upon the belief that the aspiring entrepreneur, in this
case named Don Douglass, could acquire and grow the busi-
ness. The initial $600,000 investment and $200,000 second-
ary infusion a few months later launched Douglass’ business
plan and paved the way for Engler of Houston to then become
Terrain King Corporation and subsequently become The Alamo
Group, Inc. During the next several years we continued to
participate as needed in the emerging capitalization of Alamo,
which increased our investment to $2,191,000 as Alamo me-
thodically grew its manufacturing business across the U.S.,
Canada, Europe and Australia.
Today Alamo, headquartered in Seguin, Texas, is a NYSE
company with more than 2,300 employees, operating 18 man-
ufacturing plants with annual sales nearing $500 million. In
the fourth quarter of 2009, Alamo purchased the assets of
Bush Hog, the U.S. market leader for commercial sized rotary
mowing systems. The combination of Bush Hog with Alamo’s
Rhino brand of rotary mowers provides a commanding market
presence. Furthermore, Alamo’s campaigns of aggressive cost
containment, synchronization of inventory to demand levels,
and labor efficiency have produced a streamlined operating
platform. These systems should allow Alamo to extract higher
operating profits from the historical base of business, plus pro-
vide impressive earnings from the newly acquired Bush Hog
business. On a fully diluted basis, Alamo reported first quarter
2010 earnings of $0.34 per share compared to earnings of
$0.15 per share during the first quarter of 2009.
On April 29, 2010, we announced that a Stock Purchase
Agreement had been executed with NorthStar Memorial Group,
LLC whereby NorthStar would acquire 100% of the outstanding
common stock of Lifemark Group for $84.75 million. The
transaction is only contingent upon regulatory approval from
the licensing and permitting department of the State of Cali-
fornia, which is expected to occur during the quarter ended
June 30, 2010. We will retain certain real estate previously
owned by Lifemark that was held for long term investment
purposes, pay the professional transaction costs and retire cer-
tain debt owed by Lifemark. We estimate that $46.2 million of
the cash proceeds will be retained for future investment activi-
ties and $24.4 million will be paid in long-term capital gains
tax on behalf of our shareholders. Based on an individual tax
rate of 15%, it is estimated that individual shareholders will
receive a net tax credit of $3.73 per share effective December
31, 2010 from this transaction. Any additional capital gains or
losses we experience during the course of 2010 will alter this
amount.
Preparing for the Future
Glenn Neblett recently joined the Company as a vice presi-
dent. Glenn received both an accounting degree and an MBA
from Baylor University, accumulated public accounting expe-
rience with Ernst & Young and spent 13 years in investment
banking, with the last ten years as a director with Houlihan
Lokey in Dallas and Los Angeles. Glenn’s focus will include on-
going business development activities with the Company, se-
curing and executing new venture transactions and providing
investment monitoring support at the director level. Glenn will
be filling the position vacated by Jeff Peterson, who was repo-
sitioned as the CEO of The Whitmore Manufacturing Company
in 2009.
3
Marquez Bela was recruited to a newly created vice president
position that will manage the strategic acquisitions of our Con-
trolled Affiliate portfolio companies. Four of our six Controlled
Affiliates are judged well positioned to further energize their
acquisition programs. Marquez received Bachelors degrees
from the University of Texas within the Plan II Honors Program
and the Business Honors Program. He began his twelve year
investment banking and private equity career with Goldman,
Sachs & Co. and gained additional experience with a middle
market fund and two boutique investment firms.
These staff additions combined with the expected proceeds
from the Lifemark sale, should position Capital Southwest to
invest into an improved deal flow during a venture capital
cycle that remains depressed. As reported by the National
Venture Capital Association in April 2010, venture capital firms
across the United States raised 31% less in the first quarter of
2010 than they raised in the first quarter of 2009, representing
the slowest quarter since 1993.In May 2010, Mergers and Ac-
quisitions Report indicated that the average length of time
General Partners of traditional private equity firms spent fun-
draising continued to increase. Funds that had closed on fund
raises thus far in 2010 took an average of 19 months to final-
ize the transactions, more than double the timeframe expe-
rienced in 2004. While all this may translate into opportunity
for us as fewer dollars are chasing increasingly attractive pri-
vate companies, it also highlights the benefit of our structure
that allows our investment staff to focus on investing versus
fundraising. Our philosophy and approach allow us to general-
ly operate more efficiently than our peers and pursue superior
returns with minimal distraction.
June 7, 2010
Chairman of the Board and President
4
Business
Capital Southwest Corporation is one of the nation’s largest publicly-
owned venture capital investment companies. Since its formation in
1961 and its designation as a business development company in
1988, the Company and its wholly-owned small business investment
company subsidiary have provided capital to support the growth of
small and medium-sized businesses in varied industries throughout
the United States.
Investments are focused on opportunities for capital appreciation
derived from expansion financings, management buyouts, recapitali-
zations, industry consolidations and early-stage financings. The port-
folio is a composite of companies in which Capital Southwest Corpora-
tion has major interests, as well as a number of developing companies
and marketable securities of established publicly traded companies.
Our Investment Philosophy
We invest in enterprises believed to have exceptional growth po-
tential.
We finance those managers who have a proven record of achieve-
ment, focused determination, and unquestionable integrity.
We invest for the long term, which to us means building companies
that will lead their industries for many years.
Unlike most venture capitalists, we do not have an exit strategy
that causes successful managers to sell their companies or go pub-
lic.
These and other investment principles have been forged by our
Company’s 49 years of experience in providing patient capital and
management assistance to those entrepreneurs judged to be capable
of building successful businesses with enduring value.
A significant cornerstone of our investment philosophy is our long-
term perspective, which has enabled us to hold positions in enterprises
destined to achieve accelerating growth after 10, 20 or 30 years. Cur-
rently, investments held over 20 years represent approximately 26%
of the cost and 76% of the value of our portfolio.
5
The RectorSeal Corporation
$120,200,000
Lifemark Group
$71,000,000
Twelve Largest Investments – March 31, 2010
The RectorSeal Corporation, Houston, Texas, with facilities in Texas, New
York and Idaho, manufactures specialty chemical products including pipe
thread sealants, firestop sealants, plastic cements and other formulations
for plumbing, HVAC, electrical and industrial applications. The company
also makes special tools for plumbers and systems for containing smoke
from building fires. RectorSeal’s subsidiary, Jet-Lube, Inc., with plants in
Texas, England and Canada, produces anti-seize compounds, specialty lubri-
cants and other products used in industrial and oil field applications. Anoth-
er subsidiary produces and sells automotive chemical products. RectorSeal
also owns a 20% equity interest in The Whitmore Manufacturing Company
(described on this page).
During the year ended March 31, 2010, RectorSeal earned $9,571,000 on
revenues of $102,075,000, compared with earnings of $10,170,000 on rev-
enues of $112,762,000 in the previous year. RectorSeal’s earnings do not
reflect its 20% equity in The Whitmore Manufacturing Company.
At March 31, 2010, Capital Southwest owned 100% of RectorSeal’s com-
mon stock having a cost of $52,600 and a value of $120,200,000.
Lifemark Group, Hayward, California, owns and operates cemeteries,
mausoleums and mortuaries. Lifemark’s operations, all of which are in Cali-
fornia, include a major cemetery and funeral home in San Mateo, a mauso-
leum and an adjacent mortuary in Oakland and cemeteries, mausoleums
and mortuaries in Hayward and Sacramento. Its funeral and cemetery
trusts enable Lifemark’s clients to make pre-need arrangements. The com-
pany’s assets also include excess real estate holdings.
For the fiscal year ended March 31, 2010, Lifemark reported earnings of
$716,000 on revenues of $25,298,000, compared with earnings of $635,000
on revenues of $28,193,000 in the previous year.
At March 31, 2010, Capital Southwest owned 100% of Lifemark Group’s
common stock, which had a cost of $4,510,400 and was valued at
$71,000,000.
Encore Wire Corporation
$67,431,375
The Whitmore Manufacturing Company
$47,500,000
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, as well as armored cable for
residential, commercial and industrial construction. Encore’s products are
sold through distributors and building materials retailers.
For the year ended December 31, 2009, Encore reported net income of
$3,636,000 ($0.16 per share) on net sales of $649,613,000, compared with
income of $39,771,000 ($1.70 per share) on net sales of
net
$1,081,132,000 in the previous year. The March 31, 2010 closing Nasdaq
bid price of Encore’s common stock was $20.80 per share.
At March 31, 2010, the $5,800,000 investment in 4,086,750 shares of
Encore’s restricted common stock by Capital Southwest and its subsidiary
was valued at $67,431,375 ($16.50 per share), representing a fully-diluted
equity interest of 17.3%.
6
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 Air Sentry division manufactures
fluid contamination control devices. The company’s assets also include sev-
eral commercial real estate interests.
During the year ended March 31, 2010, Whitmore reported net income of
$3,661,000 on net sales of $26,777,000, compared with net income of
$3,209,000 on net sales of $28,163,000 in the previous year. The company
is owned 80% by Capital Southwest and 20% by Capital Southwest’s sub-
sidiary, The RectorSeal Corporation (described on this page).
At March 31, 2010, the direct investment in 80% of Whitmore by Capital
Southwest was valued at $47,500,000 and had a cost of $1,600,000.
Alamo Group Inc.
$42,454,500
Heelys, Inc.
$19,845,870
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, mobile excavators, street-sweeping and
snow removal equipment and replacement parts. Founded in 1969, Alamo
Group operates 18 manufacturing facilities and serves governmental, indus-
trial and agricultural markets in North America, Europe, and Australia.
For the year ended December 31, 2009, Alamo reported net income of
$17,091,000 ($1.65 per share) on net sales of $446,487,000, compared
with net income of $10,999,000 ($1.11 per share) on net sales of
$557,135,000 in the previous year. The March 31, 2010 closing NYSE mar-
ket price of Alamo’s common stock was $19.99 per share.
At March 31, 2010, the $2,190,937 investment in Alamo by Capital
Southwest and its subsidiary was valued at $42,454,500 ($15.00 per share),
consisting of 2,830,300 restricted shares of common stock, representing a
fully-diluted equity interest of 22.0%.
Heelys, Inc., Carrollton, Texas, designs, markets and distributes branded
footwear, equipment and accessories. The company imports its products
from China and Korea and distributes them through domestic and interna-
tional sporting goods chains, department and lifestyle stores and specialty
footwear retailers.
During the year ended December 31, 2009, Heelys reported net loss of
$5,125,000 (-$0.19 per share) on net sales of $43,777,000, compared with
net loss of $5,924,000 (-$0.22 per share) on net sales of $70,741,000 in the
previous year. The March 31, 2010 closing Nasdaq bid price of Heely’s
common stock was $2.37 per share.
At March 31, 2010, the $102,490 investment in Heelys by Capital South-
west’s subsidiary was valued at $19,845,870 ($2.13 per share), consisting of
9,317,310 restricted shares of common stock, representing a fully-diluted
equity interest of 31.1%.
Media Recovery, Inc.
$13,400,000
All Components, Inc.
$12,276,650
Media Recovery, Inc. (MRI), Dallas, Texas, is the holding company of
DataSpan, ShockWatch and Damage Prevention Company. DataSpan pro-
vides datacenter supplies and services to corporate customers through a
direct sales force. ShockWatch manufactures and distributes devices used
to detect mishandled shipments and devices for monitoring material han-
dling equipment. Media Recovery’s subsidiary, The Damage Prevention
Company, Denver, Colorado, manufactures dunnage products used to pre-
vent damage in trucking, rail and export container shipments.
During the year ended September 30, 2009, Media Recovery reported net
loss of $2,626,000 on net sales of $110,311,000, compared with net income
of $4,354,000 on net sales of $132,864,000 in the previous year.
At March 31, 2010, the $5,415,000 investment in Media Recovery by Cap-
ital Southwest and its subsidiary was valued at $13,400,000, consisting of
800,000 shares of Series A Convertible Preferred Stock and 4,000,002
shares of common stock, representing a fully-diluted equity interest of
97.5%.
All Components, Inc., Pflugerville, Texas, distributes and produces memo-
ry and other electronic components for personal computer manufacturers,
retailers, value-added resellers and other corporate customers. Through its
sales and distribution center near Austin, Texas and its distribution center in
Miami, Florida, the company serves over 2,000 customers throughout the
United States and Latin America.
During the year ended August 31, 2009, All Components reported net
income of $1,863,000 on net sales of $186,188,000, compared with net
income of $1,167,000 on net sales of $200,673,000 in the previous year.
At March 31, 2010, the $6,150,000 investment in All Components by
Capital Southwest and its subsidiary was valued at $12,276,650 consisting
of an 8.25% Subordinated Note valued at $6,454,925 and 150,000 shares of
Series A Convertible Preferred Stock valued at $5,821,725, representing a
80.4% fully-diluted equity interest.
7
Hologic, Inc.
$11,726,155
Texas Capital Bancshares, Inc.
$9,288,774
Hologic, Inc., Bedford, Massachusetts, is a leading developer, manufac-
turer and supplier of bone densitometers, mammography and breast biopsy
devices, direct-to-digital x-ray systems and other x-ray based imaging sys-
tems. These products are generally targeted to address women’s health-
care and general radiographic applications.
For the year ended September 26, 2009, Hologic reported net loss of
$2,176,237,000 (-$8.48 per share) on net sales of $1,637,134,000 com-
pared with net loss of $385,617,000 (-$1.57 per share) on net sales of
$1,674,499,000 in the previous year. The March 31, 2010 closing Nasdaq
bid price of Hologic’s common stock was $18.53 per share.
At March 31, 2010, Capital Southwest and its subsidiary owned 632,820
unrestricted shares of common stock, having a cost of $220,000 and a mar-
ket value of $11,726,155 ($18.53 per share).
Texas Capital Bancshares, Inc. of Dallas, Texas, formed in 1998, has total
assets of approximately $5.7 billion. With branch banks in Austin, Dallas,
Fort Worth, Houston, Plano and San Antonio, Texas Capital Bancshares con-
ducts its business through its subsidiary, Texas Capital Bank, N.A., which
targets middle market commercial and wealthy private client customers in
Texas.
For the year ended December 31, 2009, Texas Capital reported net in-
come of $18,769,000 ($0.55 per share), compared with net income of
$24,266,000 ($0.87 per share) in the previous year. The March 31, 2010
closing Nasdaq bid price of Texas Capital’s common stock was $18.97 per
share.
At March 31, 2010, Capital Southwest owned 489,656 unrestricted shares
of common stock, having a cost of $3,550,006 and a market value of
$9,288,774 ($18.97 per share).
Extreme International, Inc.
$8,525,000
Balco, Inc.
$8,000,000
Extreme International, Inc., Sugar Land, Texas, owns Bill Young Produc-
tions, Texas Video and Post, and Extreme Communications and Vanilla Goril-
la which produce radio and television commercials and corporate communi-
cations videos.
During the year ended September 30, 2009, Extreme reported net income
of $1,205,000 on net sales of $11,272,000, compared with net income of
$1,435,000 on net sales of $11,545,000 in the previous year.
At March 31, 2010, Capital Southwest and its subsidiary owned 39,359
shares of Series C Convertible Preferred Stock, 3,750 shares of 8% Series A
Convertible Preferred Stock and 13,035 shares of common stock, having a
cost of $3,325,875 and a market value of $8,525,000, representing a fully-
diluted equity interest of 53.6%.
Balco, Inc., Wichita, Kansas, designs and manufactures innovative archi-
tectural products used in the construction and remodeling of educational
facilities, commercial and industrial buildings, airports, hotels, hospitals,
parking garages and high-end residential condominiums. Company prod-
ucts include an extensive line of high quality, standard or custom-
engineered expansion joint covers, floor grids and mats, stair nosings,
grates and frames and trench and access covers.
During the year ended May 31, 2009, Balco reported net income of
$952,000 on net sales of $14,651,000, compared with net income of
$841,000 on net sales of $13,675,000 in the previous year.
