Capital Southwest
Annual Report 2011

Plain-text annual report

A n n u A l R e p o R t M A R c h 31, 2 011 Capital Southwest is a publicly-owned business development company with net assets at March 31, 2011 of $539,233,139. Our investment approach allows us to achieve capital appreciation through long-term investments in exceptional businesses. Since our formation in 1961, we have sought to invest in companies with strong management teams and sound financial performance. As a public company we are never between funds—we have no exit deadlines. We have a history of holding our position for decades, enabling companies to achieve their full potential. In addition to capital, we provide our portfolio companies services to ensure success including best practices resources and guidance, active board representation, corporate finance strategy and experienced advice when needed. 50 Y e A R s o f A p p l Y i n g s t R o n g VA l u e c R e A t i o n p R i n c i p l e s B oa r d of D i r e c t or s B oa r d of D i r e c t or s Henry D. Akin, Jr. I. Frank Betts Donald W. Burton O. E. Clift Charles B. Cooney Wilton J. Daniel Melvin L. Decker Cam F. Dowell, Jr. M. H. Earp Murray Fasken J. D. Francis Joe Kirk Fulton James B. Gardner 1963–1966 1961–1972 2007–present 1964–1966 1961–1966 1961–1972 1961–1988 1961 1966 1961–1964 1966–1975 1963–1965 1973–1975 1961–1963 Lewis Grinnan, Jr. Graeme W. Henderson 1963–1964, 1976–present Derrell Henry Joseph F. Irvin Weldon M. Jones Lewis Kayton R. Crosby Kemper Alfred J. Knapp Theo Lamb Samuel B. Ligon Gary L. Martin H. Albert McEvoy Charles P. McGaha 1961–1965 1961–1966 1961–1965 1961–1966 1970 1961–1966 1961–1964 2004–present 1989–present 1961–1964 1961–1972 1961 Founded on Strong Principles Company started by 21 banks and 8 individual investors; licensed as a Small Business Investment Company. First and only public offering in July 1961 gives Company near $15 million in assets. 1971 Wider Exposure Capital Southwest becomes a NASDAQ listed company, joining the first electronic stock exchange in the world. 1976 and 1977 Building Net Asset Value Two Company-sponsored cash tender offers to all shareholders at less than the existing Net Asset Value contracted total shareholders’ equity and notably changed owner- ship dynamics. Resulting 1968 Structured for Success Company qualifies as a Regulated Investment Company avoiding double taxation on distribution of dividends. 1976 Employees as Owners Adoption of Employee Stock Ownership Plan for Company and certain affiliates; ESOP currently holds 4.9% of outstanding stock. B oa r d of D i r e c t or s B oa r d Ch a i r m e n William B. Munson III 1961–1975 Michaux Nash 1961–1970 1981–2003 James M. Nolan Clifford J. Osborn 1961–1988 Virgil P. Patterson 1961–1980 Harlan Ray 1961–1967 James P. Simmons 1961–1966 M. E. Singleton, Jr. 1961–1972 Carroll R. Spearman 1961–1962 William R. Thomas 1973–2008 1961–1962 Dr. D. M. Wiggins 1989–present John H. Wilson Don Wooten 1961–1966 Cam F. Dowell, Jr. Harlan Ray M. E. Singleton, Jr. Clifford J. Osborn William R. Thomas Gary L. Martin P r e s i de n t s Harlan Ray M. E. Singleton, Jr. Clifford J. Osborn William R. Thomas Gary L. Martin 1961 1962–1966 1967–1972 1973–1982 1983–2008 2009–present 1961–1962 1963–1966, 1968–1971 1967, 1972–1980 1981–2007 2008–present Net Asset Value increased by 49.5% per share in 1976 and 8.1% in 1977. A two- for-one stock dividend also repositioned the total shares outstanding. 1986 Proof of Concept Company reaches Net Asset Value of $50 million. Capital appreciation achieved through wise investing in promising companies. 2006 Helping Businesses Grow Company reaches Net Asset Value of $500 million. Our long-term perspective has allowed businesses to steadily build value over time. 2011 Celebrating the Past and Looking to the Future Company celebrates 50 years as a business development company. 1992 Making the Right Investments Company reaches Net Asset Value of $100 million, a reflection of the steady growth and development of our portfolio companies. 