At March 31, 2010, the $624,920 investment in Balco by Capital South-
west was valued at $8,000,000 consisting of 445,000 shares of common
stock and 60,920 shares of Class B non-voting common stock, representing
a fully-diluted equity interest of 90.9%.
8
Consolidated Schedule of Investments – March 31, 2010
Company
Equity (a)
Investment (b)
Cost
Value (c)
¥, †ALAMO GROUP INC.
Seguin, Texas
Tractor-mounted mowing and mobile excavation
equipment for governmental, industrial and agricultural
markets; street-sweeping equipment for municipalities.
ALL COMPONENTS, INC.
Pflugerville, Texas
Electronics contract manufacturing; distribution and production
of memory and other components for computer manufacturers,
retailers and value-added resellers.
22.0%
2,830,300 shares common stock (acquired 4-1-73
thru 5-25-07)
$ 2,190,937
$ 42,454,500
80.4%
8.25% Subordinated Note, $6,000,000 principal due
2012 (acquired 6-27-07)
150,000 shares Series A Convertible Preferred Stock, con-
vertible into 600,000 shares of common stock at $0.25
per share (acquired 9-16-94)
Warrants to purchase 350,000 shares of common stock at
$11.00 per share, expiring 2017 (acquired 6-27-07)
6,000,000
6,454,925
150,000
5,821,725
–
6,150,000
–
12,276,650
ATLANTIC CAPITAL BANCSHARES, INC.
Atlanta, Georgia
Holding company of Atlantic Capital Bank, a full service commercial bank.
¥BALCO, INC.
90.9%
Wichita, Kansas
Specialty architectural products used in the construction and
1.9%
remodeling of commercial and institutional buildings.
BOXX TECHNOLOGIES, INC.
Austin, Texas
Workstations for computer graphic imaging and design.
¥CMI HOLDING COMPANY, INC.
Richardson, Texas
Owns Chase Medical, which develops and sells devices used
in cardiac surgery to relieve congestive heart failure; develops
and supports cardiac imaging systems.
15.2%
22.4%
300,000 shares common stock (acquired 4-10-07)
3,000,000
3,150,000
445,000 shares common stock and 60,920 shares Class B
non-voting common stock (acquired 10-25-83 and 5-30-02)
624,920
8,000,000
3,125,354 shares Series B Convertible Preferred Stock,
convertible into 3,125,354 shares of common stock at
$0.50 per share (acquired 8-20-99 thru 8-8-01)
10% convertible promissory note, due 2013 (acquired 2-23-10)
1,631,516 shares Series C-1 Convertible Preferred
Stock, convertible into 1,631,516 shares of common
stock at $2.15 per share (acquired 7-10-09)
2,327,658 shares Series A Convertible Preferred Stock,
convertible into 2,327,658 shares of common stock at
$1.72 per share (acquired 8-21-02 and 6-4-03)
Warrants to purchase 109,012 shares of common stock at
1,500,000
650,000
2
1,300,000
2,863,347
2,857,759
4,000,000
2
$1.72 per share, expiring 2012 (acquired 4-7-04)
–
–
†Publicly-owned company; ¥ Control investment
‡Unrestricted securities as defined in Note (b)
Warrants to purchase 636,151 shares of Series A-1 Convertible
Preferred Stock at $1.72 per share expiring 2017 and
2019 (acquired 7-2-07 and 6-9-09)
Warrant to purchase 90,698 shares of Series D or D-1
Convertible Preferred Stock at $1.72 per share expiring
2017 (acquired 2-23-10)
–
–
–
7,513,347
–
4,157,761
9
Consolidated Schedule of Investments – March 31, 2010
Company
CINATRA CLEAN TECHNOLOGIES, INC.
Houston, Texas
Cleans above ground oil storage tanks with a patented,
automated system.
Equity (a)
59.2%
Investment (b)
Cost
Value (c)
10% Subordinated Secured Promissory Note, $6,200,000
principal due 2013 (acquired 7-14-08 thru 3-23-10)
1,128,649 shares Series A Convertible Preferred Stock,
convertible into 1,128,649 shares of common stock at $1.00
per share (acquired 7-14-08 and 11-19-08)
$ 6,000,300
$ 3,815,235
1,128,649
7,128,949
1,128,649
4,943,884
†ENCORE WIRE CORPORATION
McKinney, Texas
Electric wire and cable for residential, commercial and
industrial construction use.
17.3%
4,086,750 shares common stock (acquired 7-16-92 thru
10-7-98)
5,800,000
67,431,375
EXTREME INTERNATIONAL, INC.
Sugar Land, Texas
Owns Bill Young Productions, Texas Video and Post, and
Extreme Communications, which produce radio and television
commercials and corporate communications videos.
53.6%
13,035 shares Series A Common Stock (acquired 9-26-08
and 12-18-08)
39,359.18 shares Series C Convertible Preferred Stock,
convertible into 157,437.72 shares of common stock at
$25.00 per share (acquired 9-30-03)
3,750 shares 8% Series A Convertible Preferred Stock,
convertible into 15,000 shares of common stock at $25.00
per share (acquired 9-30-03)
325,875
600,000
2,625,000
7,236,000
375,000
3,325,875
689,000
8,525,000
¥, †HEELYS, INC.
Carrollton, Texas
Heelys stealth skate shoes, equipment and apparel sold
through sporting goods chains, department stores and
footwear retailers.
†HOLOGIC, INC.
Bedford, Massachusetts
Medical instruments including bone densitometers,
mammography devices and digital radiography systems.
iMEMORIES, INC.
Scottsdale, AZ
Enables online video and photo sharing and DVD creation
for home movies recorded in analog and new digital format.
KBI BIOPHARMA, INC.
Durham, NC
Provides fully-integrated, outsourced drug development
and bio-manufacturing services.
31.1%
9,317,310 shares common stock (acquired 5-26-00)
102,490
19,845,870
<1%
‡632,820 shares common stock (acquired 8-27-99)
220,000
11,726,155
26.2%
14.8%
17,391,304 shares Series B Convertible Preferred Stock,
convertible into 17,391,304 shares of common stock at
$0.23 per share (acquired 7-10-09)
7,142,857 shares Series B-2 Convertible Preferred Stock,
convertible into 7,142,857 shares of common stock at
$0.70 per share (acquired 9-08-09)
4,000,000
4,000,000
5,000,000
5,000,000
†Publicly-owned company; ¥ Control investment
‡Unrestricted securities as defined in Note (b)
10
Company
Equity (a)
Investment (b)
Cost
Value (c)
Consolidated Schedule of Investments – March 31, 2010
¥ LIFEMARK GROUP
Hayward, California
Cemeteries, mausoleums and mortuaries located in
northern California.
100.0%
1,449,026 shares common stock (acquired 7-16-69)
$ 4,510,400
$ 71,000,000
¥ MEDIA RECOVERY, INC.
Dallas, Texas
Computer datacenter and office automation supplies and
accessories; impact, tilt monitoring and temperature sensing devices
to detect mishandled shipments; dunnage for protecting shipments.
97.5%
PALLETONE, INC.
Bartow, Florida
Manufacturer of wooden pallets and pressure-treated
8.4%
lumber.
800,000 shares Series A Convertible Preferred Stock,
convertible into 800,000 shares of common stock at
$1.00 per share (acquired 11-4-97)
4,000,002 shares common stock (acquired 11-4-97)
12.3% senior subordinated notes, $2,000,000
principal due 2012 (acquired 9-25-06)
150,000 shares common stock (acquired 10-18-01)
Warrant to purchase 15,294 shares of common stock
at $1.00 per share, expiring 2011 (acquired 2-17-06)
¥, †PALM HARBOR HOMES, INC.
Dallas, Texas
Integrated manufacturing, retailing, financing and insuring
of manufactured housing and modular homes.
30.5%
7,855,121 shares common stock
(acquired 1-3-85 thru 7-31-95)
Warrant to purchase 286,625 shares of common
stock at $3.14 per share, expiring 2019
800,000
4,615,000
5,415,000
2,200,000
11,200,000
13,400,000
1,553,150 2,000,000
2
150,000
45,746
1,748,896
–
2,000,002
10,931,955
6,833,955
¥ THE RECTORSEAL CORPORATION
Houston, Texas
Specialty chemicals for plumbing, HVAC, electrical,
construction, industrial, oil field and automotive applications;
smoke containment systems for building fires; also owns
20% of The Whitmore Manufacturing Company.
TCI HOLDINGS, INC.
Denver, Colorado
Cable television systems and microwave relay systems.
†TEXAS CAPITAL BANCSHARES, INC.
Dallas, Texas
Regional bank holding company with banking operations
in six Texas cities.
(acquired 4-24-09)
100.0%
27,907 shares common stock
(acquired 1-5-73 and 3-31-73)
–
10,931,955
–
6,833,955
52,600
120,200,000
–
21 shares 12% Series C Cumulative Compounding Preferred
Stock (acquired 1-30-90)
–
677,250
1.6%
‡489,656 shares common stock (acquired 5-1-00)
3,550,006
9,288,774
†Publicly-owned company; ¥ Control investment
‡Unrestricted securities as defined in Note (b)
11
Company
Equity (a)
Investment (b)
Cost
Value (c)
Consolidated Schedule of Investments – March 31, 2010
TRAX HOLDINGS, INC.
Scottsdale, Arizona
Provides a comprehensive set of solutions to improve the trans-
portation validation, accounting, payment and information
management process.
31.1%
1,061,279 shares Series A Convertible Preferred Stock,
convertible into 1,061,279 common stock at $4.71
per share (acquired 12-8-08 and 2-17-09)
$ 5,000,000 $ 5,687,669
VIA HOLDINGS, INC.
Sparks, Nevada
Designer, manufacturer and distributor of high-quality office
seating.
28.1%
9,118 shares Series B Preferred Stock (acquired 9-19-05) 4,559,000
1,118 shares Series C Preferred Stock (acquired 11-1-07) 281,523
4,840,523
2
2
4
WELLOGIX, INC.
Houston, Texas
Developer and supporter of software used by the oil and gas
19.6%
4,788,371 shares Series A-1 Convertible Participating
Preferred Stock, convertible into 4,788,371 shares
of common stock at $1.0441 per share (acquired
industry.
8-19-05 thru 6-15-08)
¥ THE WHITMORE MANUFACTURING COMPANY
Rockwall, Texas
Specialized surface mining, railroad and industrial lubricants;
coatings for automobiles and primary metals; fluid contamination control devices.
80.0%
80 shares common stock (acquired 8-31-79)
5,000,000
2
1,600,000
47,500,000
MISCELLANEOUS
–
–
–
–
–
–
–
100.0%
–
–
–
Ballast Point Ventures II, L.P. – 2.6% limited partnership
interest (acquired 8-4-08 thru 11-3-09)
675,000
675,000
BankCap Partners Fund I, L.P. – 6.0% limited partnership
interest (acquired 7-14-06 thru 6-18-09)
5,513,837
5,179,842
CapitalSouth Partners Fund III, L.P. – 2.0% limited partnership
interest (acquired 1-22-08 and 2-12-09)
831,256
831,256
Diamond State Ventures, L.P. – 1.8% limited partnership
interest (acquired 10-12-99 thru 8-26-05)
¥ Discovery Alliance, LLC – 90.0% limited liability company
(acquired 9-12-08 thru 3-12-10)
Essex Capital Corporation – 10% unsecured promissory
note due 8-19-11 (acquired 8-16-09)
First Capital Group of Texas III, L.P. – 3.0% limited partnership
interest (acquired 12-26-00 thru 8-12-05)
¥ Humac Company – 1,041,000 shares common stock
(acquired 1-31-75 and 12-31-75)
STARTech Seed Fund I – 12.1% limited partnership
interest (acquired 4-17-98 thru 1-5-00)
STARTech Seed Fund II – 3.2% limited partnership
interest (acquired 4-28-00 thru 2-23-05)
Sterling Group Partners I, L.P. – 1.6% limited partnership
interest (acquired 4-20-01 thru 1-24-05)
76,000 186,852
750,000
750,000
–
1,000,000
778,895
451,208
–
163,000
178,066
950,000
1
1
1,064,042
607,044
$100,022,994 $477,943,057
TOTAL INVESTMENTS
†Publicly-owned company; ¥ Control investment
12
‡Unrestricted securities as defined in Note (b)
Consolidated Schedule of Investments – March 31, 2009
Company
Equity (a)
Investment (b)
Cost
Value (c)
¥, †ALAMO GROUP INC.
Seguin, Texas
Tractor-mounted mowing and mobile excavation
equipment for governmental, industrial and agricultural
markets; street-sweeping equipment for municipalities.
26.0%
2,830,300 shares common stock (acquired 4-1-73
thru 5-25-07)
$ 2,190,937
$ 22,642,400
ALL COMPONENTS, INC.
Austin, Texas
Electronics contract manufacturing; distribution and production
of memory and other components for computer manufacturers,
80.0%
retailers and value-added resellers.
8.25% Subordinated Note due 2012 (acquired 6-27-07)
150,000 shares Series A Convertible Preferred Stock, con-
vertible into 600,000 shares of common stock at $0.25
per share (acquired 9-16-94)
Warrants to purchase 350,000 shares of common stock at
$11.00 per share, expiring 2017 (acquired 6-27-07)
6,000,000
3,000,000
150,000
1
–
6,150,000
–
3,000,001
ATLANTIC CAPITAL BANCSHARES, INC.
Atlanta, Georgia
Holding company of Atlantic Capital Bank a full service
commercial bank.
¥ BALCO, INC.
Wichita, Kansas
Specialty architectural products used in the construction and
remodeling of commercial and institutional buildings.
2.0%
300,000 shares common stock (acquired 4-10-07)
3,000,000
3,000,000
90.9%
445,000 shares common stock and 60,920 shares Class B
non-voting common stock (acquired 10-25-83 and 5-30-02)
624,920
6,600,000
BOXX TECHNOLOGIES, INC.
Austin, Texas
Workstations for computer graphics imaging and design.
15.2%
3,125,354 shares Series B Convertible Preferred Stock,
convertible into 3,125,354 shares of common stock at
$0.50 per share (acquired 8-20-99 thru 8-8-01)
1,500,000
¥ CMI HOLDING COMPANY, INC.
Richardson, Texas
Owns Chase Medical, which develops and sells devices used
in cardiac surgery to relieve congestive heart failure; develops
and supports cardiac imaging systems.
15.3%
10% Convertible Subordinated Note, due 2009 (acquired 7-2-07
thru 10-9-07)
2,363,347
1,000,000
2,327,658 shares Series A Convertible Preferred Stock,
convertible into 2,327,658 shares of common stock at
$1.72 per share (acquired 8-21-02 and 6-4-03)
Warrants to purchase 109,012 shares of common stock at
4,000,000
2
$1.72 per share, expiring 2012 (acquired 4-7-04)
–
–
Warrant to purchase 431,982 shares of Series A-1 Convertible
Preferred Stock at $1.72 per share expiring 2017
(acquired 7-2-07)
–
6,363,347
–
1,000,002
†Publicly-owned company; ¥ Control investment
‡Unrestricted securities as defined in Note (b)
13
2
Company
Equity (a)
Investment (b)
Cost
Value (c)
Consolidated Schedule of Investments – March 31, 2009
CINATRA CLEAN TECHNOLOGIES, INC.
Houston, Texas
Cleans above ground oil storage tanks with a patented,
automated system.
59.2%
10% subordinated secured promissory note (acquired 7-14-08
thru 12-8-08)
$ 4,263,000
$ 4,263,000
1,128,649 shares Series A Convertible Preferred Stock,
convertible into 1,128,649 shares of common stock at $1.00
per share (acquired 7-14-08 and 11-19-08)
1,128,649
5,391,649
1,128,649
5,391,649
999,981
2,329,963
3,329,944
999,981
2,868,000
3,867,981
¥ DENNIS TOOL COMPANY
Houston, Texas
Polycrystalline diamond compacts (PDCs) used in oil field drill
bits and in mining and industrial applications.
67.4%
20,725 shares 5% Convertible Preferred Stock, convertible
into 20,725 shares of common stock at $48.25 per
share (acquired 8-10-98)
140,137 shares common stock (acquired 3-7-94 and 8-10-98)
†ENCORE WIRE CORPORATION
McKinney, Texas
Electric wire and cable for residential, commercial and
industrial construction use.
17.2%
4,086,750 shares common stock (acquired 7-16-92 thru
10-7-98)
5,800,000
65,388,000
EXTREME INTERNATIONAL, INC.
Sugar Land, Texas
Owns Bill Young Productions, Texas Video and Post, and
Extreme Communications, which produce radio and television
commercials and corporate communications videos.
53.6%
13,035 shares Series A common stock (acquired 9-26-08
and 12-18-08)
39,359.18 shares Series C Convertible Preferred Stock,
convertible into 157,436.72 shares of common stock at
$25.00 per share (acquired 9-30-03)
3,750 shares 8% Series A Convertible Preferred Stock,
convertible into 15,000 shares of common stock at $25.00
per share (acquired 9-30-03)
325,875
463,850
2,625,000
5,602,376
375,000
3,325,875
533,774
6,600,000
¥, †HEELYS, INC.
Carrollton, Texas
Heelys stealth skate shoes, equipment and apparel sold
through sporting goods chains, department stores and
footwear retailers.
†HOLOGIC, INC.
Bedford, Massachusetts
Medical instruments including bone densitometers,
mammography devices and digital radiography systems.
¥ LIFEMARK GROUP
Hayward, California
Cemeteries, mausoleums and mortuaries located in
northern California.
31.1%
9,317,310 shares common stock (acquired 5-26-00)
102,490
13,975,965
<1%
‡632,820 shares common stock (acquired 8-27-99)
220,000
8,277,286
100.0%
1,449,026 shares common stock (acquired 7-16-69)
4,510,400
71,000,000
†Publicly-owned company; ¥ Control investment
‡Unrestricted securities as defined in Note (b)
14
Company
Equity (a)
Investment (b)
Cost
Value (c)
Consolidated Schedule of Investments – March 31, 2009
¥ MEDIA RECOVERY, INC.
Dallas, Texas
Computer datacenter and office automation supplies and
accessories; impact, tilt monitoring and temperature sensing devices
to detect mishandled shipments; dunnage for protecting shipments.
97.1%
PALLETONE, INC.
Bartow, Florida
Manufacturer of wooden pallets and pressure-treated
8.5%
lumber.
800,000 shares Series A Convertible Preferred Stock, con-
vertible into 800,000 shares of common stock at $1.00
per share (acquired 11-4-97)
4,000,002 shares common stock (acquired 11-4-97)
12.3% Senior Subordinated Notes due 2012 (acquired
9-25-06)
150,000 shares common stock (acquired 10-18-01)
Warrant to purchase 15,294 shares of common stock
at $1.00 per share, expiring 2011 (acquired 2-17-06)
31.5%
7,855,121 shares common stock (acquired 1-3-85
thru 7-31-95)
$ 800,000
4,615,000
5,415,000
$ 2,500,000
12,300,000
14,800,000
1,553,150
150,000
2
2
45,746
1,748,896
–
4
10,931,955
9,818,902
¥, †PALM HARBOR HOMES, INC.
Dallas, Texas
Integrated manufacturing, retailing, financing and insuring
of manufactured housing and modular homes.
¥ THE RECTORSEAL CORPORATION
Houston, Texas
Specialty chemicals for plumbing, HVAC, electrical,
construction, industrial, oil field and automotive applications;
smoke containment systems for building fires; also owns 20%
of The Whitmore Manufacturing Company.
TCI HOLDINGS, INC.
Denver, Colorado
Cable television systems and microwave relay systems.
†TEXAS CAPITAL BANCSHARES, INC.
Dallas, Texas
Regional bank holding company with banking operations
in six Texas cities.
TRAX HOLDINGS, INC.
Scottsdale, Arizona
Provides a comprehensive set of solutions to improve the trans-
portation validation, accounting, payment and information
management process.
VIA HOLDINGS, INC.
Sparks, Nevada
Designer, manufacturer and distributor of high-quality office
seating.
†Publicly-owned company; ¥ Control investment
100.0%
27,907 shares common stock (acquired 1-5-73 and
3-31-73)
52,600
107,200,000
–
21 shares 12% Series C Cumulative Compounding Preferred
Stock (acquired 1-30-90)
–
677,250
1.6%
‡489,656 shares common stock (acquired 5-1-00)
3,550,006
5,508,630
32.5%
1,061,279 shares Series A Convertible Preferred Stock, convertible
into 1,061,279 common stock at $4.71 per share
(acquired 12-8-08 and 2-17-09)
5,000,000 5,000,000
28.1%
9,118 shares Series B Preferred Stock (acquired 9-19-05)
1,118 shares Series C Preferred Stock (acquired 11-1-07)
4,559,000
281,523
4,840,523
2
2
4
‡Unrestricted securities as defined in Note (b)
15
Consolidated Schedule of Investments – March 31, 2009
Equity (a)
19.9%
Investment (b)
Cost
Value (c)
4,788,371 shares Series A-1 Convertible Participating
Preferred Stock, convertible into 4,788,371 shares
of common stock at $1.0441 per share (acquired
8-19-05 thru 6-15-08)
$ 5,000,000
$ 2
80.0%
80 shares common stock (acquired 8-31-79)
1,600,000
36,000,000
Company
WELLOGIX, INC.
Houston, Texas
Developer and supporter of software used by the oil and gas
industry.
¥ THE WHITMORE MANUFACTURING COMPANY
Rockwall, Texas
Specialized surface mining, railroad and industrial lubricants;
coatings for automobiles and primary metals; fluid contamina-
tion control devices.
MISCELLANEOUS
–
–
–
–
–
–
100.0%
–
–
–
Ballast Point Ventures II, L.P. – 2.6% limited partnership
interest (acquired 8-4-08 thru 10-24-08)
375,000
375,000
BankCap Partners Fund I, L.P. – 6.0% limited partnership
interest (acquired 7-14-06 thru 10-10-08)
3,766,681
3,766,681
CapitalSouth Partners Fund III, L.P. – 2.8% limited partnership
interest (acquired 1-22-08 and 2-12-09)
831,256
831,256
Diamond State Ventures, L.P. – 1.9% limited partnership
interest (acquired 10-12-99 thru 8-26-05)
¥ Discovery Alliance, LLC – 90.0% limited liability company
(acquired 9-12-08 thru 3-1-09)
First Capital Group of Texas III, L.P. – 3.0% limited partnership
interest (acquired 12-26-00 thru 8-12-05)
¥ Humac Company – 1,041,000 shares common stock
(acquired 1-31-75 and 12-31-75)
STARTech Seed Fund I – 12.1% limited partnership
interest (acquired 4-17-98 thru 1-5-00)
STARTech Seed Fund II – 3.2% limited partnership
interest (acquired 4-28-00 thru 2-23-05)
Sterling Group Partners I, L.P. – 1.7% limited partnership
interest (acquired 4-20-01 thru 1-24-05)
111,000
111,000
450,000
450,000
964,604
840,260
–
133,000
178,066
950,000
1
1
1,064,042
379,746
$89,339,191 $396,635,023
TOTAL INVESTMENTS
†Publicly-owned company; ¥ Control investment
‡Unrestricted securities as defined in Note (b)
16
Notes to Consolidated Schedule of Investments
(a) Equity
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 stock, plus stock reserved for all warrants, con-
vertible securities and employee stock options. The symbol ―<1%‖
indicates that the Company holds a potential equity interest of less
than 1%.
(b) Investments
Unrestricted securities (indicated by ‡) are freely marketable
securities having readily available market quotations. All other securi-
ties are restricted securities which are subject to one or more re-
strictions on resale and are not freely marketable. At March 31, 2010,
restricted securities represented approximately 95.6% of the value of
the consolidated investment portfolio.
Our investments are carried at fair value in accordance with the In-
vestment Company Act of 1940 (the ―1940 Act‖) and FASB Accounting
Standards Codification™ (ASC) Topic 820, Fair Value Measurements
and Disclosures. In accordance with the 1940 Act, unrestricted minor-
ity-owned publicly traded securities, for which the market quotations
are readily available, are valued at the closing sale price for the NYSE
listed securities and the lower of the closing bid price or the last sale
price for NASDAQ securities on the valuation date; and restricted pub-
licly traded securities and other privately held securities are valued as
determined in good faith by our Board of Directors.
We adopted FASB ASC Topic 820 on April 1, 2008 (see footnote 1 in
―Notes to Consolidated Financial Statements,‖ page 25). ASC Topic
820 provides a framework for measuring the fair value of assets and
liabilities along with guidance regarding a fair value hierarchy, which
prioritizes information used to measure fair value and the effect of fair
value measurements on earnings and provides for enhanced disclo-
sures determined by the level within the hierarchy of information used
for valuation.
ASC Topic 820 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand
the use of fair value in any new circumstances. ASC Topic 820 defines
fair value in terms of the price that would be received upon the sale of
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (the ―exit price‖) and
excludes transaction costs. Under ASC Topic 820, the fair value mea-
surement also assumes that the transaction to sell an asset occurs in
the principal market for the asset or, in the absence of a principal mar-
ket, the most advantageous market for the asset. The principal mar-
ket is the market in which the reporting entity would sell or transfer
the asset with the greatest volume and level of activity for the asset.
In determining the principal market for an asset or liability under ASC,
it is assumed that the reporting entity has access to the market as of
the measurement date. Our Board of Directors retained Duff & Phelps
to provide limited scope third party valuation services on eight invest-
ments comprising 81.3% of our net asset value at March 31, 2010.
Please refer to our Form 10-K for full disclosure of Duff & Phelps’ ser-
vices.
(c) Value
Debt Securities are generally valued on the basis of the price the
security would command in order to provide a yield-to-maturity equiv-
alent to the present yield of comparable debt instruments of similar
quality. Issuers whose debt securities are judged to be of poor quality
and doubtful collectability may instead be valued by assigning major
17
percentage discounts commensurate with the quality of such debt
securities. Debt securities may also be valued based on the resulting
value from the sale of the business at the estimated fair market value.
Partnership Interests, Preferred Equity and Common Equity
including unrestricted marketable securities, which are valued at the
closing sale price for the NYSE listed securities and the lower of the
closing bid price or the last sale price for NASDAQ securities on the
valuation date, and restricted marketable securities for which there is a
public market, are valued at the closing sale price for the NYSE listed
securities and the lower of the closing bid price or the last sale price for
NASDAQ securities on the valuation date, adjusted in good faith by our
Board of Directors if they deem a discount or premium would be likely
or obtainable upon a sale or transfer of our interest. For those without
a principal market, the Board of Directors considers the financial condi-
tion 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; protective put analysis based on the Black-Scholes
option pricing model; the nature and duration of resale restrictions;
and the nature of any rights enabling the Company to require the is-
suer to register restricted securities under applicable securities laws.
In determining the fair value of restricted securities, the Board of Di-
rectors considers the inherent value of such securities without regard
to the restrictive feature and adjusts for any diminution in value result-
ing from restrictions on resale. Investments, in certain entities that
calculate net asset value per share (or its equivalent) and for which fair
market value is not readily determinable, are valued using the net
asset value per share (or its equivalent, such as member units or
ownership interest in partners’ capital to which a proportionate share
of net assets is attributed) of the investment.
Equity Warrants are valued on the basis of accepted formulas de-
rived from empirical studies which define the market value of a war-
18
rant in relation to the market price of its common stock. These formu-
las measure the ―option value‖ of a warrant as well as its ―exercise
value‖ (the amount, if any, by which the value of the stock exceeds
the exercise price of the warrant). In applying such formulas, the
market price of the stock is usually discounted to reflect the fact that
the stock is restricted and the calculated value is of the warrant itself
may be discounted (if deemed appropriate) to reflect its restrictive
nature. Generally, the option value is excluded if the formula indicates
(i) the warrant expires within six months, (ii) the market price of the
stock (discounted) is less than one-half of the exercise price of the
warrant, or (iii) the market price of the stock (discounted) is more
than two times the amount of the exercise price of the warrant.
(d) Agreements between certain issuers and the Company provide
that the issuers will bear substantially all costs in connection with the
disposition of common stock, including those costs involved in registra-
tion under the Securities Act of 1933, but excluding underwriting dis-
counts and commissions. These agreements cover common stock
owned at March 31, 2010 and common stock which may be acquired
thereafter through the exercise of warrants and conversion of deben-
tures and preferred stock. 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, Lifemark Group and The Whitmore Manufac-
turing 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 our independent registered public
accounting firm. Acquisition dates indicated are the dates specific se-
curities were acquired, which may differ from the original investment
dates. Certain securities were received in exchange for or upon con-
version or exercise of other securities previously acquired.
New Investments and Additions to Previous Investments
Dispositions
Portfolio Changes During the Year
Ballast Point Ventures II, L.P. .....................................
BankCap Partners Fund I, L.P. ...................................
Cinatra Clean Technologies, Inc.. ...............................
CMI Holding Company, Inc. ........................................
Discovery Alliance, LLC ..............................................
iMemories, Inc. ...........................................................
KBI Biopharma, Inc.....................................................
Palm Harbor Homes, Inc. ...........................................
Amount
$ 300,000
1,747,156
1,737,300
1,150,000
300,000
4,000,000
5,000,000
3,000,000
$17,234,456
$3,329,944
Dennis Tool Company ......................................
35,000
Diamond State Ventures ...................................
Essex Capital Corporation .................................
-
First Capital Group of Texas .............................. 185,709
Cost ............................
Amount
Received
$4,763,416
35,000
206,522
185,709
Repayments Received ....................................
$3,000,000
$3,550,653
$5,190,647
19
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Assets and Liabilities
Assets
2010
2009
Liabilities
March 31
March 31
2010
2009
Investments at market or fair value
Companies more than 25% owned
(Cost: 2010 – $26,178,302,
2009 - $29,208,246) ......................................
$330,147,325
$286,488,248
Other liabilities ................................................... ......
Pension liability ..................................................
Deferred income taxes ....................................... ......
Total liabilities.................................
$ 1,070,540
1,082,941
2,095,518
4,248,999
$ 253,294
934,427
1,092,427
2,280,148
66,388,010
Net Assets
Companies 5% to 25% owned
(Cost: 2010 – $21,562,243,
2009 - $20,412,243) ...............................
73,589,142
Companies less than 5% owned
(Cost: 2010 – $52,282,449,
2009 - $39,718,702) ...............................
74,206,590
43,758,765
Total investments
(Cost: 2010 – $100,022,994,
2009 – $89,339,191) ..............................
Cash and cash equivalents ......................
Receivables
Dividends and interest ..................
Affiliates ....................................... .........
Pension assets ........................................
Other assets ............................................ .........
477,943,057
4,093,508
1,012,782
864,943
7,068,957
191,338
396,635,023
14,721,730
498,506
16,706
5,468,861
202,313
Total assets ................................. $491,174,585
$417,543,139
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,326,516
shares at March 31, 2010 and
March 31, 2009 .............................................. ......
Additional capital ................................................ ......
Undistributed net investment income .. ..............
Undistributed net realized gain on
4,326,516
126,554,546
2,061,109
4,326,516
124,571,029
2,963,640
Investments .................................................... ......
-
Unrealized appreciation of investments ............. 377,920,063
Treasury stock – at cost 584,878 shares
at March 31, 2010 and March 31,2009 .......... (23,936,648) (23,936,648)
Total net assets ................................................. 486,925,586
42,622
307,295,832
415,262,991
Total liabilities and net assets ............................ ......
Net assets value per share
$491,174,585
$417,543,139
(on the 3,741,638 shares outstanding) ......... $ 130.14
$ 110.98
The accompanying Notes are an integral part of these Consolidated Financial Statements
20
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended March 31
2010
2009
2008
Investment income (see note 9):
Interest ....................................................................................................................................................................................