2007 More Than Money Named one of America’s 100 Most Trustworthy Companies from a field of more than 8,000 publicly- traded companies. to o u R s h A R e h o l d e R s As Capital Southwest passes the 50-year mark, it causes one to pause and reflect. We recently reviewed archived reports, reference materials and good memories as we compared the Capital Southwest of 1961 to the Capital Southwest of 2011. While today’s business topics such as social networking, hackers, and massive government bailouts are different than issues addressed in 1961, the fundamentals of a solid business which include strategic leadership, strong ethics, and astute governance remain unchanged. As we have reviewed our first 50 years, four key drivers of our success emerge. Our clear sense is that these same fundamentals will be just as important in the second 50 years. Shareholders’ Trust Beginning with the founding 21 banks and 8 individual investors who capitalized the Company on April 19, 1961, we have learned to appreciate and respect the trust our share- holders have placed in the directors, officers, managers and staff of Capital Southwest Corporation. Although the shareholder ranks have grown to over 3,300 individuals and scores of organized funds, their long-term mutual objectives for superior capital growth remain unchanged and have guided our 50-year mission. Professional Staff Capital Southwest’s first 50 years of growth has been accomplished by a total of 5 presi- dents, 24 investment staff, 11 financial staff, and 10 administrative staff. We are thankful for the inspired legacy forged by those before us and are pleased to be part of the ongoing history that will continue into subsequent periods. Fifty years of success provides a sound footing for the future. Portfolio Companies The catalyst for success in venture capital investing is the creativity and drive of inspired owners and managers at each of our portfolio companies. We have sought to identify those remarkable entrepreneurs and fortify their dreams with appropriate measures of capital and counsel, mirroring the encouraging attitude of our own shareholders. Our portfolio companies’ success is our success. Their pain is our pain. Capitalistic Environment As we survey the thrust of comments intended to sway public opinions toward different political initiatives, we are reminded that lawmakers who understand the funda mentals of property rights and reward hard-earned growth are our champions. On the contrary, lawmakers who knowingly harvest more than they plant or fail to protect those who create growth are counterproductive over the long haul. We are privileged to operate in a state and nation that honors competent risk taking and respects both the positive and negative outcomes of those endeavors. Gary L. Martin Chairman of the Board and President June 10, 2011 c A p i t A l s o u t h w e s t • 2 011 A n n u A l R e p o R t 1 f i n A n c i A l h i g h l i g h t s Net Asset Value at March 31, 2011 was $539,233,139 equivalent to $143.68 per share. Comparative annual data is summarized below: Net assets Shares outstanding Net assets per share March 31, 2011 March 31, 2010 $539,233,139 3,753,038 $143.68 $486,925,586 3,741,638 $130.14 Assuming reinvestment of all dividends and tax credits on retained long-term capital gains, the March 31, 2011 net asset value was 18.5% greater than the March 31, 2010 net asset value of $130.14 per share. During the year ended March 31, 2011, investments classified as Controlled Affiliates increased $51,033,905 (excluding Lifemark Group) in net unrealized appreciation, represent- ing a 19.7% increase in this investment category. The Major Publicly Traded Investments category experienced a net increase in appreciation of $26,629,559, representing a 19.5% increase over prior year. These two categories combined represent 97.8% of the total increase in unrealized appreciation of $79,478,132 (excluding Lifemark Group). March 31, 2011 March 31, 2010 Market Value % of Total Investments Market Value % of Total Investments Controlled Affiliates (mainly) The RectorSeal Corporation Lifemark Group The Whitmore Manufacturing Co. Media Recovery, Inc. Major Publicly Traded Investments Encore Wire Corporation Alamo Group, Inc. Heelys, Inc. Palm Harbor Homes, Inc. Venture Capital Assets Marketable Securities Total $144,700,000 — 55,600,000 18,100,000 81,735,000 62,266,600 19,193,659 — 80,923,650 26,753,746 $489,272,655 29.5 0.0 11.4 3.7 16.7 12.7 3.9 0.0 16.5 5.5 100.0 $120,200,000 71,000,000 47,500,000 13,400,000 67,431,375 42,454,500 19,845,870 6,833,955 68,262,428 21,014,929 $477,943,057 25.1 14.9 9.9 2.8 14.1 8.9 4.2 1.4 14.3 4.4 100.0 In addition to a complete list of our investments, this report includes a description of our twelve largest holdings (see pages 6 through 8). These twelve investments had a combined cost of $39,531,622 and a combined value of $449,334,689, representing 91.8% of the value of our investment portfolio at March 31, 2011. 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 compa- nies 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: Period Ended March 31, 2011 Capital Southwest* S&P 500 Stock Index** 5 years 10 years 3.1% 8.4% 2.3% 1.4% * 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. 