Dividends .................................................................................................................................................................................
Management and directors’ fees ............................................................................................................................
$ 1,044,867
3,788,680
1,275,759
6,109,306
Operating expenses:
Salaries .................................................................................................................................................................
Net pension benefit ................................................................................................................................................
Stock option expense ............................................................................................................................................
Professional fees ..................................................................................................................................................
Other operating expenses......................................................................................................................................
Income before income taxes ...................................................................................................................................
Income tax expense ................................................................................................................................................
$ 1,375,215
11,533,878
1,076,039
13,985,132
$
2,255,550
3,656,833
882,300
6,794,683
2,294,187
(253,229)
503,645
689,425
431,473
3,665,501
10,319,631
136,176
1,619,008
(327,345)
263,664
798,172
614,824
2,968,323
3,826,360
111,160
2,839,070
(369,108)
675,210
551,112
207,224
3,903,508
2,205,798
115,017
Net investment income ........................................................................................................................................
$ 2,090,781
$ 10,183,455
$ 3,715,200
Proceeds from disposition of investments ...............................................................................................................
$ 5,190,647
Cost of investments sold ......................................................................................................................................... 3,550,653
$ 20,697,647
4,718,381
$
1,433,891
1,193,867
Net realized gain on investments before income taxes............................................................................................
Income tax expense ................................................................................................................................................
1,639,994
814,503
15,979,266
5,222,964
Net realized gain on investments .........................................................................................................................
825,491
10,756,302
240,024
-
240,024
Net increase (decrease) in unrealized appreciation of investments .................................................................
70,624,231
(159,247,203)
(142,969,698)
Net realized and unrealized gain (loss) on investments ....................................................................................
$71,449,722
$(148,490,901)
$(142,729,674)
Increase (decrease) in net assets from operations ............................................................................................ $73,540,503
$(138,307,446)
$(139,014,474)
The accompanying Notes are an integral part of these Consolidated Financial Statements
21
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Changes in Net Assets
Years Ended March 31
2010
2009
2008
Operations:
Net investment income ............................................................................................................................................
Net realized gain on investments .............................................................................................................................
Net increase (decrease) in unrealized appreciation of investments .........................................................................
Increase (decrease) in net assets from operations ..................................................................................................
$ 2,090,781
825,491
70,624,231
73,540,503
$ 3,715,200
$ 10,183,455
10,756,302
(159,247,203) (142,969,698)
(139,014,474)
(138,307,446)
240,024 .................................
Distributions from:
Undistributed net investment income .......................................................................................................................
Net realized gains deemed distribution to shareholders ..........................................................................................
(2,993,310) (12,256,745)
(868,114) (8,646,560)
(2,333,291)
-
Capital share transactions:
Allocated increase in share value for deemed distribution .......................................................................................
Exercise of employee stock options.........................................................................................................................
Change in pension plan funded status, net of tax ....................................................................................................
Stock option expense ..............................................................................................................................................
Treasury stock .........................................................................................................................................................
Increase (decrease) in net assets ............................................................................................................................
868,114
-
440,192
675,210
-
71,662,595
8,646,560
-
231,390
-
(1,178,764)
(1,473,329)
503,645
263,664
(16,903,346) -
(142,031,475)
(168,437,221)
Net assets, beginning of year ....................................................................................................................................
415,262,991
583,700,212
725,731,689
Net assets, end of year .......................................................................................................................................... $486,925,586
$415,262,991
$583,700,214
The accompanying Notes are an integral part of these Consolidated Financial Statements
22
Capital Southwest Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Cash flows from operating activities
Increase (decrease) in net assets from operations ...............................................................
Adjustments to reconcile increase (decrease) in net assets from operations ........................
to net cash provided by (used in) operating activities:
Proceeds from disposition of investments ..........................................................................
Proceeds from repayment of debt securities .......................................................................
Purchases of securities .......................................................................................................
Maturities of securities.........................................................................................................
Depreciation and amortization .............................................................................................
Net pension benefit .............................................................................................................
Net realized (gain) loss on investments before income taxes ..............................................
Net (increase) decrease in unrealized appreciation of investments .....................................
Stock option expense ..........................................................................................................
Increase in dividend and interest receivable .......................................................................
(Increase) decrease in receivables from affiliates ................................................................
Increase in other assets ......................................................................................................
Increase (decrease) in other liabilities .................................................................................
Decrease in accrued pension cost ......................................................................................
Increase in deferred income taxes ......................................................................................
Net cash provided by (used in) operating activities ...............................................................
Cash flows from financing activities
Distributions from undistributed net investment income ........................................................
Proceeds from exercise of employee stock options ..............................................................
Purchase of treasury stock ...................................................................................................
Payment of federal income tax for deemed capital gains distribution ....................................
Net cash used in financing activities .....................................................................................
Net (decrease) in cash and cash equivalents .......................................................................
Cash and cash equivalents at beginning of year ...................................................................
Cash and cash equivalents at end of year ............................................................................
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest ..................................................................................
Income taxes .........................................................................
2010
Years Ended March 31
2009
2008
$ 73,540,503
$(138,307,446)
$(139,014,474)
5,190,647
3,000,000
(17,234,456)
-
33,130
(369,108)
(825,491)
(70,624,231)
675,210
(514,278)
(617,026)
(22,155)
817,246
-
129,600
(6,820,409)
(2,993,310)
-
-
(814,503)
(3,807,813)
(10,628,222)
14,721,730
$ 4,093,508
20,697,647
-
(13,030,107)
-
40,478
(253,229)
(10,756,302)
159,247,203
503,645
(364,160)
5,270
(33,358)
7,620
(68,934)
88,700
17,777,027
1,433,891
(10,733,536)
154,500
32,756
(327,345)
(240,024)
142,969,698
263,664
190,275
(8,705)
(80,195)
(33,281)
(135,768)
114,000
(5,414,544)
(12,256,745)
-
(16,903,346)
(5,222,964)
(34,383,055)
(16,606,028)
31,327,758
$ 14,721,730
(2,333,291)
231,390
-
-
(2,101,901)
(7,516,445)
38,844,203
$ 31,327,758
$ -
$ -
$ -
$ 3,756
$ -
$ -
The accompanying Notes are an integral part of these Consolidated Financial Statements
23
Notes to Consolidated Financial Statements
ORGANIZATION AND BASIS OF PRESENTATION
Organization
Basis of Presentation
Capital Southwest Corporation (―CSC‖ or the ―Company‖) was orga-
nized 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 subsid-
iary, 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 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.‖ Capital Southwest Management Company (―CSMC‖), a
wholly-owned subsidiary of CSC, is the management company for CSC
and CSVC. CSMC generally incurs all normal operating and adminis-
trative costs required for its day-to-day operations.
Our portfolio is a composite of companies in which we have majority
interests, as well as a number of developing companies and marketa-
ble 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 inves-
tee companies is critical to their business development activities.
When appropriate, CSMC receives a monthly fixed fee for their man-
agement services provided by the portfolio companies.
The consolidated financial statements have been prepared in accor-
dance with accounting principles generally accepted in the United
States of America for investment companies. Under the investment
company rules and regulations pursuant to Article 6 of Regulation S-X
and the Audit and Accounting Guide for Investment Companies issued
by the American Institute of Certified Public Accountants (the ―AICPA
Guide‖), we are precluded from consolidating any entity other than
another investment company. An exception to this general principle in
the AICPA Guide occurs if the investment company has an investment
in an operating company that provides services to the investment
company. Therefore, our consolidated financial statements include our
management company, CSMC.
We classify our portfolio investments in accordance with the re-
quirements of the 1940 Act. Under the 1940 Act, ―Control Invest-
ments‖ are defined as investments in which we own more than 25%
of the voting securities or have rights to maintain greater than 50% of
the board representation. Under the 1940 Act, ―Affiliate Investments‖
are defined as investments in which we own between 5% and 25% of
the voting securities. Under the 1940 Act, ―Non-Control/Non-Affiliate
Investments‖ are defined as investments that are neither Control In-
vestments nor Affiliated Investments.
24
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Significant Accounting Policies
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‖).
Fair Value Measurements. The Company adopted FASB ASC Topic
820 ―Fair Value Measurements” on April 1, 2008. ASC Topic 820 (1)
creates a single definition of fair value, (2) establishes a framework for
measuring fair value, and (3) expands disclosure requirements about
items measured at fair value. The Statement applies to both items
recognized and reported at fair value in the financial statements and
items disclosed at fair value in the notes to the financial statements.
The Statement does not change existing accounting rules governing
what can or what must be recognized and reported at fair value in the
Company’s financial statements, or disclosed at fair value in our notes
to the financial statements. Additionally, Topic 820 does not eliminate
practicability exceptions that exist in accounting pronouncements
amended by this Statement when measuring fair value.
Prior to ASC Topic 820, certain measurements of fair value were
based on the price that would be paid to acquire an asset, or received
to assume a liability (an entry price). FASB Topic 820 clarifies the defi-
nition of fair value as the price that would be received from the sale of
an asset, or paid to transfer a liability, in an orderly transaction be-
tween market participants at the measurement date (that is, an exit
price). The exit price is based on the amount that the holder of the
asset or liability would receive or need to pay in an actual transaction
(or in a hypothetical transaction if an actual transaction does not exist)
at the measurement date. In some circumstances, the entry and exit
price may be the same; however, they are conceptually different.
Fair value is generally determined based on quoted market prices in
the active markets for identical assets or liabilities. If quoted market
prices are not available, the Company uses valuation techniques that
place greater reliance on observable inputs and less reliance on unob-
servable inputs. Due to the inherent uncertainty in the valuation
process, the Company’s estimate of fair value may differ materially
from the values that would have been used had a ready market for
the securities existed. In addition, changes in the market environ-
ment, portfolio company performance and other events may occur
over the lives of the investments may cause the gains or losses ulti-
mately realized on these investments to be materially different than
the valuations currently assigned. We determine the fair value of each
individual investment and record changes in fair value as unrealized
appreciation or depreciation.
Pursuant to our internal valuation process, each portfolio company is
valued once a quarter. In addition to our internal valuation process,
our Board of Directors retains a nationally recognized firm to provide
limited scope third party valuation services on certain portfolio invest-
ments. Our Board of Directors retained Duff & Phelps to provide li-
mited scope third party valuation services on eight investments com-
prising 81.3% of our net asset value at March 31, 2010. Please refer
to our Form 10-K for full disclosure of Duff & Phelps’ services.
We believe our investments at March 31, 2010 and 2009 approx-
imate fair value as of those dates based on the market in which we
operate and other conditions in existence at those reporting periods.
Cash and Cash Equivalents. Cash and cash equivalents consist of
highly liquid investments with an original maturity of three months or
less at the date of purchase. Cash and cash equivalents are carried at
cost, which approximates fair value.
Investments. Investments are stated at market or fair value deter-
mined 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.
25
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 geo-
graphic areas as presented in the portfolio of investments.
Use of Estimates. The preparation of financial statements in con-
formity with accounting principles generally accepted in the United
States of America requires management to make estimates and as-
sumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those esti-
mates.
Interest and Dividend Income. Interest and dividend income is rec-
orded on an accrual basis to the extent amounts are expected to be
collected. Dividend income is recorded at ex-dividend date for mar-
ketable securities and restricted securities. In accordance with our
valuation policy, accrued interest and dividend income is evaluated
periodically for collectability. When a debt or loan becomes 90 days or
more past due, and if we otherwise do not expect the debtor to be
able to service all of its debt or other obligations, we will generally es-
tablish a reserve against the interest or dividend income, thereby plac-
ing the loan or debt security’s status on non-accrual basis and cease
recognizing interest income on that loan or debt security until the bor-
rower has demonstrated the ability and intent to pay contractual
amounts due. If a loan or debt security’s status significantly improves
regarding ability to service the debt or other obligations, it will be res-
tored to accrual basis.
Federal Income Taxes. CSC and CSVC have elected and intend to
comply with the requirements of the Internal Revenue Code (IRC)
necessary to qualify as regulated investment companies (RICs). By
meeting these requirements, they will not be subject to corporate fed-
eral income taxes on ordinary income distributed to shareholders. In
order to comply as a RIC, each company is required to timely distri-
bute to its shareholders at least 90% of investment taxable income, as
defined by the Code, each year. Taxable income generally differs from
net income for financial reporting purposes due to temporary and
26
permanent differences in the recognition of income and expenses.
Taxable income generally excludes net unrealized appreciation or de-
preciation, as investment gains or losses are not included in taxable
income until they are realized. The Company’s policy is to retain and
pay the 35% corporate tax on realized long-term capital gains. For
investment companies that qualify as RICs under the IRC, federal in-
come taxes payable on security gains that the company elects to re-
tain are accrued only on the last day of the tax year, December 31.
Therefore, CSC and CSVC made no provision for federal income taxes
on such gains and net investment income in their financial statements.
CSMC, a wholly owned subsidiary of CSC, is not a RIC and is re-
quired to pay taxes at the current corporate rate.
The Company accounts for interest and penalties as part of operat-
ing expenses. There were no interest or penalties incurred during the
years ended March 31, 2010, 2009 and 2008.
Deferred Taxes. The Company sponsors a qualified defined benefit
pension plan which covers its employees and employees of certain of
its controlled affiliates. Deferred taxes related to the qualified defined
benefit pension plan are recorded as incurred.
Stock-Based Compensation. At March 31, 2010, the Company has
two stock-based incentive compensation plans. These plans encourage
and enable the officers, employees, non-employee directors, and other
key persons of the Company to acquire an interest in the Company.
We account for our share-based compensation using the fair value
method, as prescribed by ASC 718, Compensation – Stock Compensa-
tion. Accordingly, we recognize compensation cost over the straight-
line method for all share-based payments granted on or after that date
and for all awards granted to employees prior to April 1, 2006 that
remain unvested on that date. The fair value of stock options are de-
termined on the date of grant using the Black-Scholes pricing model
and are expensed over the vesting period of the related stock options.
See ―Note 5, Stock-Based Compensation‖ for further discussion.
Defined Pension Benefits and Other Postretirement Plans. We
record annual amounts relating to defined benefit pension plans based
on calculations, which include various actuarial assumptions such as
discount rates and assumed rates of return depending on the pension
plan. Material changes in pension costs may occur in the future due to
changes in the discount rate, changes in the expected long-term rate
of return, changes in levels of contributions to the plans and other fac-
tors. The funded status is the difference between the fair value of plan
assets and the benefit obligation. We recognize changes in the funded
status of postretirement defined benefit plans in the Consolidated
Statements of Assets and Liabilities in the year in which the changes
occur and measure postretirement defined benefit plan assets and
obligations as of the date of the employer’s fiscal year-end. The Com-
pany presently uses March 31 as the measurement date for all of its
postretirement defined benefit plans.
Concentration of Credit Risk. The Company places its idle cash with
financial institutions in various money market accounts, which routine-
ly exceed the Federal Deposit Insurance Corporation insured limit. As
of March 31, 2010 and March 31, 2009, the Company’s money market
account balances exceeded the Federal Deposit Insurance Corpora-
tion’s limits by $3.1 million and $13.8 million, respectively.
Recent Accounting Pronouncements
ASC No. 715-20-50-Pension Plan and Postretirement Benefit Plan
Disclosure. In December 2008, the FASB issued ASC No. 715-20-50,
―Compensation –Retirement Benefits” (―ASC 715-20-50‖). ASC 715-
20-50 requires enhanced disclosures about our plan assets for the
defined benefit pension and other postretirement benefit plans. The
enhanced disclosures required by this ASC are intended to provide
users of financial statements with a greater understanding of: (1) how
investment allocation decisions are made, including the factors that
are pertinent to an understanding of investment policies and strate-
gies; (2) the major categories of plan assets; (3) the inputs and valua-
tion techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements using significant unobservable inputs
(level 3) on changes in plan assets for the period; and (5) significant
concentrations of risk within plan assets. This ASC became effective
for us for our fiscal year ended March 31, 2010 and resulted in certain
disclosures in Note 7.
ASC No. 855-10-Subsequent Events. In May 2009, the FASB issued
ASC No. 855-10, ―Subsequent Events” (―ASC 855-10‖), which sets
forth general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are
issued or available to be issued. ASC 855-10 became effective in the
first quarter of fiscal March 31, 2010 and did not have a material im-
pact on our consolidated financial statements. Additionally, in Febru-
ary 2010, the FASB issued Accounting Standards Update (―ASU‖) No.
2010-09, ―Amendments to Certain Recognition and Disclosure Re-
quirements” (―ASU 2010-09‖), which became effective upon issuance
and amended the guidance on subsequent events to remove the re-
quirement for SEC filers to disclose the date through which an entity
has evaluated subsequent events. We have evaluated certain events
and transactions occurring after March 31, 2010 and, as disclosed in
Note 10, we had one event that met the definition of a subsequent
event for the period ended March 31, 2010.
Accounting Standard Codification. The Financial Accounting Stan-
dards Board’s (―FASB‖) Accounting Standards Codification™ (―ASC‖)
became effective on July 1, 2009. At that date, the ASC became
FASB’s officially recognized source of authoritative U.S. generally ac-
cepted accounting principles (―GAAP‖) applicable to all public and non-
public non-governmental entities, superseding existing FASB, Ameri-
can Institute of Certified Public Accountants (―AICPA‖), Emerging Is-
sues Task Force (―EIFT‖) and related literature. Rules and interpretive
releases of the SEC under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other ac-
counting literature is considered non-authoritative. The switch to ASC
affects the way companies refer to U.S. GAAP in financial statements
and accounting policies. Citing particular content in the ASC involves
specifying the unique numeric path to the content through the Topic,
Subtopic, Section and Paragraph structure.
27
ASU No. 2009-05- Fair Value Measurements and Disclosures (Topic
820): Measuring Liabilities at Fair Value. In August 2009, the FASB
issued Accounting Standards Update (―ASU‖) No. 2009-05, ―Measuring
Liabilities at Fair Value” (―ASU 2009-05‖), which amends ASC 820-10.
ASU 2009-05 provides clarification in circumstances when a quoted
price in an active market for an identical liability is not available. In
such instances, a reporting entity is required to measure fair value
utilizing a valuation technique that uses (1) the quoted price of the
identical liability when traded as an asset; (2) quoted prices for similar
liabilities when traded as assets; or (3) another valuation technique
that is consistent with the existing principles of ASC Topic 820, such as
an income or market approach. ASU 2009-05 also clarifies that when
estimating the fair value of a liability, a reporting entity is not required
to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of the liability.
Additionally, ASU 2009-5 clarifies that both a quoted price in an active
market for an identical liability at the measurement date and the
quoted price for an identical liability when traded as an asset in an
active market when no adjustment to the quoted price of the asset are
required are Level 1 fair value measurements. This ASU became ef-
fective for us for our fiscal year ended March 31, 2010 and did not
have a material impact on our consolidated financial statements.
ASU No. 2009-12—Fair Value Measurements and Disclosures (Topic
820): Investments in Certain Entities That Calculate Net Asset per
Share (or Its Equivalent). In September 2009, the FASB issued ASU
No. 2009-12 ―Investments in Certain Entities That Calculate Net Asset
Per Share (or Its Equivalent),‖ which provides further guidance for
measuring the fair value of investments in certain entities that calcu-
late net asset value per share or its equivalent; provided the invest-
ment does not have a readily determined fair value and the net asset
value is calculated in a manner that is consistent with ASC Topic 946-
Financial Services-Investment Companies, as of the reporting entities’
measurement date, including the measurement of all or substantially
all of the underlying investments of the investee in accordance with
Topic 820. In such instances, a reporting entity is permitted to esti-
mate the fair value of an investment using the net asset value per
share. This ASU became effective for us for our fiscal year ended
March 31, 2010 and did not have a material impact on our consolidat-
ed financial statements.
ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. In Janu-
ary 2010, the FASB issued ASU No. 2010-06 ―Improving Disclosures
about Fair Value Measurements,‖ which provides more robust disclo-
sures about (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the
activity in Level 3 fair value measurements, and (4) the transfers be-
tween Levels 1, 2, and 3. ASU 2010-06 is effective for annual and in-
terim periods beginning after December 15, 2009, except for the re-
quirement to provide the Level 3 activity on a gross basis, which is
effective for annual periods beginning after December 15, 2010 and
for interim periods within those fiscal years. The Company will adopt
ASU 2010-06 in the first quarter of 2010, except for the requirement
to provide the Level 3 activity on a gross basis, which will be adopted
after December 15, 2010. The Company does not expect the adoption
of these disclosures to have a material impact on our consolidated
financial position or results of operations.
2. Investments
We fair value our investments in accordance with GAAP as deter-
mined in good faith by our Board of Directors. When available, we
base the fair value of our investments on directly observable market
prices or on market data derived for comparable assets. For all other
investments, inputs used to measure fair value reflect management’s
best estimate of assumptions that would be used by market partici-
pants in pricing the investments in a hypothetical transaction.
The levels of fair value inputs used to measure our investments are
characterized in accordance with the fair value hierarchy established
by ASC Topic 820 ―Fair Value Measurements and Disclosures.‖ Where
inputs for an asset or liability fall in more than one level in the fair val-
28
ue hierarchy, the investment is classified in its entirety based on the
lowest level input that is significant to that investment’s fair value
measurement. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical investments (Level 1) and
lowest priority to unobservable inputs (Level 3). We use judgment
and consider factors specific to the investment in determining the sig-
nificance of an input to a fair value measurement.
The three levels of the fair value hierarchy and investments that fall
into each of the levels are described below:
Level 1: Investments whose values are based on unadjusted
quoted prices in active markets that are accessible at the mea-
surement date for identical, unrestricted assets or liabilities. We
use Level 1 inputs for publicly traded unrestricted securities for
which we do not have a controlling interest. Such investments
are valued at the closing price for listed securities and at the lower
of the closing bid price or the closing sale price for securities
traded on the NASDAQ on the valuation date.
Level 2: Investments whose values are based on data other than
the quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. We did not value
any of our investments using level 2 inputs as of March 31, 2010.
Level 3: Investments whose values are based on prices or valua-
tion techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. These inputs re-
flect management’s own assumptions about the assumptions a
market participant would use in pricing the investment. We use
Level 3 inputs for measuring the fair value of substantially all of
our investments. See ―Notes to Schedule of Investments‖ (c) on
page 17 for the investment policy used to determine the fair value
of these investments.
As required by ASC 820, when the inputs used to measure a fair
value fall within different levels of the hierarchy, the level within the fair
value measurement is categorized is based on the lowest level input
that is significant to the fair value measurement in its entirety. For
example, a level 3 fair value measurement may include inputs that are
observable (Levels 1 and 2) and unobservable (3). We conduct re-
views of fair value hierarchy on a quarterly basis. Changes in the ob-
servability of valuation inputs may result in a reclassification of certain
assets.
The following fair value hierarchy tables set forth our investment
portfolio by level as of March 31, 2010 and 2009 (in millions):
Fair Value Measurements
at 3/31/2010 Using
Asset Category
Debt
Partnership Interests
Preferred Equity
Common Equity
Total Investments
Total
$ 14.6
8.6
35.3
419.4
$477.9
Asset Category
Debt
Partnership Interests
Preferred Equity
Common Equity
Total Investments
Total
$ 8.3
6.8
16.4
365.2
$396.7
Quoted Prices in
Active Markets
for Identical Assets
Level 1
$ -
-
-
21.0
$21.0
Significant
Other
Observable
Inputs
Level 2
$ -
-
-
-
$ -
Significant
Unobservable
Inputs
Level 3
$ 14.6
8.6
35.3
398.4
$456.9
Fair Value Measurements
at 3/31/2009 Using
Quoted Prices in
Active Markets
for Identical Assets
Level 1
$ -
-
-
13.8
$13.8
Significant
Other
Observable
Inputs
Level 2
$ -
-
-
-
$ -
Significant
Unobservable
Inputs
Level 3
$ 8.3
6.8
16.4
351.4
$382.9
29
The following tables set forth a summary of changes in the fair value
of investment assets and liabilities measured using Level 3 inputs dur-
ing the years ended March 31, 2010 (in millions):
held at reporting date was $63,933,254 and $(124,976,775), respec-
tively.
Net
Unrealized
Net New
Conversion of
Fair Value
Appreciation
Investments
Security from
Fair Value
Asset Category
3/31/09
(Depreciation)
(Divestitures)
Debt to Equity
3/31/10
Debt
$ 8.3
$ 4.9
2.7
$ (1.3)
$ 14.6
Partnership
Interests
Preferred
Equity
Common
6.8
(0.2)
2.1
-
8.6
16.4
9.4
8.2
1.3
35.3
Equity
351.4
49.3
(2.3)
-
398.4
Total
Investments $382.9
$ 63.4
$10.7
-
$ 456.9
Net
Unrealized
Net New
Conversion of
Fair Value
Appreciation
Investments
Security from
Fair Value
Asset Category
3/31/08
(Depreciation)
(Divestitures)
Debt to Equity
3/31/09
Debt
$ 9.0
$ (5.0)
$ 4.3
$ -
$ 8.3
Partnership
Interests
Preferred
Equity
Common
Equity
Equity
5.3
(0.9)
21.8
(11.5)
458.3
(107.2)
2.3
6.1
0.3
-
-
-
6.8
16.4
351.4
Warrants
0.4
(0.4)
-
-
-
Total
Investments $ 494.8
$ (124.9)
$13.0
$-
$ 382.9
The amount of total gains for the years ended March 31, 2010 and
2009 included in change in net assets attributable to the change in net
unrealized appreciation (depreciation) relating to assets (level 3) still
30
3. Income Taxes
We operate to qualify as a RIC under Subchapter M of the IRC. In
order to qualify as a RIC, we must annually distribute at least 90% of
our taxable ordinary income, based on our tax year, to our sharehold-
ers in a timely manner. Ordinary income includes net short-term capi-
tal gains but excludes net long-term capital gains. A RIC is not subject
to federal income tax on the portion of its ordinary income and long-
term capital gains that are distributed to its shareholders, including
―deemed distributions‖ discussed below. As permitted by the IRC, a
RIC can designate dividends paid in the subsequent tax year as divi-
dends of current year ordinary income and net long-term gains if
those dividends are both declared by the extended due date of the
RIC’s federal income tax return and paid to shareholders by the last
day of the subsequent tax year. We have a calendar tax year end of
December 31.
We have distributed or intend to distribute sufficient dividends to
eliminate taxable income for our completed tax years. If we fail to
satisfy the 90% distribution requirement or otherwise fail to qualify as
a RIC in any tax year, we would be subject to tax in such year on all of
our taxable income, regardless of whether we made any distributions
to our shareholders. For the tax years ended December 31, 2009 and
2008, we declared and paid ordinary dividends in the amount of
$2,993,310 and $12,256,745, respectively.
Additionally, we are also subject to a nondeductible federal excise
tax of 4% if we do not distribute at least 98% of our investment com-
pany ordinary taxable income before the end of our tax year. For the
tax year ended December 31, 2009 we distributed 100% of our in-
vestment company ordinary taxable income. As a result we have
made no provision for income taxes on ordinary taxable income for
the tax year ended December 31, 2009.
A RIC may elect to retain its long-term capital gains by designating
them as a ―deemed distribution‖ to its shareholders and paying a fed-
eral tax of 35% on the long-term capital gains for the benefit of its
shareholders. Shareholders would then report their share of the re-
tained capital gains on their income tax returns as if it had been re-
ceived and report a tax credit for the tax paid on their behalf by the
RIC. Shareholders then add the amount of the ―deemed distribution,‖
net of such tax, to the basis of their shares. For the tax year ended
December 31, 2009, we have estimated net long-term capital gains of
$2,327,150 for tax purposes and $1,682,616 for book purposes,
which we elected to retain and treat as deemed distributions to our
shareholders. Likewise, for the tax year ended December 31, 2008,
we had net long-term capital gains of $14,922,751 for tax purposes
and $15,936,644 for book purposes, which we elected to retain and
treat as deemed distributions to our shareholders. As a result of our
election to retain long-term capital gains, we incurred federal taxes on
behalf of our shareholders in the amount of $814,503 and $5,222,964
for the tax years ended December 31, 2009 and 2008, respectively.
As of December 31, 2009, we did not have any undistributed long-
term capital gains since they are being treated as a ―deemed distribu-
tion.‖
For the tax years ended December 31, 2009 and 2008, CSC and
CSVC qualified to be taxed as RICs. We intend to meet the applicable
qualifications to be taxed as a RIC in future years. Management feels
it is probable that we will maintain our RIC status for a period longer
than one year. However, either company’s ability to meet certain port-
folio diversification requirements of RICs in future years may not be
controllable by such company.
CSMC, a wholly owned subsidiary of CSC, is not a RIC and is re-
quired to pay taxes at the current corporate rate. The Company spon-
sors a qualified defined benefit pension plan which covers its em-
ployees and employees of certain of its wholly owned portfolio compa-
nies. Deferred taxes related to the qualified defined pension plan are
recorded as incurred.
4. Undistributed Net Realized Gains (Losses) on Investments
Distributions made by RICs often differ from aggregate GAAP-basis
undistributed net investment income and accumulated net realized
gains (total GAAP-basis net realized gains). The principal cause is that
required minimum fund distributions are based on income and gain
amounts determined in accordance with federal income tax regula-
tions, rather than GAAP. The differences created can be temporary,
meaning that they will reverse in the future, or they can be perma-
nent. In subsequent periods, when all or a portion of a temporary
difference becomes a permanent difference, the amount of the per-
manent difference will be reclassified to ―additional capital.‖
The following table sets forth a summary of our net realized gains on
transactions by category:
Net Realized Gains On Transaction In
For the Tax Year Ended December 31,
Investment Securities of
Unaffiliated issuers
Affiliated issuers
Investments other than securities
2009
$206,5212
1,433,472
-
2008
$15,936,644
-
-
Net realized gain on investments before taxes
$1,639,994
$15,936,644
Income tax expense
Net realized gain on investments
814,503
$ 825,491
5,222,964
$10,713,680
Net realized gains (for tax purposes)
$2,327,150
$14,922,751
As a result of our election to retain long-term capital gains, we in-
curred federal taxes on behalf of our shareholders in the amounts
listed in the table above. As of March 31, 2010, we did not have undi-
stributed long-term capital gains (losses) since they are being treated
as a ―deemed distribution,‖ while we reported undistributed long-term
capital gains of $42,622 as of March 31, 2009.
5. Employee Stock Option Plan
On July 20, 2009, shareholders approved our 2009 Stock Incentive
Plan (the ―2009 Plan‖), which provides for the granting of stock op-
tions to employees and officers of the Company and authorizes the
31
issuance of common stock upon exercise of such options for up to
140,000 shares. All options are granted at or above market price,
generally expire up to ten years from the date of grant, and are gen-
erally exercisable on or after the first anniversary of the date of grant
in five annual installments. Options to purchase 38,750 shares at a
price of $76.74 (market price at the time of the grant) were granted
on October 19, 2009. Additionally, options to purchase 20,000 shares
at a price of $95.79 (market price at time of the grant) were granted
on March 22, 2010. All 58,750 shares remain outstanding, thus leav-
ing 81,250 options available for grant under the plan.
The Company previously granted stock options under our 1999
Stock Option Plan (the ―1999 Plan‖), as approved by shareholders on
July 19, 1999. The 1999 Plan expired on April 19, 2009. Options pre-
viously granted under the 1999 Plan and outstanding on July 20, 2009
continue to be governed by the provisions of the 1999 Plan. All op-
tions granted under the 1999 Plan were granted at or above market
price, generally expire up to 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.