2 c e l e b R A t i n g o u R 5 0 t h A n n i V e R s A R Y 200 200 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 200 180 160 140 120 100 80 60 40 20 0 p e R f o R M A n c e h i s t o R Y p e R s h A R e M a r c h 31, 2 0 01 – M a r c h 31, 2 011 $200 180 160 140 120 100 80 60 40 20 0 Net Asset Value Market Price 2001 79.54 65.00 2002 88.77 68.75 2003 71.09 48.15 2004 103.75 2005 108.36 2006 144.56 2007 186.75 2008 150.09 2009 110.98 2010 130.14 2011 143.68 75.74 79.10 95.50 153.67 123.72 76.39 90.88 91.53 A total of $17,136,824 was invested during the twelve months ended March 31, 2011 including $9,455,958 in new holdings and $7,680,866 in existing holdings. New venture investments include: » CapStar Holdings Corporation—$3,703,619. CapStar was incor porated in May 2010 to acquire, hold and manage certain real estate and other assets effectively retained by Capital Southwest Corporation upon the sale of our stock in Lifemark Group to NorthStar Memorial Group, LLC in June 2010. Our investment is in the form of common stock representing ownership of 100% of CapStar. » Phi Health, Inc.—$5,752,339. Phi was formed in January 2011 as a new corporate entity to hold and manage the assets of CMI Holding Company, Inc., which was reorganized through a friendly foreclosure. In addition to the $2,839,088 of cash invested, Capital Southwest converted $2,913,251 of notes formerly held by CMI Holding Company, Inc. into convertible preferred stock in Phi Health, Inc. The investment is in the form of convertible preferred stock representing a fully diluted potential ownership of 67% of Phi. Additions to existing investments include contracted capital calls from Ballast Point Ventures II, LP in the amount of $525,000; BankCap Partners Fund I, LP for $248,433; Cinatra Clean Technologies, Inc. for $3,408,415; CMI Holding Company, Inc. for $2,263,251; Discovery Alliance, LLC for $150,000; iMemories, Inc. for $1,000,000 and Via Holdings, Inc. for $85,767. Future commitments in existing holdings, subject to specific conditions are $1,800,000 for Ballast Point Ventures II, LP; $237,730 for BankCap Partners Fund I, LP; $1,270,000 for CapitalSouth Partners Fund III, LP; $3,500,000 for CapStar Holdings Corporation; $95,239 for Cinatra Clean Technologies, Inc.; $486,900 for Sterling Group Partners, LP; and $3,200,000 for Trax Holdings, Inc. Lifemark Group During the year ended March 31, 2011, we sold all of our shares of common stock of Lifemark Group to NorthStar Memorial Group, LLC generating cash proceeds of $74,822,145 and $3,703,619 of real estate and assets, which were directly transferred to the aforemen- tioned CapStar Holdings Corporation. With a cost basis of $4,510,400, Lifemark Group had been part of our portfolio since 1966. c A p i t A l s o u t h w e s t • 2 011 A n n u A l R e p o R t 3 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Capital Southwest staff—committed to growing your investment. d i f f e R e n t i A t e d A p p R o A c h We have a history of holding non-control positions for decades. Most of our initial investments are minority positions; however, we have attained majority ownership of several businesses as co-investors (and some managers) desired liquidity. Capital Southwest Typical PE Firm Holding Period (Avg.) 20 Years 5–7 Years Ownership 20%–45% 51%–100% Follow-On Financing? Yes Depends on Fund Stage As a perpetual concern, we are never between funds and are able to provide subsequent growth capital to companies. As a public company, we are open-minded about the timing of exiting our investments. When significant growth is on the horizon, selling may not be wise. M o R e th A n M o n e Y In addition to capital, we provide our portfolio companies many services to ensure success: » Active board representation » Transitional leadership and executive recruiting » Attention and experienced advice » Corporate finance strategy and modeling » Acquisition sourcing, advisory, due diligence and negotiation 4 c e l e b R A t i n g o u R 5 0 t h A n n i V e R s A R Y th e s u c c e s s c u R V e ™ The S-curve…Every Company’s Reality » Over time companies and products transition from start up, to growth, to maturity and decline, and eventually to obsolescence. » Why do some companies fail to achieve their potential, resulting in significant lost value? » Reasons include: An incomplete man- agement team; inadequate capitaliza- tion; innovation from competitors. » Capital Southwest often makes its initial investment to empower management to pursue a company’s initial growth opportunity. Reinvent the