We recognize compensation cost over the straight-line method for all
share-based payments granted and for all awards granted to em-
ployees prior to April 1, 2006 that remain unvested. The fair value of
the stock options are determined on the date of grant using the
―Black-Scholes Pricing Model‖ and are expensed over the vesting pe-
riod of the related stock options. Accordingly, for the years ended
March 31, 2010, 2009 and 2008, we recognized compensation ex-
pense of $675,210, $503,645, and $263,664 respectively.
As of March 31, 2010, the total remaining unrecognized compensa-
tion cost related to non-vested stock options was $3,332,391, which
will be amortized over the weighted-average service period of approx-
imately 4.1 years.
32
The following table summarizes the 2009 Plan and the 1999 Plan
price per option at grant date using the Black-Scholes Pricing Model:
Date of
Issuance
2009 Plan
March 22, 2010
October 19, 2009
1999 Plan
July 30, 2008
July 21, 2008
July 16, 2007
July 17, 2006
May 15, 2006
Weighted
Average
Fair Value
Black-Scholes Pricing Model Assumptions
Expected Risk-Free
Dividend
Yield
Expected
Volatility
Interest
Rate
Expected
Life
(in years)
$32.56
$25.36
0.84%
1.04%
2.43%
2.36%
37.8%
37.6%
$29.93
$27.35
$41.78
$33.05
$31.28
0.62%
0.67%
0.39%
0.61%
0.64%
3.36%
3.41%
4.95%
5.04%
5.08%
20.2%
20.2%
19.9%
21.2%
21.1%
5
5
5
5
5
7
7
The following summarizes activity in the stock option plans for the
years ended March 31, 2010, 2009 and 2008:
2009 Plan
Balance at March 31, 2009
Granted
Exercised
Canceled
Balance at March 31, 2010
Number
of shares
Weighted Average
Exercise Price
-
58,750
-
-
58,750
$ -
83.23
-
-
$83.23
1999 Plan
Balance at March 31, 2008
Balance at March 31, 2009
Granted
Exercised
Canceled
70,400
37,500
-
-
107,900
-
-
-
107,900
Balance at March 31, 2010
Combined Balance at March 31, 2010 166,650
Granted
Exercised
Canceled
$110.00
123.72
-
-
$114.78
-
-
-
$114.78
$103.65
March 31, 2010
Outstanding
Exercisable
Weighted Average Aggregate Intrinsic
Remaining Contractual Term
Value
4.1 years
3.4 years
$4,889,443
$1,158,499
At March 31, 2010, the range of exercise prices and weighted-
average remaining contractual life of outstanding options was $65.00
to $152.98 and 4.1 years, respectively. There were no options exer-
cised during the years ended March 31, 2010 and March 31, 2009.
The total intrinsic value of options exercised during the years ended
March 31, 2008 was $75,129. The exercise prices ranged from
$65.00 to $93.49 per share for the each of the years ended March 31,
2008. New shares were issued for $231,390 cash received from op-
tion exercises for the years ended March 31, 2008.
At March 31, 2010, 2009 and 2008, the number of options exercis-
able was 38,960, 21,445 and 9,930, respectively and the weighted-
average exercise price of those options was $107.94, $97.00 and
$79.01, respectively.
6. Employee Stock Ownership Plan
CSC and one of its controlled affiliates sponsor a qualified employee
stock ownership plan (―ESOP‖) in which certain employees participate.
Contributions to the plan, which are invested in CSC 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.
Effective April 1, 2007, the vesting period for the ESOP is three
years. During the 3 years ended March 31, 2010, the Company made
contributions to the ESOP, which were charged against net investment
income, of $144,436 in 2010, $0 in 2009 and $94,210 in 2008.
7. Retirement Plans
CSC sponsors a qualified defined benefit pension plan which covers
its employees and employees of certain of its controlled affiliates. The
following information about the plan represents amounts and informa-
tion related to CSC’s participation in the plan and is presented as
though CSC 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 10 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, 2010.
Additionally, CSC 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 tables set forth the qualified plan’s net pension benefit,
benefit obligation, fair value of plan assets, and amounts recognized in
CSC’s consolidated statements of assets and liabilities at March 31,
2010, 2009 and 2008; as well as amounts recognized in CSC’s consol-
idated statements of assets and liabilities at March 31, 2010 and
2009:
Years Ended March 31
2010
2009
2008
Net pension benefit
Service cost-benefits earned during
the year ...........................................
$116,746
Interest cost on projected benefit obligation 191,936
(735,366)
Expected return on assets .....................
Net amortization ...................................
9,006
Net pension benefit from qualified plan ... $(417,678)
$67,340
290,310
(732,837)
3,725
$(371,462)
$67,514
222,895
(673,366)
3,725
$(379,232)
Change in benefit obligation
Benefit obligation at beginning
of year ............................................ $2,914,813
116,746
Service cost .........................................
191,936
Interest cost .........................................
Actuarial gain (loss) ..............................
295,379
Benefits paid ........................................ (68,131)
Plan change .........................................
-
Benefit obligation at end of year ............. $3,450,443
$3,699,285
67,340
290,310
(916,874)
$3,965,100
67,514
222,895
(160,840)
(259,810) (395,384)
-
$3,699,285
33
34,262
$2,914,513
Years Ended March 31
2010
2009
2008
Years Ended March 31
2010
2009
2008
Change in plan assets
Fair value of plan assets at beginning
of year ........................................... $8,383,373 $11,120,337 $12,973,292
(1,457,571)
Actual return on plan assets ..................
2,204,158
(395,384)
Benefits paid ....................................... (68,131)
Fair value of plan assets at end of
year ................................................ $10,519,400
(2,477,154)
(259,810)
$ 8,383,373 $11,120,337
March 31
2010
2009
Change in benefit obligation
Benefit obligation at beginning
$934,427
of year ............................................
26,847
Service cost .........................................
60,334
Interest cost .........................................
61,332
Actuarial gain (loss) ..............................
-
Benefits paid ........................................
Plan change .........................................
-
Benefit obligation at end of year ............. $1,082,941
$942,122
10,986
104,777
(74,613)
$1,178,891
10,483
57,588
(169,072)
(68,934) (135,768)
-
$942,122
20,089
$934,427
Funded status and amounts recognized in our
consolidated statements of assets and liabilities
Actuarial present value of benefit obligations:
Accumulated benefit obligation.......................... $(3,076,629) $(2,630,743)
Projected benefit obligation for service rendered to
date ................................................................ $(3,450,443) $(2,914,513)
Amounts recognized in our consolidated
statements of assets and liabilities
Projected benefit obligation....................................... $(1,082,941) $(934,427)
Unrecognized net (gain) loss from past experience
March 31
2010
2009
8,383,373
5,468,860
different from that assumed and effects of
changes in assumptions ...................................
Unrecognized prior service costs ...............................
Additional asset, FAS 158 .........................................
518,775
Prepaid pension cost included in pension liabilities ...... $(1,082,941)
618,712
$(934,427)
(347,741)
$(431,432)
(171,034) (187,280)
Plan assets at fair value* .......................................... 10,519,400
Funded status ......................................................... 7,068,957
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions ................................... 1,328,748
150,710
Unrecognized prior service costs ...............................
Additional asset, FAS 158 .........................................
(1,479,458)
Prepaid pension cost included in pension assets .......... $ 7,068,957
2,502,161
159,716
(2,661,877)
$ 5,468,860
_____________
*Primarily equities and bonds including approximately 25,000 shares of CSC Common
Stock.
The following tables set forth the retirement restoration plan’s net
pension benefit and benefit obligation amounts at March 31, 2010,
2009 and 2008; as well as amounts recognized in CSC’s consolidated
statements of assets and liabilities at March 31, 2010, 2009:
Years Ended March 31
2010
2009
2008
Net pension benefit
Service cost-benefits earned during
the year .........................................
Interest cost on projected benefit obligation
Net amortization ..................................
Net pension benefit from qualified plan ..
$26,847
60,334
(38,605)
$48,576
$10,986
104,777
2,470
$118,233
$10,483
57,588
(16,186)
$51,885
34
The following assumptions were used in estimating the actuarial
present value of the projected benefit obligations:
Years Ended March 31
2009
2010
2008
Discount rate .........................................
Rate of compensation increases ...............
6.00%
5.0%
6.5%
5.0%
6.25%
5.0%
The following assumptions were used in estimating the net periodic
(income)/expense:
Years Ended March 31
2009
2010
2008
Discount rate .........................................
Expected return on plan assets ................
Rate of compensation increases ...............
6.5%
6.5%
5.0%
6.25%
6.5%
5.0%
6.0%
6.5%
5.0%
Following are the expected benefit payments for the next five years
and in the aggregate for the years 2016-2020:
Years Ended March 31
(In Thousands) 2011 2012
Qualified Plan $60 $207 $199 $191 $184
Restoration Plan $18
2013 2014 2015
$82
$93
$89
$85
2016-
2020
$1,034
$367
We use the ―Citigroup Pension Liability Index‖ to determine the discount
rate. The expected rate of return on assets assumption was determined
based on the anticipated performance of the various asset classes in the
plan’s portfolio and the allocation of assets to each class. The anticipated
asset class return is developed using historical and predicted asset return
performance, considering the investments underlying each asset class and
expected investment performance based on forecasts of inflation, interest
rates and market indices for fixed income and equity securities.
Plan Assets
CSC’s pension plan is administered by a board-appointed committee
that has fiduciary responsibility for the plan’s management. The trus-
tee of the plan is JPMorgan Asset Management. Currently, approx-
imately 18% of the assets are selected and managed by the trustee
and the remainder of the assets is managed by the committee, in-
vested mostly in equity securities, including CSC stock. The plan as-
sets are invested using a total return approach whereby a mix of equi-
ty securities, debt securities and other investments are used to pre-
serve asset values, diversify risk and achieve our targeted investment
return benchmark. Investment performance and asset allocation are
measured and monitored on an ongoing basis.
Plan assets are managed in a balanced portfolio comprised of two
major components: an equity portion and a fixed income portion. The
expected role of Plan equity investments is to maximize the long-term
real growth of Fund assets, while the role of fixed income investments
is to generate current income, provide for more stable periodic returns
and provide some protection against prolonged decline in the market
value of Fund equity investments.
The current target allocations for plan assets are 60-80% equity, 15-
40% for fixed income, and 0-15% for cash and cash equivalents. Eq-
uity investments include U.S. and foreign equities, as well as publicly
traded and non-publicly traded mutual funds. Fixed income securities
include long-duration government obligations, government agency
obligations and corporate obligations.
CSC’s pension plan asset allocations are as follows:
Percentage of plan assets
at March 31
2010
Asset Category
Equity securities ......................................................
74.2%
Fixed income securities ............................................ 16.5%
9.3%
Cash and cash equivalents .......................................
100.0%
2009
67.7%
19.2%
13.1%
100.0%
The following fair value hierarchy table sets forth our pension plan
investment portfolio by level as of March 31, 2010 (in millions):
Fair Value Measurements
at Reporting Date Using
Quoted
Prices in
Active
Markets for
Identical
Assets
Total
Level 1
$ 7.8 $ 6.4
1.7 -
1.0 1.0
$10.5 $7.4
Significant
Other
Observable
Inputs
Level 2
$ 1.4
1.7
-
$ 3.1
Significant
Unobservable
Inputs
Level 3
$ -
-
-
$ -
Asset Category
Equity securities (a)
Fixed income securities (b)
Cash and cash equivalents
Total
There were no plan assets valued using significant unobservable inputs (level 3) as
of March 31, 2010.
(a) This category includes investment in equity securities of large, medium and
small companies and equity investments in foreign companies. Mutual funds in-
cluded in this category are valued using the net asset value per unit as of the valua-
tion date. These investments include shares of our common stock. At March 31,
2010 and 2009, Capital Southwest Corporation common stock represented 21.9%
and 22.7%, respectively, of the plan assets.
b) This category includes investments in investment grade fixed income instru-
ments, primarily U.S. government obligations.
35
8. Commitments
CSC has agreed, subject to certain conditions, to invest up to
$5,518,463 in seven portfolio companies.
The Company leases office space under an operating lease which
requires base annual rentals of approximately $101,000 through April,
2013. For the three years ended March 31, total rental expense
charged to investment income was $92,075 in 2010, $84,117 in 2009
and $80,569 in 2008.
9. Sources of Income
Income was derived from the following sources:
Years Ended
March 31
2010
Companies more than
25% owned .............
Companies 5% to 25%
owned ....................
Companies less than
5% owned ..............
Other sources, including
temporary investments
Investment Income
Realized Gain
Interest
Dividends
Income
Other
(Loss) on
Investments
Before Income
Taxes
$14,473
$3,359,942 $1,055,900
$1,433,472
1,500
326,940
13,000
–
1,009,276
101,798
206,522
206,522
19,618
$1,044,867
337
$3,788,680 $1,275,759
–
-
$1,639,994
Investment Income
Years Ended
March 31
2009
Companies more than
Interest
Dividends
Realized Gain
(Loss) on
Investments
Before Income
Taxes
Other
Income
Years Ended
March 31
2008
Companies more than
Investment Income
Realized Gain
Interest
Dividends
(Loss)
Investments
Before Income
Taxes
Other
Income
25% owned ............. $ –
$2,979,631
$839,800
$ –
Companies 5% to 25
owned .....................
Companies less than
5% owned ...............
Other sources,
including temporary
investments .............
364 ,762
326 940
42,500
–
469,066
350,262
–
240,024
1,421,722
$2,255,550
–
$3,656,833
–
$882,300
–
$240,024
10. Subsequent Events
On April 29, 2010 Capital Southwest Corporation, Lifemark Group, a
wholly owned investment of the Company, NorthStar Memorial Group,
LLC and NorthStar Cemetery Services of California, LLC, a wholly
owned subsidiary of NorthStar (―Purchaser‖), entered into a Stock
Purchase Agreement, providing for the sale of all issued and outstand-
ing shares of capital stock of Lifemark Group to Purchaser.
Consideration for the sale will be cash in the aggregate of
$84,750,000. Pursuant to terms of the Stock Purchase Agreement,
the purchase price will be reduced by the amount of the Lifemark’s
outstanding indebtedness. The purchase price will also be subject to
an adjustment based on certain estimated costs or expenses that
have been or will be incurred by the Company or its subsidiary asso-
ciated with, arising out of or relating to the distribution of certain as-
sets. In addition, the purchase is subject to customary adjustments
based on the amount of Seller’s net assets at the time the sale is com-
pleted.
25% owned ............. $ – $10,946,581 $1,055,000
$ –
Companies 5% to 25%
owned ....................
Companies less than
5% owned ..............
Other sources,
including temporary
investments ............
36
249,417
326,940
20,750
–
743,937
260,357
9
15,979,266
381,861
–
$1,375,215 $11,533,878 $1,076,039 $15,979,266
280
–
The Stock Purchase Agreement contains representations and war-
ranties, covenants, indemnification provisions and closing conditions
that are customary for transactions of this type, including covenants
by the Seller related to the conduct of business between the signing of
the Stock Purchase Agreement and completion of the sale. Comple-
tion of the transaction is subject to customary closing conditions for
transactions of this type, including approval from the State of Califor-
nia.
Schedule of Investments in and Advances to Affiliates
SCHEDULE 12-14
Portfolio Company/Type of Investment (1)
Control Investments
THE RECTORSEAL CORPORATION
27,907 shares of common stock.............
LIFEMARK GROUP
1,449,026 shares of common stock ........
THE WHITMORE MANUFACTURING COMPANY
80 shares of common stock ...................
ALAMO GROUP INC.
2,830,300 shares of common stock ........
HEELYS, INC.
9,317,310 shares of common stock ...
MEDIA RECOVERY, INC
800,000 shares Series A Convertible Preferred Stock, convertible into
800,000 shares of common stock at $1.00 .............
4,000,002 shares common stock ...........
PALM HARBOR HOMES, INC.
7,855,121 shares common stock ...........
BALCO, INC.
445,000 shares common stock and 60,920 shares Class B non-voting
common stock
DENNIS TOOL COMPANY
20,725 shares 5% Convertible Preferred Stock, convertible into 20,725
shares of common stock at $48.25 per share .........
140,137 shares common stock ..............
DISCOVERY ALLIANCE, LLC
90.0% limited liability company .............
HUMAC COMPANY
1,041,000 shares of common stock ........
Total Control Investments
Affiliated Investments
ENCORE WIRE CORPORATION
4,086,750 shares of common stock ........
Amount of
Interest, Fees
or Dividends
Credited in
Income (2)
Fair Value at
March 31,
2009
Gross
Additions (3)
Gross
Reductions (4)
Fair Value at
March 31,
2010
$ 2,477,870
$ 107,200,000
$ 13,000,000
$ -
$ 120,200,000
500,000
71,000,000
-
649,467
36,000,000
11,500,000
-
-
71,000,000
47,500,000
717,872
22,642,400
19,812,100
-
42,454,500
-
-
-
13,975,965
5,869,905
-
19,845,870
2,500,000
12,300,000
-
-
(300,000)
(1,100,000)
2,200,000
11,200,000
46,972
9,818,902
3,000,000
(5,984,947)
6,833,955
-
6,600,000
1,400,000
-
8,000,000
-
33,333
999,981
2,868,000
-
-
(999,981)
(2,868,000)
-
-
-
450,000
300,000
-
750,000
4,800
$ 4,430,314
133,000
$ 286,488,248
30,000
$ 54,912,005
-
$ (11,252,928)
163,000
$ 330,147,325
$339,940
$65,388,000
$2,043,375
$ -
$67,431,375
37
Schedule of Investments in and Advances to Affiliates
SCHEDULE 12-14
Amount of
Interest, Fees
or Dividends
Credited in
Income (2)
Fair Value at
March 31,
2009
Gross
Additions (3)
Gross
Reductions (4)
Fair Value at
March 31,
2010
-
-
2
2,857,759
$(1,000,000)
$1,500
-
$1,000,000
-
$ -
1,300,000
$ -
1,300,000
Portfolio Company/Type of Investment (1)
Affiliated Investments (continued)
CMI HOLDING COMPANY, INC.
10% Convertible Promissory Note, due 2009 .........
10% Convertible Promissory Note, due 2013 .........
1,631,516 shares Series C-1 Convertible Preferred Stock, convertible into
1,631,516 shares of common stock at $2.15 per share ..
2,327,658 shares Series C-1 Convertible Preferred Stock, convertible into
2,327,658 shares of common stock at $1.72 per share ..
Warrants to purchase 109,012 shares of common stock at $1.72 per
share, expiring 2012
Warrants to purchase 636,151 shares of Series A-1 Convertible Preferred
Stock at $1.72 per share expiring 2017 and 2019
Warrants to purchase 90,698 shares of Series D or D-1 Convertible Pre-
ferred Stock at $1.72 per share expiring 2017
PALLETONE, INC.
12.3% Senior Subordinated Notes, $2,000,000 due 2012
150,000 shares of common stock
Warrant to purchase 15,294 shares of common stock at $1.00 per share,
expiring 2011
BOXX TECHNOLOGIES, INC.
3,125,354 shares Series B Convertible Preferred Stock, convertible
into 3,125,354 shares of common stock at $0.50 per share
WELLOGIX, INC.
4,788,371 shares Series A-1 Convertible Preferred Stock, convertible
into 4,788,371 shares of common stock at $1.0441 per share
Total Affiliated Investments
Total Control & Affiliated Investments
This schedule should be read in conjunction with the Company’s Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes
to Consolidated Financial Statements.
-
$(1,000,000)
$(12,252,928)
2
$73,589,142
$403,736,467
2
$66,388,010
$352,876,258
-
$ 8,201,132
$63,113,137
-
$ 341,440
$4,771,754
1,999,998
-
2,000,000
2
2,857,761
2
2
-
-
-
-
2
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1) The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.
(2) Represents the total amount of interest, fees and dividends, credited to income for the portion of the year an investment was included in the Control or Non-
Control/Non-Affiliate categories, respectively.
(3) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest, and
the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases
in unrealized depreciation as well as movement of an existing portfolio company into this category and out of a different category.
(4) Gross reductions included in decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities
for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the
movement of an existing portfolio company out of this category and into a different category.
38
Selected Per Share Data and Ratios
2010
Years Ended March
2008
2007
2009
2006
Per Share Data
Investment income ..................................................................................................................................
Operating expenses ................................................................................................................................
Interest expense ......................................................................................................................................
Income taxes ...........................................................................................................................................
$ 1.63 $ 3.74 $ 1.75
(.76)
-
(.03)
(.98)
-
(.03) (.04)
(1.04)
-
$ 1.79 $ 1.25
(.51)
(.11)
(.01)
(.57)
(.12)
(.01)
Net investment income ............................................................................................................................
Distributions from undistributed net investment income ...........................................................................
.56
(.80)
2.72
(3.28)
.96
(.60)
1.09
(.60)
.62
(.60)
Net realized gain (loss) net of tax ............................................................................................................
Net increase (decrease) in unrealized appreciation of investments .........................................................
Treasury stock repurchase *
Exercise of employee stock options ** ..................................................................................................... -
Stock option expense ..............................................................................................................................
Net change in pension plan funded status ...............................................................................................
Treasury Stock ........................................................................................................................................
Adjustment to initially apply FASB No. 158, net of tax .............................................................................
.18
.12
-
-
.22
18.88
2.87
(42.56)
.06
(36.76)
3.85
38.00
4.00
32.22
-
.13
(.39)
1.40
-
(.09)
.07
(.30)
-
-
(.49)
.04
-
-
.30
(.04)
-
-
-
-
Increase (decrease) in net asset value ....................................................................................................
19.16
(39.11)
(36.66)
42.19
36.20
Net asset value
Beginning of year .................................................................................................................................
110.98 150.09
186.75
144.56 108.36
End of year ..........................................................................................................................................
$130.14 $110.98 $150.09 $186.75 $144.56
Ratios and Supplemental Data
Ratio of operating expenses to average net assets .................................................................................
.71%
1.96%
Ratio of net investment income to average net assets .............................................................................
Portfolio turnover rate .............................................................................................................................. 1.16% 2.51%
.87%
.47%
.46%
.58%
.22%
.36%
.68%
.13%
.42%
.51%
2.36%
Net asset value total return ...................................................................................................................... 18.50% (22.56)% (19.27)% 29.85% 34.31%
Shares outstanding at end of period (000s omitted) ................................................................................
3,741
3,741
3,889
3,886
3,860
____________
* Net increase is due to purchases of common stock at prices less than beginning period net asset value.
**Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.
39
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Se-
curities Exchange Act of 1934 as a process designed by, or under the
supervision of the Company’s principal executive and principal financial
officers and effected by the Company’s Board of Directors, manage-
ment and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally ac-
cepted accounting principles and include those policies and procedures
that:
pertain to the maintenance of records that in reasonable detail accu-
rately and fairly reflect the transactions and dispositions of the as-
sets of the Company;
provide reasonable assurance that transactions are recorded as ne-
cessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and
provide reasonable assurance regarding prevention or timely detec-
tion of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial re-
porting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to risk
that controls may become inadequate because of changes in condi-
40
tions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management has assessed the effectiveness of our internal control
over financial reporting as of March 31, 2010. In making this assess-
ment, management used the criteria described in ―Internal Control-
Integrated Framework‖ issued by the Committee of Sponsoring Or-
ganizations of the Treadway Commission (COSO). Based on the re-
sults of this assessment, management (including our Chief Executive
Officer and our Chief Financial Officer) has concluded that, as of March
31, 2010, the Company’s internal control over financial reporting was
effective.
The effectiveness of the Company’s internal control over financial re-
porting has been audited by Grant Thornton LLP, the independent
registered public accounting firm, as stated in their report which ap-
pears on the next page of this Annual Report on Form 10-K.
Date: May 28, 2010
/s/ Gary L. Martin
Gary L. Martin
Chairman of the Board and President
/s/ Tracy L. Morris
Tracy L. Morris
Chief Financial Officer
(chief financial/accounting officer)
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Capital Southwest Corporation
We have audited Capital Southwest Corporation (a Texas Corpo-
ration) and subsidiaries’, (the ―Company‖) internal control over
financial reporting as of March 31, 2010, based on criteria estab-
lished in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commis-
sion (COSO). The Company’s management is responsible for main-
taining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over finan-
cial reporting 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 effective internal con-
trol over financial reporting was maintained in all material re-
spects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasona-
ble basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted ac-
counting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reason-
able assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with gen-
erally accepted accounting principles, and that receipts and ex-
penditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the fi-
nancial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projec-
tions of any evaluation of effectiveness to future periods are sub-
ject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of March 31,
2010, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of assets and liabilities of the Company as
of March 31, 2010 and 2009, including the schedule of invest-
ments as of March 31, 2010 and 2009, and the related consolidat-
ed statements of operations, changes in net assets and cash flows
for each of the three years in the period ended March 31, 2010,
and the selected per share data and ratios for each of the five
years in the period ended March 31, 2010, and our report dated
May 28, 2010 expressed an unqualified opinion and included ex-
planatory paragraphs regarding the Company’s adoption of ASC
820, ―Fair Value Measurements and Disclosures.‖
/s/Grant Thornton, LLP
Dallas, Texas
May 28, 2010
41
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Capital Southwest Corporation
We have audited the accompanying consolidated statements of
assets and liabilities of Capital Southwest Corporation (a Texas
Corporation) and subsidiaries (the ―Company‖) as of March 31,
2010 and 2009, including the schedule of investments as of
March 31, 2010 and 2009, and the related consolidated state-
ments of operations, changes in net assets, and cash flows for
each of the three years in the period ended March 31, 2010,
and the selected per share data and ratios for each of the five
years in the period ended March 31, 2010. Our audits of the
basic financial statements included the Schedule of Invest-
ments In and Advances to Affiliates. These financial state-
ments, per share data and ratios and financial statement sche-
dule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial state-
ments, per share data and ratios and financial statement sche-
dule 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 finan-
cial statements and selected per share data and ratios 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, 2010 and 2009, and confirmation of securities not held by
the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
42
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 financial position of Capital
Southwest Corporation and subsidiaries as of March 31, 2010
and 2009, and the results of their operations, changes in their
net assets, and their cash flows for each of the three years in
the period ended March 31, 2010, and the selected per share
data and ratios for each of the five years in the period ended
March 31, 2010, in conformity with accounting principles gen-
erally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when consi-
dered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information
set forth therein.
As discussed in Note 2 to the accompanying consolidated fi-
nancial statements, effective April 1, 2008, the Company
adopted Accounting Standard Codification (ASC) 820, ―Fair
Value Measurements and Disclosures.‖
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Capital Southwest Corporation and subsidiaries’ internal con-
trol over financial reporting as of March 31, 2010, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated May 28,
2010, expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
Dallas, Texas
May 28, 2010
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 in
net assets from operations‖ and consists of three elements. The first
is ―Net investment income,‖ which is the difference between the Com-
pany’s income from interest, dividends and fees and its combined op-
erating 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 port-
folio securities and their stated cost, net of applicable income tax ex-
pense based on the Company’s tax year. The third element is the ―Net
increase in unrealized appreciation of investments,‖ which is the net
change in the market or fair value of the Company’s investment port-
folio, compared with stated cost. It should be noted that the ―Net rea-
lized gain (loss) on investments‖ and ―Net increase in unrealized ap-
preciation of investments‖ are directly related in that when an appre-
ciated portfolio security is sold to realize a gain, a corresponding de-
crease in net unrealized appreciation occurs by transferring the gain
associated with the transaction from being ―unrealized‖ to being ―rea-
lized.‖ 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 Com-
pany 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
$19,618 in 2010, $381,498 in 2009 and $1,421,048 in 2008. The
Company also receives management fees primarily from its controlled
affiliates which aggregated $984,800 in 2010, $984,800 in 2009 and
$784,800 in 2008. During the three years ended March 31, 2010, the
Company recorded dividend income from the following sources:
Years Ended March 31
2010
2009 2008
Alamo Group Inc. ................................... $ 679,272 $ 679,272 $ 678,732
Balco, Inc. ...............................................
-
-
224,400
Dennis Tool Company ..............................
33,333
49,499
62,499
Encore Wire Corporation ..........................
326,940
326,940
326,940
Heelys, Inc. .............................................
Kimberly–Clark Corporation ......................
Lifemark Group .......................................
PalletOne, Inc. .........................................
-
-
-
-
9,317,310
89,529
-
-
-
167,481
571,333
-
The RectorSeal Corporation ...................... 2,117,870
720,000
1,154,133
Sprint Nextel Corporation .........................
-
-
TCI Holdings, Inc. ....................................
81,270
81,270
6,750
81,270
The Whitmore Manufacturing Company ....
529,467
180,000
288,533
Other...................................................... 20,528
89,558
94,762
$3,788,680 $11,533,878 $3,656,833
Total operating expenses, increased by $238,007 or 6.5% during
the year ended March 31, 2010. While, total operating expenses, in-
creased by $697,177 or 23.5% during the year ended March 31,
2009. Due to the nature of its business, the majority of the Compa-
ny’s operating expenses are related to employee and director compen-
sation, office expenses, legal, professional and accounting fees and the
net pension benefit.
43
Net Realized Gain (Loss) on Investments
Net realized gain on investments was $1,639,994 (after income tax
expense of $814,503) during the year ended March 31, 2010, com-
pared with a gain of $10,756,302 (after income tax expense of
$5,222,964) during 2009 and a gain of $240,024 during 2008. Man-
agement does not attempt to maintain a comparable level of realized
gains from year to year, but instead attempts to maximize total in-
vestment 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 in-
crease in unrealized appreciation of investments of $70,624,231, in
2010 and a decrease of $159,247,203, in 2009 and a decrease of
$142,969,698 in 2008. As explained in the first paragraph of this dis-
cussion and analysis, the realization of gains or losses results in a cor-
responding decrease or increase in unrealized appreciation of invest-
ments. Set forth in the following table are the significant increases and
decreases in unrealized appreciation 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
2010
2009
2008
Alamo Group Inc. ........................ $19,812,100 $(22,642,400) $(2,803,090)
5,600,000
All Components, Inc. .................... 9,276,649
(9,600,000)
14,303,625 (18,390,625)
Encore Wire Corporation ............... 2,043,375
Heelys, Inc. .................................. 5,869,905
(20,963,948) (160,724,088)
The Whitmore Manufacturing
Company ................................... 11,500,000
-
Lifemark Group ............................
Media Recovery, Inc. .................... (1,400,000)
Palm Harbor Homes, Inc. .............. (2,984,947)
The RectorSeal Corporation ........... 13,000,000
44
(2,000,000) 12,000,000
- 31,000,000
(22,700,000)
(7,500,000)
(21,601,583) (39,275,516)
(37,000,000) 46,200,000
As shown in the table for the year ended March 31, 2010, we sus-
tained significant increases in several of our largest investments. The
largest increases in unrealized appreciation are attributable to Alamo
Group, Inc., which increased $19,812,100; Heelys, Inc., which in-
creased $5,869,905; Encore Wire Corporation, which increased
$2,043,375, all due to an increase in their respective stock prices; as
well as All Components, Inc., which increased $9,726,649 as a result
of debt reduction on its senior credit facility. The $13,000,000 increase
in The RectorSeal Corporation was primarily attributable to the impact
of increased valuations of companies operating within their respective
sector. The $11,500,000 increase in The Whitmore Manufacturing
Company was attributable to improved earnings. Offsetting these
increases were Media Recovery, Inc., which decreased $1,400,000 due
to slowdowns in certain segments of their business; and Palm Harbor
Homes, Inc., which decreased $2,984,947, due to a reduction in their
stock price.
A description of the investments listed above and other material
components of the investment portfolio are included elsewhere in this
report under the caption ―Consolidated Schedule of Investments –
March 31, 2010 and 2009.‖
Portfolio Investments
During the year ended March 31, 2010, the Company invested
$17,234,456 in various portfolio securities listed elsewhere in this re-
port under the caption ―Portfolio Changes During the Year,‖ which also
lists dispositions of portfolio securities. During the 2009 and 2008
fiscal years, the Company invested a total of $13,030,107 and
$10,733,536, respectively.