Business » “Organizations should assume that their present strategies will need to be replaced within 2 or 3 years and that product life cycles are shorter than they were” (Age of Paradox, John Handy). » S-curve management requires that an organization embrace change and innovation. » Great, enduring companies have multiple S-curves. » We refer to the process of partnering with management to generate a series of innovation opportunities as “The Success Curve”™. CSC—Catalyst for The Success Curve™ » Most private investors that fund a com- pany at point “A” will be planning to exit at “B” or “C,” not to reinvest in the next S-curve. » This exit mindset often causes the H T W O R G H T W O R G H T W O R G Start Up Growth Maturity Decline Lost Value CSC Investment T I M E Start Up Growth Maturity Decline Innovation Opportunity T I M E Start Up Growth Maturity Decline Typical Fund Investment Time Frame C B interests of management and investors to diverge. A » We provide patient capital that is not tied to the typical pre-determined 5- to 7-year exit. » We partner with management to help a company achieve its potential. » Our interest is aligned with management teams that desire to build exceptional businesses over time. CSC Investments T I M E c A p i t A l s o u t h w e s t • 2 011 A n n u A l R e p o R t 5 tw e l V e l A R g e s t i n V e s t M e n t s March 31, 2011 $144,700,000 The RectorSeal Corporation (Houston, TX) manufactures specialty chemical products and control devices for plumbing, HVAC, electrical and industrial applications. Its subsidiaries include: Blue Magic, Inc., a producer of branded automo- tive and household chemical products; Jet-Lube, Inc., manufacturer of specialty lubricants and other products used in industrial and oil field applica- tions; and Smoke Guard, Inc., producer of sys- tems for containing smoke from building fires. RectorSeal also owns a 20% equity interest in The Whitmore Manufacturing Company. During the year ended March 31, 2011, RectorSeal earned $6,405,000 on revenues of $113,300,000, compared with earnings of $9,571,000 on revenues of $102,075,000 in the previous year. RectorSeal’s earnings do not reflect its 20% equity in The Whitmore Manufacturing Company. At March 31, 2011, Capital Southwest owned 100% of RectorSeal’s common stock having a cost of $52,600 and a value of $144,700,000. Value includes RectorSeal’s 20% equity interest in The Whitmore Manufacturing Company. $81,735,000 Encore Wire Corporation (McKinney, TX) man- ufactures 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, commer- cial and industrial construction. Encore’s products are sold through distributors and building materi- als retailers. For the year ended December 31, 2010, Encore reported net income of $15,290,000 ($0.66 per share) on net sales of $910,222,000, compared with net income of $3,636,000 ($0.16 per share) on net sales of $649,613,000 in the previous year. The March 31, 2011 closing Nasdaq bid price of Encore’s common stock was $24.30 per share. At March 31, 2011, the $5,800,000 investment in 4,086,750 restricted shares of Encore’s common stock by Capital Southwest and its subsidiary was valued at $81,735,000 ($20.00 per share), repre- senting a fully-diluted equity interest of 16.9%. $62,266,600 Alamo Group Inc. (Seguin, TX) 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, industrial and agricultural markets in North America, Europe, and Australia. For the year ended December 31, 2010, Alamo reported net income of $21,117,000 ($1.78 per share) on net sales of $524,540,000, compared with net income of $17,091,000 ($1.65 per share) on net sales of $446,487,000 in the previous year. The March 31, 2011 closing NYSE market price of Alamo’s common stock was $27.45 per share. At March 31, 2011, the $2,190,937 investment in Alamo by Capital Southwest and its subsidiary was valued at $62,266,600 ($22.00 per share), consisting of 2,830,300 restricted shares of com- mon stock, representing a fully-diluted equity interest of 22.0%. $55,600,000 The Whitmore Manufacturing Company (Rockwall, TX) manufactures specialty lubri- cants for heavy equipment used in surface min- ing, railroads and other industries, and produces water-based coatings for the automotive and pri- mary metals industries. Whitmore’s Air Sentry division manufactures fluid contamination con- trol devices. The company’s assets also include several commercial real estate tracts. During the year ended March 31, 2011, Whitmore reported net income of $4,861,000 on net sales of $36,760,000, compared with net income of $3,661,000 on net sales of $26,956,000 in the previous year. The company is owned 80% by Capital Southwest and 20% by Capital Southwest’s subsidiary, The RectorSeal Corporation. At March 31, 2011, Capital Southwest’s 80% equity interest in Whitmore was valued at $55,600,000 and had a cost of $1,600,000. 