Financial Liquidity and Capital Resources
At March 31, 2010, the Company had cash and cash equivalents of
approximately $4.1 million. Pursuant to the Small Business Adminis-
tration (―SBA‖) regulations, cash and cash equivalents of $2.7 million
held by CSVC may not be transferred or advanced to CSC without the
consent of the SBA.
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 41 years. Retention of future gains is viewed
as an important source of funds to sustain the Company’s investment
activity. Approximately $21.0 million of the Company’s investment
portfolio is represented by unrestricted publicly traded securities and
represent a source of liquidity.
Funds to be used by the Company for operating or investment pur-
poses may be transferred in the form of dividends, management fees
or loans from Lifemark Group, The RectorSeal Corporation and The
Whitmore Manufacturing Company, controlled affiliates of the Compa-
ny, to the extent of their available cash reserves and borrowing capaci-
ties.
Management believes that the Company’s cash and cash equiva-
lents and cash available from other sources described above are ade-
quate to meet its expected requirements. Consistent with the long-
term strategy of the Company, the disposition of investments from
time to time may also be an important source of funds for future in-
vestment activities.
Contractual Obligations
As shown below, the Company had the following contractual obliga-
tions as of March 31, 2010. For information on our capital commit-
ments see Note 8 of the Consolidated Financial Statements.
Payments Due By Period ($ in Thousands)
1 Year
Contractual Obligations Total
Operating lease obligations $312
$101
Total $312 $101
2-3
Years
$202
$202
More Than
3 Years
$9
$9
Critical Accounting Policies
Valuation of Investments
In accordance with the Investment Company Act of 1940, invest-
ments in unrestricted securities (freely marketable securities having
readily available market quotations) are valued at market and invest-
ments 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 Com-
pany, unrestricted securities are valued at the closing sale price for
NYSE 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 con-
sidered 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 determin-
ing 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 se-
curities, 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.
Impact of Inflation
The Company does not believe that its business is materially af-
fected by inflation, other than the impact which inflation may have on
the securities markets, the valuations of business enterprises and the
45
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 compa-
ny due to the nature of the company’s investment portfolio. Accor-
dingly 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 re-
strictions 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 share-
holders of the Company from achieving price appreciation and divi-
dend distributions.
46
Selected Consolidated Financial Data
(all figures in thousands except per share data)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Financial Position (as of March 31)
Investments at cost..................................... $ 87,602
Unrealized appreciation .............................. 228,316
Investments at market or
fair value ................................................. 315,918
Total assets ................................................ 322,668
Notes payable * ..........................................
16,000
Net assets .................................................. 303,436
3,815
Shares outstanding.....................................
$ 82,194 $ 91,462 $ 97,283 $ 84,546 $ 88,597 $ 71,642 $ 81,027 $ 89,339 $ 100,023
377,920
461,831
265,287 195,598
309,666 337,476
609,513 466,544
307,296
347,481 287,060
406,949 422,022
357,183 298,490 423,979 434,384
13,000
339,891 272,211 400,157 417,947
3,857
23,000
20,500
14,000
3,857
3,829
3,829
550,428
569,368
8,000
558,036
3,860
681,155 547,571
729,507 586,685
-
725,732 583,700
3,889
3,886
-
396,635
417,543
-
415,263
3,741
477,943
491,175
-
486,926
3,741
Changes in Net Assets (years ended March 31)
Net investment income ............................... $ 1,723 $ 2,042 $ 2,299 $ 2,587 $ 2,406 $ 2,389 $ 4,233 $ 3,715 $ 10,183
2,091
Net realized gain (loss) on
investments ............................................
(5,126)
(762)
2,007
12,603
(10,112)
15,451
14,966
240
10,756
826
Net increase (decrease) in
unrealized appreciation
before distributions ................................. (10,311) 36,971 (69,689) 114,068 27,810
Increase (decrease) in net
assets from operations
before distributions .................................
Cash dividends paid ...................................
Employee stock options
exercised ................................................
-
Stock option expense ................................. -
Change in pension plan
499 -
997 -
- - - -
(65,383) 129,258
(2,309)
(13,714)
(2,289)
38,251
(2,295)
20,104
(2,314)
(2,297)
124,355
147,682 (142,969) (159,246)
70,624
142,195
(2,314)
166,881 (139,014)
(2,333)
(2,323)
(138,307)
(12,257)
73,541
(2,993)
208
231
- 169 263
1,795
-
503
-
675
440
-
funded status ..........................................
Treasury stock ............................................
Adjustment to initially apply FASB
Statement No. 158, net of tax ..
Increase (decrease) in net assets
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,178)
-
(1,473)
(16,903)
-
(16,003)
- -
(67,680) 127,946
- -
17,790
-
140,089
1,173 - -
167,695 (142,031) (168,437)
-
71,663
36,455
Per Share Data (as of March 31)
Net assets .................................................. $ 79.54
65.00
Closing market price ...................................
$ 88.77 $ 71.09 $ 103.75 $ 108.36 $ 144.56 $ 186.75 $ 150.09
123.72
79.10
153.67
48.15
95.50
75.47
68.75
$110.98
76.39
$130.14
90.88
Cash dividends paid ...................................
.60
.60
.60
.60
.60
.60
.60
.60
3.26
.80
Excludes quarter-end borrowing which is repaid on the first business day after year end.
47
Stock Transfer Agent
April 1, 2008 are as follows:
Shareholder Information
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, 2010. This total does not include an estimated
4,000 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 Global 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
March 31, 2010 ..........................................................
December 31, 2009 ....................................................
September 30, 2009 ...................................................
June 30, 2009 ............................................................
High
Low
$96.04 $78.51
71.72
79.95
69.60
82.90
67.60
84.21
Quarter Ended
March 31, 2009 ..........................................................
December 31, 2008 ....................................................
September 30, 2008 ...................................................
June 30, 2008 ............................................................
High
Low
$109.66 $53.57
141.50
60.52
146.81 102.02
128.99 103.67
Dividends
The payment dates and amounts of cash dividends per share since
48
Payment Date
May 30, 2008 ............................................................................
October 31, 2008 ......................................................................
November 28, 2008 ...................................................................
December 26, 2008 ...................................................................
May 29, 2009 ............................................................................
November 30, 2009 ...................................................................
Cash Dividend
$0.40
0.30
0.40
2.16
0.40
0.40
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 share-
holders of record who own a minimum of 25 shares. The Company
pays all costs of administration of the Plan except brokerage transac-
tion 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 Corpora-
tion will be held on Monday, July 19, 2010, at 10:00 a.m. in the North
Dallas Bank Tower Meeting Room (second floor), 12900 Preston Road,
Dallas, Texas 75230.
Dividend Reinvestment Plan – Questions and Answers
What are the benefits of joining the Plan?
• As a participant in the Automatic Dividend Reinvestment and Op-
tional Cash Contribution Plan, your dividends are reinvested and you
may make cash contributions of $100 to $10,000 in any month to
purchase additional shares of Capital Southwest Corporation stock
for your plan account.
• Because purchases are made on a pooled basis, transaction costs
should be less than those associated with individual purchases of
small numbers of shares.
Who is eligible to join?
Only holders of record of 25 or more shares are eligible. If your shares
are held in the name of a broker or other nominee, you must instruct
your broker or nominee to register the shares directly in your name.
Is there any cost to participate in the Plan?
You pay only your share of transaction costs, which are included in the
price of purchased shares. Capital Southwest pays all costs of admin-
istration.
How does the automatic dividend reinvestment feature work?
The Plan, available to all shareholders of record of 25 or more shares,
provides a convenient way to acquire additional shares. After you join,
cash dividends on your shares (including shares you hold and shares
in your plan account), or on a lesser number of shares you may speci-
fy, will automatically be reinvested by American Stock Transfer & Trust
Company as your agent.
May I deposit Shares for safekeeping?
Although not required, you may deposit share certificates registered in
your name for addition to your plan account. The agent will automati-
cally reinvest dividends on all shares in your plan account.
How does the optional cash contribution feature work?
To make voluntary cash purchases, you first must join the Plan and
participate in the automatic dividend reinvestment feature. Contribu-
tions for voluntary cash purchases of $100 to $10,000 in any month
can then be made by sending a check to the agent, together with the
remittance form which accompanies each plan account statement.
Contributions can also be made by completing an automatic cash
withdrawal authorization form, enabling you to make regular monthly
purchases with funds transferred from your bank account.
What statements will I receive?
Each time shares are purchased, you will receive a statement showing
the total shares in your plan account, the amount of the latest rein-
vested dividend or optional cash contribution, the number of shares
purchased and the price per share.
How is information reported for income tax purposes?
Reinvested dividends are subject to income tax to the same extent as
if received in cash. You will receive a Form 1099 information return
regarding the Federal income tax status of all dividends paid during
the year.
How would I terminate my participation in the Plan?
You may terminate your participation at any time by giving notice to
the agent. Upon termination, you will receive a certificate for the
number of shares then held in your plan account, plus a check for any
fractional share interest.
How do I join the Plan?
Call Capital Southwest at (972) 233-8242 for a plan brochure and au-
thorization form. Then, sign and return the authorization form to
American Stock Transfer & Trust Company, Dividend Reinvestment
Dept., P.O. Box 922 Wall Street Station, New York, NY 10269-0560.
Your name or names should be signed as they appear on your stock
certificates. You may register all of your shares in the Plan or such
lesser number of shares (a minimum of 25) as you indicate.
49
Federal Income Tax Information
For Shareholders on December 31, 2009
Capital Southwest Corporation (―CSC‖) elected to retain the taxable
net long-term capital gains realized during its taxable year ended De-
cember 31, 2009, and pay the applicable Federal income tax, as
shown below on a per share basis.
Nominees who received Form 2439 were required to issue a sup-
plemental Form 2439 to beneficial owners at December 31, 2008. If
you owned shares of CSC which were held in the name of a broker or
other nominee and have not received a supplemental Form 2439, you
should request Form 2439 from the record holder to substantiate the
available 2009 tax benefits.
Net long-term capital gains retained
Federal income tax paid
$0.622 per share
$0.2177 per share
For Shareholders from 1968 through 2008
In accordance with the Internal Revenue Code, shareholders of
record on December 31, 2009 were required to include their pro rata
portion ($0.622 per share) of these gains on Schedule D of their 2009
Federal tax returns and are entitled to a credit for, or a refund of, their
pro rata portion ($0.2177 per share) of the Federal income tax paid by
CSC. This payment will ordinarily exceed the corresponding tax liabili-
ty and result in a net credit or refund.
Each shareholder is deemed to have reinvested the amount con-
structively distributed (less the tax), and accordingly is entitled to in-
crease the cost basis of his shares by $0.4043 per share. This will
reduce the future tax liability when those shares of CSC are sold.
Internal Revenue Service Form 2439 was mailed to all shareholders
of record on December 31, 2009 setting forth the specific amounts to
be included in each shareholder’s 2009 tax return. This form was ac-
companied by a detailed instruction letter entitled ―Important Tax In-
formation‖ dated January 29, 2010, which contained tax information
applicable to all shareholders. This instruction letter also described the
procedure to be used by tax-exempt shareholders such as pension
trusts and individual retirement accounts to obtain a cash refund of
$0.2177 per share by filing IRS Form 990-T.
50
In certain years from 1968 through 2009, CSC made elections to
retain taxable net long-term capital gains. The table below shows the
record dates for all years for which CSC made such elections and the
per share amounts of the retained long-term capital gains, the Federal
income taxes paid and the amounts by which shareholders on each
record date are entitled to increase the tax basis of each share (ad-
justed for stock splits in 1976, 1981 and 1987):
Record date
March 31, 1968
March 31, 1969
March 31, 1970
March 31, 1983
March 31, 1984
March 31, 1985
December 31, 1986
December 31, 1989
December 31, 1991
December 31, 1992
December 31, 1996
December 31, 1997
December 31, 1998
December 31, 1999
December 31, 2005
December 31, 2006
December 31, 2008
December 31, 2009
Retained
capital gains
per share
$0.5041
0.3102
0.2366
1.2106
0.1797
0.3469
3.2523
3.2378
5.9375
2.0823
4.7546
4.9821
0.2001
3.0474
3.5761
8.1469
3.9883
0.6220
Federal income
taxes paid
per share
$0.1292
0.0852
0.0662
0.3390
0.0503
0.0971
0.9106
1.1008
2.0187
0.7080
1.6641
1.7437
0.0700
1.0666
1.2516
2.8514
1.3959
0.2177
Increase in
tax basis
per share
$0.3749
0.2250
0.1704
0.8716
0.1294
0.2498
2.3417
2.1370
3.9188
1.3743
3.0905
3.2384
0.1301
1.9808
2.3245
5.2955
2.5924
0.4043
Professionals
Gary L. Martin, Chairman of the Board and President, joined Capital
Southwest in 1972 and served as Chief Financial Officer, subsequently
serving as Vice President and Secretary-Treasurer. From 1979 to
2007, he served as President and Chief Executive Officer of The Whit-
more Manufacturing Company, a portfolio company of Capital South-
west. His previous experience included a financial management posi-
tion within the commercial development industry. He earned a BBA
degree from the University of Oklahoma.
William M. Ashbaugh, Senior Vice President, joined Capital South-
west in 2001. Previously, he served as Managing Director in the cor-
porate finance departments of Hoak Breedlove Wesneski & Co., Prin-
cipal Financial Securities, Inc. and Southwest Securities and as First
Vice President, Corporate Finance, with Rauscher Pierce Refsnes (now
RBC Dain Rauscher). His experience includes direction of public offer-
ings, private placements and merger and acquisition transactions. He
holds an MBA summa cum laude from The University of Texas at Aus-
tin and a BS summa cum laude from Texas A&M University.
Marquez D. Bela, Vice President, joined Capital Southwest in 2010.
Previously, he served as Managing Member of Covalent Capital, a pri-
vate equity firm focused on early stage to mid-size companies. Prior
to Covalent Capital, he was with SKM Growth Investors, an affiliate of
Saunders Karp and Megrue, a $1.5 billion equity fund. His previous
experience includes operational consulting and investment banking
with Goldman Sach’s high technology practice. He graduated from the
University of Texas at Austin, where he received a B.A. from the Plan
II Honors Program and a B.B.A in finance from the Business Honors
Program.
Glenn M. Neblett, Vice President, joined Capital Southwest in 2010.
Previously, he served as Director in the corporate finance and financial
sponsors groups at Houlihan Lokey, where he advised clients in mer-
gers and acquisitions, private placements and restructurings. He holds
undergraduate and graduate degrees from Baylor University, and is a
Chartered Financial Analyst and Certified Public Accountant.
Ray D. Schwertner, Vice President, joined Capital Southwest in
2009. Previously, he served as President and Chief Executive
Officer of The Whitmore Manufacturing Company, a portfolio
company of Capital Southwest, from 2007 to 2009 and as
Secretary-Treasurer from 1990 to 2007. His previous
experience included a financial management position in the
manufacturing industry and in public accounting. He earned a
BBA degree from Angelo State University and is a Certified
Public Accountant.
Tracy L. Morris, Chief Financial Officer, Chief Compliance Officer and
Corporate Secretary, joined Capital Southwest in 2007. Previously,
she served as Controller of Best Merchant Partners, LP and Silverleaf
Resorts, Inc. She received a BS degree from Millersville University of
Pennsylvania and is a Certified Public Accountant.
William R. Thomas III, Assistant Vice President, joined Capital
Southwest in 2006. Previously, Will served as a U.S. Air Force officer
in varied positions including chief pilot of an airlift group, director of
logistics operations and chief of aircraft development contracts. He
has also served as a consultant for Investor Group Services, where he
analyzed potential investments in mid-market companies. He has an
MBA from Harvard Business School and a BS in engineering sciences
from the U.S. Air Force Academy.
51