6 c e l e b R A t i n g o u R 5 0 t h A n n i V e R s A R Y $19,193,659 Heelys, Inc. (Carrollton, TX) designs, markets and distributes innovative sports-inspired foot- wear, equipment and accessories. Known for its Heelys-wheeled footwear, the company distrib- utes its products through domestic and interna- tional sporting goods chains, department and lifestyle stores and specialty footwear retailers. During the year ended December 31, 2010, Heelys reported a net loss of $3,991,000 ($0.14 per share) on net sales of $30,436,000, compared with a net loss of $5,125,000 ($0.19 per share) on net sales of $43,777,000 in the previous year. The March 31, 2011 closing Nasdaq bid price of Heelys common stock was $2.29 per share. At March 31, 2011, the $102,490 investment in Heelys by Capital Southwest’s subsidiary was valued at $19,193,659 ($2.06 per share), consist- ing of 9,317,310 restricted shares of common stock, representing a fully-diluted equity interest of 31.6%. $18,100,000 Media Recovery, Inc. (Dallas, TX) is the holding company of DataSpan, ShockWatch and Damage Prevention Company. DataSpan is in the data protection business providing datacenter supplies and services to corporate customers through a direct sales force. ShockWatch manufactures and distributes devices used to detect mishandled shipments, devices for monitoring material han- dling, and equipment impact detection monitors. Damage Prevention Company produces dunnage products used to prevent damage in trucking, rail and export container shipments. During the year ended September 30, 2010, Media Recovery reported net income of $1,864,000 on net sales of $107,915,000, compared with a net loss of $2,626,000 on net sales of $110,311,000 in the previous year. At March 31, 2011, the $5,415,000 investment in Media Recovery by Capital Southwest and its subsidiary was valued at $18,100,000, consisting of 800,000 shares of Series A Convertible Pre- ferred Stock and 4,000,002 shares of common stock, representing a fully-diluted equity interest of 97.9%. $14,042,276 Hologic, Inc. (Bedford, MA) is a leading devel- oper, manufacturer and supplier of premium diagnostic products, medical imaging systems and surgical products dedicated to serving the healthcare needs of women. Hologic’s core busi- ness units are focused on breast health, diagnos- tics, GYN surgical, and skeletal health. For the year ended September 25, 2010, Hologic reported net loss of $62,813,000 ($0.24 per share) on revenue of $1,679,552,000 compared with net loss of $2,216,642,000 ($8.64 per share) on revenue of $1,637,134,000 in the previous year. The March 31, 201 closing Nasdaq bid price of Hologic’s common stock was $22.19 per share. At March 31, 2011, Capital Southwest and its subsidiary owned 632,820 unrestricted shares of common stock, having a cost of $220,000 and a market value of $14,042,276 ($22.19 per share). $13,499,940 All Components, Inc. (Pflugerville, TX) distributes and produces memory and other elec- tronic components for personal computer manu- facturers, retailers, value-added resellers and other corporate customers. Through its sales and distribution center near Austin, Texas and its dis- tribution center in Miami, Florida, the company serves over 2,000 customers throughout the United States and Latin America. During the year ended August 31, 2010, All Components reported net income of $4,314,000 on net sales of $279,279,000, compared with net income of $1,863,000 on net sales of $186,188,000 in the previous year. At March 31, 2011, the $2,150,000 investment in All Components by Capital Southwest and its subsidiary was valued at $13,499,940 consisting of a $2,000,000 8.25% Subordinated Note, 150,000 shares of Series A Convertible Preferred Stock and Warrants valued at $11,499,940, repre- senting an 80.4% fully-diluted equity interest. c A p i t A l s o u t h w e s t • 2 011 A n n u A l R e p o R t 7 $12,711,470 Texas Capital Bancshares, Inc. (Dallas, TX) formed in 1998, has total assets of approximately $6.4 billion. With branch banks in Austin, Dallas, Fort Worth, Houston, Plano and San Antonio, Texas Capital Bancshares conducts 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, 2010, Texas Capital reported net income of $37,187,000 ($1.02 per share), compared with net income of $18,769,000 ($0.55 per share) in the previous year. The March 31, 2011 closing Nasdaq bid price of Texas Capital’s common stock was $25.96 per share. At March 31, 2011, Capital Southwest owned 489,656 unrestricted shares of common stock, having a cost of $3,550,006 and a market value of $12,711,470 ($25.96 per share). $11,603,000 Extreme International, Inc. (Sugar Land, TX) owns Bill Young Productions, Texas Video and Post, and Extreme Communications and Vanilla Gorilla which produce radio and television com- mercials and corporate communications videos. During the year ended September 30, 2010, Extreme reported net income of $1,615,000 on net sales of $12,984,000, compared with net income of $1,205,000 on net sales of $11,272,000 in the previous year. At March 31, 2011, Capital Southwest and its subsidiary owned 39,359 shares of Series C Con vertible Preferred Stock, 3,750 shares of 8% Series A Convert ible Preferred Stock and 13,035 shares of common stock, having a cost of $3,325,875 and a market value of $11,603,000, representing a fully-diluted equity interest of 53.6%. $10,124,714 Cinatra Clean Technologies, Inc. (Houston, TX) is a start-up business formed to quickly and safely clean above ground oil storage tanks with a pat- ented, automated system never before utilized in the United States. The non-manned tank clean- ing and hydrocarbon recovery system exceeds the most demanding health, safety and environ- mental standards. $5,758,030 Trax Holdings, Inc. (Scottsdale, AZ) provides a comprehensive set of solutions to improve trans- portation validation, accounting, payment and information management processes. The Trax competitive advantage is its capability of auto- mating business processes that have traditionally been impossible to automate due to their com- plexity or uniqueness. During the year ended June 30, 2010, Cinatra reported net sales of $4,077,000 and a net loss of $1,994,000, compared with no sales and a net loss of $570,000 in the previous year. During the year ended December 31, 2010, Trax reported a net loss of $1,952,000 on net sales of $14,394,000 compared to the previous year net loss of $2,955,000 on net sales of $11,079,000. At March 31, 2011, Capital Southwest owned 3,033,410 shares of Convertible Preferred Stock valued at $3,033,410; a 10% Note valued at $6,200,700; and a 12% Note valued at $890,604, for a total cost of $10,124,714 and a value of $10,124,714, representing a fully-diluted interest of 68.8%. At March 31, 2011, Capital Southwest owned 1,061,279 Convertible Preferred Stock having a cost of $5,000,000 and a market value of $5,758,030, representing a fully-diluted equity interest of 30.7%. 8 c e l e b R A t i n g o u R 5 0 t h A n n i V e R s A R Y c o R p o R A t e i n f o R M A t i o n b o A R d o f d i R e c t o R s Gary L. Martin Chairman of the Board and President of the Corporation Donald W. Burton General Partner, The Burton Partnership Graeme W. Henderson Investments Samuel B. Ligon Investments John H. Wilson President, U.S. Equity Corporation Dallas, Texas Tampa, Florida Pasadena, California Dallas, Texas Dallas, Texas o f f i c e R s Gary L. Martin Tracy L. Morris Chairman of the Board and President of the Corporation Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer William M. Ashbaugh Senior Vice President Marquez D. Bela Glenn M. Neblett Jeffrey G. Peterson Ray D. Schwertner William R. Thomas III Vice President Vice President Vice President Vice President Vice President m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b n g i s e D t r o p e R l a u n n A tR A n s f e R A g e n t American Stock Transfer & Trust Company, LLC New York, New York T (800) 937-5449 www.amstock.com e x c h A n g e Listed on NASDAQ for 40 years ti c k e R s Y M b o l CSWC i n d e p e n d e n t p u b l i c A c c o u n t A n t s Grant Thornton LLP Dallas, Texas l e g A l c o u n s e l Locke Lord Bissell & Liddell LLP Dallas, Texas A n n u A l M e e t i n g July 18, 2011, 10:00 a.m. North Dallas Bank Building 12900 Preston Road, Suite 200 Dallas, Texas 75230 d i V i d e n d R e i n V e s t M e n t As a service to our shareholders, the Company offers an Automatic Dividend Reinvestment and Optional Cash Contribution Plan for shareholders of record who own a minimum of 25 shares. The Company pays all adminis- tration costs of the Plan except broker- age transaction fees. Contact the Company for more information. c o n t A c t i n f o R M A t i o n Capital Southwest Corporation 12900 Preston Road, Suite 700 Dallas, Texas 75230 T (972) 233-8242 F (972) 233-7362 www.capitalsouthwest.com 12900 Preston Road, Suite 700 Dallas, Texas 75230 972-233-8242 www.capitalsouthwest.com 

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